Canada's recession: deep but short
Bloomberg News
Bloomberg News
Published: Wednesday, May 20, 2009
Canada's recession, likely its deepest since the Great Depression, may also be its shortest.
Rising home and car sales, unexpected gains in building permits and employment, easing credit conditions and higher commodity prices signal Canada's slump may be nearing an end. Eight of 11 economists surveyed by Bloomberg this month predict the economy will return to growth next quarter.
"It doesn't feel quite like it's over yet, but people are breathing a little bit better," said Russ Girling, president of pipelines at TransCanada Corp., the country's biggest pipeline company, which recorded a 12% rise in revenue in the first quarter.
All but one of the country's five post-Second World War major recessions have lasted at least one year, with the shortest in 1957 at nine months, according to Philip Cross, who tracks the country's business cycles for Statistics Canada.
Canada's economy contracted at a 3.4% pace in the last quarter of 2008 and growth in the first quarter may shrink at a 7.3% rate, the Bank of Canada estimates.
The U.S. recession started in December 2007, according to the National Bureau of Economic Research, the arbiter of U.S. business cycles. Statistics Canada, which defines a major recession as a slump in which both employment and output post annual declines, has yet to date the start of Canada's recession, Cross said. The Bank of Canada has said the country entered into a recession in the fourth quarter of last year.
No Bailouts
While Canada has suffered from falling U.S. demand for exports, the country's banks have largely avoided credit losses. No government money has been given to any of Canada's 21 banks since global credit seized up in August 2007. The U.S. government oversees about US$200-billion in investments in banks through the taxpayer-funded Troubled Asset Relief Program.
Canada's housing market has also held up better than in the U.S., where prices declined 18.6% in February from a year earlier, according to the S&P/Case-Shiller index of 20 major cities. Average resale home prices in Canada dropped at less than half that pace during the same period, according to the Canadian Real Estate Association.
"We may not be in a recovery, but I think we might be in a position where it's not getting worse, where it's truly plateauing," Prime Minister Stephen Harper said in a May 8 interview, adding he'd like another "month or two" of data before coming to that conclusion.
Canada's benchmark Standard & Poor's/TSX Composite Index has posted a 50% gain in U.S. dollars since its low on March 9, compared with the 34% gain for the Standard & Poor's 500 Index over the same period.
Recession
Economists surveyed by Bloomberg this month said they expect Canadian growth to rebound at an annual pace of 0.5% in the third quarter and by 2% in the fourth quarter.
"In February, the rapid decline in demand had come to an end and by April, the rapid declines in employment had come to an end," Cross said. "Was that a temporary end or not? We don't know."
While Canada's jobless rate is at a seven-year high of 8%, the economy in April created new jobs for the first time in six months and sales of existing homes rose the most in more than five years. Credit markets are also improving. The Bank of Canada's composite index of financial market conditions is at its strongest since September.
Improved credit markets have allowed companies such as Enbridge Inc., the biggest transporter of oil to the U.S. from Canada's oil sands, to move ahead with the new debt sales to finance operations. Enbridge sold $400-million of bonds last week.
'Cross Our Fingers'
"Our approach is to watch for windows when we think there are opportunities to raise capital funds," said Richard Bird, Enbridge's chief financial officer. "This is a window and let's cross our fingers and hope that it's a trend."
A quick end to the recession would raise pressure on the Bank of Canada, led by Governor Mark Carney, to say it no longer plans to keep its benchmark lending rate near zero through June 2010. The country's central bank projected last month the economy will contract four consecutive quarters, bringing it closer to the average length of the last five major recessions.
"The Bank of Canada will have to revisit their own view of what they will do with interest rates," said Paul-Andre Pinsonnault, an economist at National Bank Financial. "GDP will be stronger than what they are looking for."
A quick end to the recession doesn't guarantee a strong rebound. DBRS Ltd., a rating company, predicts an L-shaped recovery for Canada, which it defines as "a prolonged period of flat or slowly improving performance."
