Canada in recession: OECD
Julian Beltrame, Associated Press
November 25, 2008
OTTAWA—Canada has fallen into a recession that will last for most of next year as the world falls into the worst slump in a quarter of a century, says a respected international think-tank.
The Organization for Economic Co-operation and Development says Canada will not be immune from the global malaise, the worst since the deep recession of the early 1980s, and will see its economy shrink by an average 0.5 per cent next year.
That is by far the worst of any projection for the Canadian economy by any official or quasi-official body, although some private-sector economists have previously put the country into deficit territory. The OECD is an international think tank representing 30 of the world’s most advanced economies.
The body says as an exporting nation, Canada is being sideswiped by the global financial crisis and economic slowdown and will experience a downturn in most economic indicators next year.
It predicts unemployment will rise above seven per cent from the current 6.2 per cent and that federal and provincial governments will record an accumulated deficit of 1.3 per cent of gross domestic product.
“Sharply deteriorating conditions in global financial markets, generalized softness in the U.S. economy and receding commodity prices are amplifying export weakness and dragging down domestic spending,” the think-tank says.
“The general government is expected to move into deficit in 2009 and 2010, a largely cyclical outcome that is not alarming and leaves room to absorb eventualities but underlines the need to keep a lid on discretionary expenditure increases.”
The report predicts private consumption will fall 0.6 per cent next year.
Finance Minister Jim Flaherty said Monday he expects to introduce a significant stimulus package comprising largely of construction projects to rebuild Canada’s infrastructure in the next budget.
Flaherty suggested he will move forward the timing of the budget to early next year to ensure the economic stimulus occurs as quickly as possible.
The OECD said the Bank of Canada should also act by reducing interest rates, something economists predict will occur at the next scheduled action date, Dec. 9.
The think-tank predicts Canada’s economy will recover in 2010 and advance by 2.1 per cent, a tepid rebound, given that it is coming off a down year.
Although the OECD says Canada is in better shape than many countries confronting the downturn, the average 0.5 per cent contraction in 2009 is in line with than the 30-country average of 0.4 per cent.
The U.S. will be among the worst affected, with a gross domestic product contraction of 0.9 per cent next year, while the 15-member euro zone will shrink by an average 0.6 per cent.
Among the OECD countries, the group estimates eight million workers will lose their jobs over the next two years and that there is a risk, “albeit small,” that some countries will experience deflation — falling prices.
The biggest loss of output in the OECD is expected to occur during the fourth quarter of this year, with a 1.4 per cent contraction predicted.
The figures indicate that the developed world has now entered a slump estimated to last at least four quarters; two consecutive quarters is a common definition of recession.
“Many OECD economies are in, or are on the verge of, a protracted recession of a magnitude not experienced since the early 1980s,” said Klaus Schmidt-Hebbel, the OECD’s chief economist.
The OECD said the U.S. economy would contract by an annualized rate of 0.3 per cent in the third quarter, followed by a massive 2.8 per cent decline in the last quarter. Recovery is only anticipated in the third quarter of 2009 when output is set to spike 0.6 per cent as the effects of the credit squeeze abate, the housing downturn bottoms out and low interest rates bear fruit.
In the euro zone, output is seen to have fallen by 0.9 per cent in the third quarter, followed by a 1.0 per cent decline in the fourth. As in the U.S, output is not expected to rebound until the third quarter of 2009, and only then by the modest amount of 0.1 per cent. Official European Union figures earlier this month confirmed that the euro-zone as a whole is in recession.
In Japan, the recession, which started in the second quarter of 2008, is only expected to last through to the first quarter of 2009, when output is expected to rebound by an annual rate of 0.8 per cent. However, output is set to stagnate over the second half of 2009 as the global economic downturn and the recent rise in the yen hits demand for Japanese goods.
Because of the anticipated bounce-back in growth by the second half of next year, the OECD projected that economic output across its membership will rise in 2010 by 1.5 per cent.
The OECD’s Schmidt-Hebbel said “prompt and massive” policy action to restore confidence and provide liquidity in the banking sector appears to have “successfully limited the period of panic” but that financial institutions still need to repair their balance sheets.
“This process of adjustment will take some time and impair the flow of credit, and is the key factor weighing on activity going forward,” he said.
The uncertainties around the projections are “exceptionally large”, mainly on the downside and mostly relate to the assumption regarding the speed at which the financial market crisis is overcome, said Schmidt-Hebbel.
“Specifically, we assume that the extreme financial stress since mid-September will be short-lived but will be followed by an extended period of financial headwinds through late 2009, with a gradual normalization thereafter,” he said.
The OECD added that there was a justification for governments around the world to cut taxes or raise spending to ameliorate the effects of the recession.
“Against the backdrop of a deep economic downturn, fiscal policy stimulus has an important role to play,” Schmidt-Hebbel said.
“It is vital that any discretionary action by timely and temporary,” he said.
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