Economists bet on recession forecast

The cautious optimism of Canadian economists is fast fading as the dark clouds of recession begin to form over the nation’s dawdling economy.

Over the last two days, the Royal Bank of Canada and TD Bank have both released new gloomy forecasts predicting the second half of this year will see slower growth.

Both stopped just short of predicting an out-and-out recession.

Not the Bank of Nova Scotia, however, which warned this morning that Canada could be among the first of the world’s advanced economies to fall into another recession.

At this point it is being referred to as a “technical recession”, which means two consecutive quarters of negative growth. It may be noted that Canada’s economy shrank 40 basis points in the second quarter of this year.

“We had earlier lowered our Canadian growth forecast to 2.3% for both this year and 2011, so the RBC move doesn’t surprise me,” says Avery Shenfeld, chief economist, CIBC World Markets Inc. “It’s fair to say that there are downside risks to published forecasts for Canada, which tend to assume that politicians in Europe and the U.S. do the ‘right thing’.”

Softer growth in the U.S. and eurozone economies and their unabated economic woes are being unanimously blamed for the economic slump in the OECD countries, Canada included.

“A failure by Europe to prevent sovereign debt troubles from spilling over into a banking crisis, and the inability of Congress to provide some stimulus for 2012, would expose Canada to recession risks,” says Shenfeld. “But there’s no reason to expect a recession here if America and Europe manage to avoid one.”

Robert Kavcic, economist at BMO Capital Markets, while conceding the growth in Canada is moderating, refutes the dour pronouncements made recently by the nation’s leading banks.

“We don’t think we’re going back into recession again in Canada,” says Kavcic. “To be fair we trimmed our growth forecast already a couple of weeks ago; we are expecting a very modest growth in the second half of the year and picking up a little in 2012, but still at a very modest pace.”

He expects Canada’s economy to grow at 2% in Q3 and Q4, on average, and somewhere around 2.5% in 2012 which is slow but “not a recession.”

Those who forecast recession may be “considering the possibility that [after a negative Q2] Q3 could be negative as well which in our view is not going to be the case”, says Kavcic who’s “looking for 2.1% [GDP] growth in Q3.”

Similar sentiments were expressed by Sherry Cooper, chief economist, BMO Financial Group. “We don’t see a recession in Canada or the U.S. in the second half, although growth was very weak in the first half. We forecast Canadian growth of 2.1% in Q3 and 1.95 % in Q4 with 2012 at 2.2%.”

Others insist that moderating growth is just another sign that Canadian economy is hitting the skids and that if it feels like a recession, it probably is.

“I agree that growth will slow to something that will feel like a recession,” says Benjamin Tal, deputy chief economist at CIBC. “The spending by [U.S. president Barack] Obama will help Canada as well and also we can use monetary and fiscal policy to prevent a recession. But I agree that growth will be slow enough so it will feel like a recession.”

The Bank of Nova Scotia this morning warmed that Canada could be among the first of the world’s advanced economies to fall into another recession. The announcement comes close on the heels of foreboding forecasts made by RBC and TD Bank predicting slower growth in the second half of this year.