The Canadian economy faces multiple challenges, but should see economic growth struggle its way upward through the remainder of the year, to 0.7% for 2008, according to TD Economics.
As pathetic as that sounds, it’s an improvement from the negative growth chalked up in the first half of the year. Economic growth for 2009 will remain incredibly weak, possibly reaching 1.2%.
The biggest challenge facing the Canadian economy remains, not surprisingly, the stumbling U.S. economy, which is lurching toward ever slower growth, estimated at 1.1% in 2009.
“The Canadian and U.S. economies will continue to essentially move sideways until a fairly tepid recovery begins in the second half of 2009,” said chief economist Don Drummond. “The party is definitely over, and no corner of the globe is left out of having to help clean up the mess.”
Even if the massive $700-billion bailout of Wall Street is approved by Congress — an increasingly questionable proposition — the financial sector will face even more writedowns of assets. At the same time, the bailout will saddle taxpayers with ever more debt, which Drummond says will only result in more long-term pain.
He predicts that the U.S. economy will reach its low point this winter. By Q4, the U.S. economy will likely contract by 1.4%, as consumers curtail their spending.
“Exports have helped keep the U.S. economy afloat, but with lending and spending being crimped, the U.S. economy is on sinking ground,” says Drummond. “Unfortunately, our pessimistic forecasts for the U.S. economy are playing out.
“The Canadian economy may be more insulated than in the past, but with the U.S. in a tailspin, it just isn’t enough,” Drummond continues. “Eventually, a recession in Canada’s biggest trading partner was going to wear down that domestic resilience.”
Three-quarters of Canada’s trade is with the U.S., so a continued slowdown south of the border will inevitably crimp domestic growth. As American consumers lose their homes and tighten their purse strings, Canadian forestry and the auto sector will suffer.
“It is almost inconceivable that painful adjustments in our manufacturing sector have been completed,” said Drummond.
The service sector will not be spared either. As the U.S. financial system struggles against utter collapse, Canadian financial firms will find it difficult to secure corporate funding.
But there’s always the commodities market, right? Wrong. Drummond warns that slower global growth could drive a stake through the heart of Western Canada’s growth and put an end to rising incomes.
The TD report echoes the predictions released earlier this week by Desjardins Group, which forecasted a “quiet and slow” recovery that mirrors the slowdown.
“With economic projections this low, we are clearly going to see a long period of quasi-stagnation, especially given that there are several major downward risks looming,” said François Dupuis, vice-president and chief economist, Desjardins Group. “The recovery will be slow and progressive, with no fireworks.”
Desjardins projects Canadian GDP growth of 0.6% for 2008, rising to 1.3% in 2009.
“Along with government spending, personal consumption is the only factor that is allowing Canada’s economy to keep its head above water; however, with confidence at a low ebb, the hope of avoiding a recession is holding on by a thread,” said Yves St-Maurice, Desjardins’ director and deputy chief economist.
Filed by Steven Lamb, Advisor.ca, firstname.lastname@example.org