After months of resisting the inevitable, Canada has finally been pulled into recession by the worst global downturn since The Dirty Thirties.
The Bank of Canada's announcement last week that the domestic economy cannot continue to grow in the face of an ever deepening financial crisis comes amid predictions of staggering job losses for the fourth quarter of 2008 and a political crisis in Ottawa.
Canada's central bank also slashed its overnight rate three quarters of a percentage point, to 1.5%, the lowest level since 1958 when John Diefenbaker was prime minister. The move is intended, in part, to prop up sinking consumer confidence and provide some much-need relief for key sectors such as forestry, mining and oil that have been particularly hard hit in recent months by a commodity bust. (See pictures of the global financial crisis.)
The bank is prepared to cut rates (which remain half a percentage point above the U.S. level) further in January 2009. But will lowering interest rates put Canada on track for recovery?
Perhaps that question is premature since Canada's economy grew in the third-quarter, so it escaped the technical definition of a recession, which requires two consecutive quarters of shrinkage. But as the economic crisis triggered by U.S. subprime mortgages works its way through the economy, tens of thousands of jobs are being eaten up by a vortex of shrinking demand and plant closures. (See pictures of the recession of 1958.)
Canada lost 71,000 jobs in November, most of them in the province of Ontario, whose manufacturing sector has traditionally been a primary source of growth and prosperity. The single biggest monthly drop in a quarter-century is unlikely to be an isolated incident, and compares against 533,000 job losses for the same period in the U.S.
"Indications are that job losses will be worse in December and early next year," says Jayson Myers, president of Canadian Manufacturers & Exporters, the country's largest trade and industry association whose membership includes automakers.
Canadian manufacturers including northern transplants of the Detroit Three and their suppliers are suffering under the double burden of super-tight credit and unpaid receivables that is forcing them to burn through cash and capital in a manner not seen in generations. Detroit North is asking for C$6.8 billion in government assistance, including C$800 million that GM Canada needs immediately to keep its lights on over the holiday season.
That figure will likely be ratcheted down given that the Detroit Three are now expecting a possible loan from the TARP funds, but critics warn even if Ottawa steps up with billions of dollars in aid, it won't be able to secure any job guarantees. "The real action is between Detroit and Washington," says Joe D'Cruz, a specialist in business strategy at University of Toronto's Rotman School of Management. He's concerned that Washington could make the transfer of jobs from Canada which accounts for about 15% of Detroit Three production in North American to the U.S. a condition of any assistance.
Excluding this scenario, the Canadian economy is expected to shrink 1.6% in the fourth quarter, on an annualized basis, followed by two consecutive quarters of decline, according to TD Bank Financial Group. After that conditions are expected to improve, but "it's going to be a shallow recovery," says economist Beata Caranci with TD Bank. She expects a contraction of 1.4% for all of 2009, followed by growth of 2.4% in 2010.
Meanwhile Canada's major banks, which reported results for fiscal 2008 this month, continue to struggle with write-downs as a result of exposure to U.S. credit and equity markets. CIBC reported a loss of C$2.1 billion on the year, against net income of C$3.3 billion in 2007. The country's fifth-biggest bank blamed write downs to its U.S. subprime portfolio for the huge loss.
A stimulus package for the Canadian economy is expected to be unveiled by Prime Minister Stephen Harper's minority Conservative government at the end of January 2009. However if the budget is not well received by a parliament calling for strong fiscal support to save Canadian jobs, the government may once again face the possibility of being toppled. Earlier this month the Conservatives narrowly escaped being replaced by a coalition of parties, including the separatist Bloc Quebecois, which wants to cede the province of Quebec from Canadian confederation.
Adding political infighting to the global financial crisis may not be what Canada needs to bounce back from recession, but it signals that the country's return to prosperity will be more difficult that most imagined just a few short months ago.