Is a recession looming? Scotiabank thinks so

Canada may already be in a mild downturn given flat job growth and shaky consumer confidence

September 14, 2011   by The Canadian Press

OTTAWA—The Bank of Nova Scotia has warned Canada could be the first country to stumble into another recession in one of the more stark warnings about the gathering gloom ahead.

Scotiabank economists say Canada may already be in a mild downturn, given that the economy retreated 0.4 per cent in the second quarter and is at risk to come in negative in the third quarter ending Sept. 30.

“Nobody can say with total confidence GDP is going to come in the black in the third quarter,” says Derek Holt, vice-president of economics at Scotia Capital.

Holt notes job growth, a previous strength, has been flat the past two months.

A recession, however, would undercut Canada’s claim to be a leading wave of the global recovery and could worsen the current malaise by further shaking business and consumer confidence.

While no other forecasting group has come as close to warning of a slump, two other big Canadian banks—RBC and TD—recently downgraded their forecasts for the latter half of this year and 2012.

Both banks cited the headwinds hitting Canada’s economy, adding that a so-called double-dip slump can no longer be ruled out.

Canada’s situation would only worsen if the U.S. dips into another recession next year, which TD’s chief economist Craig Alexandre says has about a 40 per cent chance of happening.

“A U.S. recession would drag Canada down,” he says. “If it was mild, the Canadian economy might stall instead of contract. But, we are dealing with semantics. The odds of negative quarters in Canada might be less than in the U.S., but not by much.”

The other possible mechanism is a Greek default on its national debt—even if it involves a partial debt forgiveness—followed by market pressure on Italian and Spanish sovereign bonds.

While the foreign difficulties are serious, Holt believes not enough attention is being paid to weakness in the Canadian domestic market.

Two expected sources of economic strength—business investment and exports—have  shown signs of weakening, Holt says.

But not all is lost. Holt says Canada’s long-term prospects are still good, given its resource riches, solvent banks, relatively small government deficit and debt position and cash-rich corporations. In the short term, he says, the risk of a setback is real.

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