"The earliest I can see an improvement is in October or November," said Jacques Plante, chief financial officer of Hart Stores Inc., a discount retailer. "I can't imagine we'll have anything positive this summer."
Rising home and car sales, unexpected gains in building permits and employment, easing credit conditions and higher commodity prices signal Canada's slump may be nearing an end. Eight of 11 economists surveyed by Bloomberg this month predict the economy will return to growth next quarter.
"It doesn't feel quite like it's over yet, but people are breathing a little bit better," said Russ Girling, president of pipelines at TransCanada Corp., the country's biggest pipeline company, which recorded a 12% rise in revenue in the first quarter.
All but one of the country's five post-Second World War major recessions have lasted at least one year, with the shortest in 1957 at nine months, according to Philip Cross, who tracks the country's business cycles for Statistics Canada.
Canada's economy contracted at a 3.4% pace in the last quarter of 2008 and growth in the first quarter may shrink at a 7.3% rate, the Bank of Canada estimates.
The U.S. recession started in December 2007, according to the National Bureau of Economic Research, the arbiter of U.S. business cycles. Statistics Canada, which defines a major recession as a slump in which both employment and output post annual declines, has yet to date the start of Canada's recession, Cross said. The Bank of Canada has said the country entered into a recession in the fourth quarter of last year.
No Bailouts
While Canada has suffered from falling U.S. demand for exports, the country's banks have largely avoided credit losses. No government money has been given to any of Canada's 21 banks since global credit seized up in August 2007. The U.S. government oversees about US$200-billion in investments in banks through the taxpayer-funded Troubled Asset Relief Program.
Canada's housing market has also held up better than in the U.S., where prices declined 18.6% in February from a year earlier, according to the S&P/Case-Shiller index of 20 major cities. Average resale home prices in Canada dropped at less than half that pace during the same period, according to the Canadian Real Estate Association.
"We may not be in a recovery, but I think we might be in a position where it's not getting worse, where it's truly plateauing," Prime Minister Stephen Harper said in a May 8 interview, adding he'd like another "month or two" of data before coming to that conclusion.
Canada's benchmark Standard & Poor's/TSX Composite Index has posted a 50% gain in U.S. dollars since its low on March 9, compared with the 34% gain for the Standard & Poor's 500 Index over the same period.
Recession
Economists surveyed by Bloomberg this month said they expect Canadian growth to rebound at an annual pace of 0.5% in the third quarter and by 2% in the fourth quarter.
"In February, the rapid decline in demand had come to an end and by April, the rapid declines in employment had come to an end," Cross said. "Was that a temporary end or not? We don't know."
While Canada's jobless rate is at a seven-year high of 8%, the economy in April created new jobs for the first time in six months and sales of existing homes rose the most in more than five years. Credit markets are also improving. The Bank of Canada's composite index of financial market conditions is at its strongest since September.
Improved credit markets have allowed companies such as Enbridge Inc., the biggest transporter of oil to the U.S. from Canada's oil sands, to move ahead with the new debt sales to finance operations. Enbridge sold $400-million of bonds last week.
'Cross Our Fingers'
"Our approach is to watch for windows when we think there are opportunities to raise capital funds," said Richard Bird, Enbridge's chief financial officer. "This is a window and let's cross our fingers and hope that it's a trend."
A quick end to the recession would raise pressure on the Bank of Canada, led by Governor Mark Carney, to say it no longer plans to keep its benchmark lending rate near zero through June 2010. The country's central bank projected last month the economy will contract four consecutive quarters, bringing it closer to the average length of the last five major recessions.
"The Bank of Canada will have to revisit their own view of what they will do with interest rates," said Paul-Andre Pinsonnault, an economist at National Bank Financial. "GDP will be stronger than what they are looking for."
A quick end to the recession doesn't guarantee a strong rebound. DBRS Ltd., a rating company, predicts an L-shaped recovery for Canada, which it defines as "a prolonged period of flat or slowly improving performance."
"The earliest I can see an improvement is in October or November," said Jacques Plante, chief financial officer of Hart Stores Inc., a discount retailer. "I can't imagine we'll have anything positive this summer."
