6 October 2008

The gloom spreads north

The following article is excerpted from the 4 October 2008 edition of “globeandmail.com”.

…. Across the country, even in the seemingly unsinkable resource towns of the Prairies, the grim prospect of a U.S.-led global recession and credit crunch has exited the abstract realm of the financial markets and landed with a thud on the kitchen tables of average Canadians.

In most parts of the country, house prices are flat or falling – they were down 6 per cent in the city of Toronto in September over the previous year – and down with them is the net worth of millions of debt-loaded consumers. They are in poor financial shape to weather an economic downturn that is already forcing some financial institutions to review the creditworthiness of existing borrowers.

Central Canada's manufacturing sector, already reeling from about 400,000 job losses since 2003, is bracing for an even bloodier downturn than was expected only a few weeks ago. But it is hardly alone in its misery, as evidence mounted this week that the commodity price boom that has fuelled some provincial economies and filled government coffers is out of gas.

How bad it all gets depends largely on whether the $700-billion (U.S.) bailout package passed Friday by the U.S. Congress – which aims to take bad mortgage-related loans off bank balance sheets – meets its goal of getting financial institutions to start lending again. The deep integration of global financial markets – and particularly of Canadian and U.S. ones – means that it's not just the fate of the American economy, which lost 159,000 jobs last month, that hangs in the balance.

“Canadian banks are borrowing and lending in the same credit markets as U.S. banks, so if the credit markets seize up in the U.S., they're going to seize up in Canada, too,” McGill University economics professor Christopher Ragan explained.

Lender skittishness is a major worry for the Bank of Canada, which Friday massively boosted the amount of cash it plans to make available to the financial system to $20-billion from $8-billion, in a bid to unclog frozen money markets.

Still, there are no guarantees that its actions, along with similar moves by central banks around the world, will be enough to avert a protracted credit crunch. That would exacerbate the economic slowdown that had already been threatening Canadian jobs, Prof. Ragan added. “It will mean that the recession will be deeper. And any extension of a U.S. downturn is just an extension of the amount of time they're not buying Canadian wood and Canadian car parts.”…

For Canadian manufacturers, the credit crisis is the third stage of a triple whammy. They have already been battered by the surge in the value of the Canadian dollar and the spike in prices of such key commodities as steel and plastic.

Companies are hunkering down, scrapping expansion projects and cutting employees. The decline in the prices of some of Canada's key commodities, such as oil and fertilizer, could help ease their pain, since it has sent the Canadian dollar lower. But that might not matter much as a U.S. recession erodes demand for Canadian manufactured goods….

It all means finance ministers across the country will likely be facing lower revenues from income and sales taxes, while expenditures on unemployment and welfare benefits could balloon. That could push many governments – including Ottawa, which had a relatively slim $2.9-billion surplus in the first four months of the fiscal year – into the red….

Ottawa's budget deficit exploded to $41-billion in 1992-93, in the wake of the last big recession, up from $28-billion in 1989-90. But subsequent moves to eliminate the deficit and pay down the federal debt – which now rep