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Flat is the new up

One signpost of for the road ahead is the stock marekt; stocks typically begin their own upturns as much as six months ahead of the economy.

Spencer Platt/Getty Images


Flat is the new up

With the world economy tanking and Canadian forecasters pessimistic about growth, thoughts turn to how long a recession will last, and how bad it might be. Here are signposts for the bumpy road ahead

By David Parkinson

As the Canadian economy stumbles into 2009, there is no longer any doubt that the nation is looking squarely into the eye of a recession. The question now: When will it end?

Last Friday's report of a 71,000-job drop in Canadian employment in November - the worst one-month collapse in 26 years - may have been the final nail in the recessionary coffin; the labour market was the last major holdout in an economy showing marked deterioration on every other major front.

Gross domestic product looks poised to decline at least 1 per cent in the fourth quarter, and it will probably contract in the first quarter of 2009 as well. Domestic demand growth hit a 13-year low in the third quarter. Export volumes have fallen for five consecutive quarters. Housing starts in the past 12 months are down 35 per cent from a year earlier. Third-quarter consumer spending growth hit a five-year low. The Canadian dollar has sunk 20 per cent against its U.S. counterpart since September.

Most pundits have resigned themselves to the notion that the economy is in recession, with talk centred less on hopes for a near-term turnaround than on how long it will last and how low it will go.

"Recent pessimism has created a 'flat is the new up' mentality in the economy," Peter Hall, chief economist at Export Development Canada, said recently. "With the wrecking ball of recession battering the world economy, talk of growth has all but disappeared, and its mention seems to generate either wistful thinking or a cynical smirk."

So just how are Canadians supposed to navigate their way through this bleak economic winter storm of 2008-09? We highlight some key signposts that might provide direction on the rough road ahead.

S&P/TSX composite

Since equity investors are typically buying future performance, stocks tend to provide the first indications of an economy on the way down, and among the first signs that a turnaround is nearing.

Canada's stock market has certainly delivered on the first part of that: The deepening gloom has devoured more than 40 per cent of the value of the benchmark S&P/TSX composite index since it peaked last June.

But many analysts are calling for a rebound in equities next year. The Canadian, U.S. and global economies are expected to start pulling out of their nosedives in the second half of the year, and stocks typically begin their own upturns as much as six months ahead of the economy.

Even the more bearish market strategists think the S&P/TSX composite index has a shot at eclipsing 10,000 again by the end of 2009. Other more optimistic forecasters are predicting the start of a new bull market that would see the TSX surge toward 12,000 next year - a jump of almost 50 per cent from current levels.

Corporate earnings

While official consensus forecasts still reflect expectations of positive earnings growth for the fourth quarter and for 2009 in both the Canadian and U.S. markets, most economists believe those forecasts are flawed -and will inevitably tumble into negative territory once more individual companies issue revised outlooks.

Thomson Reuters Research noted last week that in the fourth quarter, the number of companies warning of lower-than-forecast earnings has eclipsed those issuing better-than-expected guidance by almost 4 to 1, almost double the historical norm.

Since corporate profits are the foundation upon which stock markets are built, experts believe the markets will have a hard time finding stable ground as long as profit warnings continue. And until earnings growth itself returns - which looks unlikely before the second half of 2009 - it will be hard for the markets and the economy as a whole to establish any convincing long-term traction.

Global GDP growth

National Bank Financial's new chief economist, Stéfane Marion, has looked at earnings growth and global GDP growth going back 35 years and concluded that in years when world GDP is growing at less than 2.5 per cent, corporate earnings are typically in outright decline.

Only when annual growth moves back above 2.5 per cent do corporate earnings begin to expand again.

Will that happen in 2009? For the year as a whole, the outlook isn't good. The International Monetary Fund recently reduced its global growth forecast for 2009 to 2.2 per cent, while many private-sector forecasters are now predicting below 2 per cent - roughly half the average growth pace.

What's more, the forecasts continue to be revised downward. Stagnant global growth could be particularly hard on the Canadian market, which depends heavily on demand for highly cyclical global commodities.


Canada's pace of housing starts hasn't dipped below 180,000 a year in seven years, before this week's report of a stunning slump to 172,000 in November. It's easy to forget that we're still at levels that would have been considered high-water marks during the decade-long funk after the bursting of the late-1980s housing bubble.

However, with interest rates much lower than what prevailed in the 1990s, no one expects the current correction to send starts back to levels witnessed in that decade.

Nevertheless, economists say the housing market was overdue for November's cool-down, particularly on the wildly oversupplied condo front.

The 180,000 neighbourhood is considered roughly in line with the annual rate of new-household creation in Canada, meaning that while starts could dip somewhat below this level temporarily, simple demographics support housing starts in this range. Any significant, sustained move above the 180,000 level would be a sign of another housing expansion, but most economists think that could be a couple of years away.


November was the first month of significant Canadian job losses since the economic slowdown began, but no one expects it to be the last.

While the U.S. - with 1.9 million job losses since the start of 2008 - may be closer to the end of its labour decline than the beginning, based on historical norms, Canada is just getting started.

In the past five U.S. recessions dating back to the mid-1970s, total job losses have averaged 2.1 million - with the peak being 2.8 million in 1982.

In the past two Canadian recessions (in the early 1980s and early 1990s), job losses averaged almost 500,000.

While few pundits expect Canada to lose nearly that many jobs in this recession - nor, indeed, nearly as many per capita as the more troubled U.S. economy - past experience still suggests that last month's job losses were the tip of the iceberg.

Economists think the Canadian labour market won't bottom out until the second half of next year, by which time total job losses could well top 200,000.

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