OTTAWA — Canada and the U.S. are heading for the worst economic performance in five years and may already be in the midst of a mild recession, says a report from an economic forecasting group.
Global Insight Canada has increased the chances of Canada experiencing a recession during the first half of 2008 — two consecutive quarters of negative growth — to 25 per cent.
The chances of the U.S. being in a slump during the same period are even greater, at 40 per cent, the economic forecasting firm said today.
While the report still forecasts both economies to stay above water — if barely — Global Insight’s managing director Dale Orr said last week’s “quite discouraging” employment numbers in the U.S. and weaker industrial production make “us more concerned than we were a month ago.”
On Friday, the U.S. reported that hiring practically stalled in December, driving the country’s unemployment rate up to a two-year high of five per cent. Canada’s next jobs report will be released Friday.
Global Insight says the most likely scenario is that Canada’s economy will grow 2.2 per cent this year, a little better than the U.S.’s 1.9 per cent. Both would be the worst economic performances since 2003.
In that forecast at least, the Toronto-based firm is in line with views presented by Canada’s five big banks at the annual outlook breakfast at the Economic Club of Toronto today.
Economists from the banks agreed that while Canada’s economy will slow from last year’s anticipated 2.8 per cent advance, the retreat won’t be all the way to the negative side.
But Global Insight also argues that the chances of what it calls the “pessimistic scenario” becoming reality are increasing. That would happen if the U.S. housing and financial sectors, already hit hard by the subprime mortgage crisis, weaken further, business productivity and investment slows, and oil prices remain at record levels.
“In this scenario, the U.S. economy declines by 1.7 per cent in the first quarter, 0.5 per cent in the second quarter and moves up to no growth in the third quarter of 2008,” the report says.
Canada will be sideswiped by such a development south of the border, the report says, because of lower demand for exports of softwood lumber, autos and auto parts, resulting in higher unemployment to 6.2 per cent from the current 5.9 per cent.
Even in the pessimistic scenario, however, Canada does not fall into recession, although growth will be microscopic in the first half of 2008 and only reach 1.4 per cent for the year as a whole. The 25 per cent risk of a Canadian recession is based on the U.S. economy performing worse than in the pessimistic scenario.
“If a person wants to be an optimist and think there will be no recession, they can be,” said Orr. “But if you want to be a pessimistic, there is evidence there to support that view as well.”
Orr notes that the odds of Ontario, Canada’s manufacturing heartland, falling into a recession this year are the same as the U.S. at 40 per cent because of the province’s disproportionate dependence on exports.
But even Alberta would suffer under the pessimistic scenario, due to reduced demand in the U.S. for its energy exports.