6 October 2008

Banks warn of ‘worse than recession’

The following article is excerpted from the 6 October 2008 edition of the “Toronto Star”.

Economists from Canada’s Big Five banks say they expect little or no growth in the near future and they warned today that the domestic economy’s current gloom will likely deepen into something worse than a recession.

The word “recession” wouldn’t describe the deep structural problems affecting everything from the U.S. housing sector to the Canadian oil industry, said Bank of Nova Scotia chief economist Warren Jestin.

“You have to invent a new word to describe what we’re in now,” he said after the banks presented their perspectives at the Economic Club today.

“It’s being driven through the financial markets into the real economy. All of those things suggest that it’s entirely different than what you might expect from a typical recession.”

In their most recent economics forecast, Scotiabank economists predict recessions for both the U.S. and Canada, economic slides that will require central bankers in both countries to cut interest rates by at least a full percentage point.

All agree that a slide in commodity prices bodes ill for the Canadian economy, which is heavily dependent on the production and export of oil and gas, metals and minerals. Drops in oil and metals prices have hit the already teetering Toronto Stock Exchange hard. …

And Bank of Montreal economist Doug Porter said prices will continue to take a beating over the next year, dragging Western Canada’s formerly booming economy in particular down with them. …

Porter said the direction of Canada’s economy depends on whether the financial-sector troubles in the United States start to settle down.

“At this point, if this kind of volatility keeps up, I think we’re looking at a much more serious downturn than the mild recession that most of us are talking about,” he said. “Over the next month, that’s what bears watching.”

The cautious outlook was echoed by Don Drummond of TD Bank, who said the Canadian economy won’t see any growth until late 2009.

Drummond told the Economic Club audience that even at that point there will be only a gradual recovery. …

Jestin remained on the more optimistic side of the loonie’s direction, predicting that it will hold above the 90-cent threshold as it weathers the financial downturn. …

Craig Wright, chief economist at RBC Financial Group, held a more pessimistic view on the dollar, predicting it would slide “just under” 90 cents by the end of next year. The loonie was down 1.78 cents to 90.68 cents US this morning.

“For Canada, exports are going to be a continued challenge by weakness in the U.S., but we’re still relatively bullish on the Canadian economy,” he said. …