Financial Update

Economists shrug off signs recession may be looming
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PAUL CHIASSON, THE CANADIAN PRESS

The Canadian Press

Federal Finance Minister Jim Flaherty smiles during a news conference following a meeting with his provincial and territorial counterparts Friday, May 30, 2008 in Montreal. Flaherty said that he and his provincial counterparts remain optimistic about the economy and believe Canada won't fall into its first recession in 16 years. THE CANADIAN PRESS/Paul Chiasson

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Despite first negative quarter in five years, economy is expected to bounce back
May 31, 2008 Eric Shackleton The Canadian Press

An auto industry strike, manufacturing cuts and winter storms have dragged the Canadian economy to its first quarterly decline in real gross domestic product in five years.
During the January to March period, the economy shrank by 0.3 per cent year over year "due to widespread cutbacks in manufacturing, most notably in motor vehicles,'' Statistics Canada said yesterday.

Excluding the auto industry, which has been battered by job cuts at the Detroit Three automakers -- it estimated GDP grew by 0.1 per cent.

Nonetheless, many economists played down the potential for recession.

"We all expected a lacklustre first quarter,'' Aron Gampel, deputy chief economist at Scotia Economics, said in an interview.

"We'll probably see a bounceback in Q2, showing basically that the economy may be on the slow track but certainly hasn't gone into reverse on a more sustained basis,'' he said.

Canada's national economy has been slowing down since last summer as weakness in the United States housing and auto sectors and the impact of a high dollar have cut exports of everything from lumber, cars and auto parts to steel, cement, newsprint and other types of materials.
That's led to layoffs in Canada's industrial heartland in Ontario and Quebec.

But at the same time, the western provinces are booming because of record high oil prices and an improved natural gas outlook as well as soaring demand from Asian markets for coal, wheat, fertilizer, grains and other products, he said.

In addition, Canadian consumers continue to spend because of low interest rates and a still-strong housing market.

Carolyn Kwan, senior economist at Merrill Lynch Canada, said a "technical" recession might be in the making.

"We have the first contraction in five years and momentum going into the second quarter, so it would not be surprising to see negative GDP results which would fit the technical definition of a recession," she said

"When average people think of a recession they think the economy is falling apart, and this is not happening in Canada -- at least not yet."

With Flaherty continuing to urge Ontario to join him in cutting business taxes to stimulate jobs, Duncan countered with caustic comments about Ottawa's single-track approach.

Flaherty and the Ontario government have been fighting for months about how best to boost the economy, with the federal Conservatives focused on corporate tax cuts as the remedy while Ontario's Liberal government seeks federal money to help attract job-creating investments from automakers and other companies.

"There are some strengths in the economy, but what struck me was the relative strength of the U.S. economy to the Canadian economy, and it (shows) to me that we haven't had a federal partner,'' Duncan said.

The provincial minister pointed to a proposal for a new Ford Canada engine factory in Windsor that he said won't happen without Ottawa's financial aid.

"Corporate tax cuts are not going to lower the dollar, corporate tax cuts are not going to lower the price of oil, corporate tax cuts are not going to strengthen the U.S. economy," Duncan said.
Flaherty also got nowhere on his attempts to bring provinces on board to create a national securities regulator to replace the 13 different provincial and territorial commissions and regulations that he said are discouraging investment.