Skip navigation

Painful downturn, quick rebound

From Friday's Globe and Mail

OTTAWA — Bank of Canada Governor Mark Carney is offering a glimmer of hope amid the grimmest economic signals in two decades.

Even as the central bank said economic output would contract an alarming 4.8 per cent this quarter, Mr. Carney boldly predicted Thursday that Canada's economy will rally to expand 3.8 per cent in 2010, a forecast that exceeds the most optimistic scenarios on Bay Street and other financial centres.

While acknowledging that 2009 will be marked by bankruptcies and job losses, he said the recession that began in the final three months of 2008 will end faster than did the contractions in the early 1990s and 1981-82.

By embracing such a rosy view, Mr. Carney is staking his credibility on a belief that the steps policy makers are taking around the world to reverse the financial crisis will work.

His forecast is based in large part on the assumption that the hundreds of billions of dollars that countries such as the United States, Britain and China are pouring into their economies will bring sputtering global demand back to life.

This flood of government spending, he said, stands to give a big boost to Canada in particular. Unlike many other rich countries, Canada counts on higher commodity prices and exports for much of its wealth.

“There is substantial contemporaneous fiscal stimulus happening around the globe,” Mr. Carney said at a press conference held to discuss the Bank of Canada's latest quarterly policy report.

“It matters more that people are expanding their budgets at the same time,” said Mr. Carney, a former investment banker with economics degrees from Harvard and Oxford.

“It actually has a stronger multiplier effect for countries like Canada who are big commodity exporters because it actually helps support commodity prices.”

The forecast for economic growth of 3.8 per cent in 2010 is an increase from the Bank of Canada's prediction of 3.4 per cent in October. When parliamentary budget officer Kevin Page surveyed private-sector forecasters this month, he came up with an average outlook for 2010 of 2.6 per cent.

“You have to be optimistic to make a forecast like this for 2010,” Stéfane Marion, chief economist at National Bank Financial in Montreal, said of the Bank of Canada outlook. Mr. Marion said he expects growth of 2.4 per cent next year.

“They are clearly on the optimistic side.”

To be sure, on a day when Statistics Canada reported that retail sales registered the biggest monthly decline in 11 years in November, Mr. Carney and the central bank made no attempt to suggest that 2009 would be anything but difficult.

GDP will shrink 1.2 per cent this year, the Bank of Canada said in a stark reversal from its October estimate of 0.6-per-cent expansion this year.

That means profits will disappear, companies will go bankrupt and workers will lose their jobs.

“The unemployment rate is going to rise,” said Mr. Carney, who earlier this week cut the Bank of Canada's benchmark lending rate to an unprecedented 1 per cent.

“It's going to take longer to find a job in that situation, whether you want to change jobs or whether you've lost your job and want to return to work.

“That is the unfortunate reality of a recession.”

Strong banks, the commodity boom and rising incomes helped Canada stave off the effects of the financial crisis longer than most.

Still, with the world's richest economies slumping into simultaneous recessions toward the end of last year, it was only a matter of time before Canada's export-dependent economy would be battered.

Coupled with slumping demand is tighter credit markets, crimping companies' ability to borrow money to expand.

“We're certainly in the midst of a once-in-a-lifetime set of economic conditions,” Steve Balmer, chief executive officer of Microsoft Corp., said in a conference call Thursday explaining the company's decision to eliminate 5,000 jobs, or 5 per cent of its work force, and an 11-per-cent drop in profits in the latest quarter.

“The economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in the economy.”

Housing, business investment, exports and inventories will all contract this year, the Bank of Canada said, and the report adds that consumption will be essentially unchanged from 2008.

The one pocket of growth that policy makers foresee is government spending: a 0.9-per-cent gain, compared with an earlier estimate of 0.7 per cent.

The increase reflects Finance Minister Jim Flaherty's pledge to announce hefty spending measures in his budget on Tuesday, including new money for roads and other infrastructure and possibly tax reductions.

Prime Minister Stephen Harper's government intends to run deficits totalling $64-billion over the next two years, a senior official told reporters Thursday on condition that he not be named.

Mr. Carney, who spoke to reporters before the government released the deficit figure, acknowledged that a big increase in government spending factored into his assessment for future growth, although he declined to say whether he had knowledge of how much Mr. Flaherty is planning.

While government spending is important, Mr. Carney said, this recession will also be kept short by his decision to begin cutting borrowing costs in the summer and a lower dollar, which will make exports more competitive.

“Monetary policy is very stimulative, and it was stimulative early,” said Mr. Carney, who has dropped the benchmark lending rate by 3.5 percentage points since December, 2007.

“That impact will start to be felt.”

Recommend this article? 33 votes

Back to top