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Carney concedes recession possible

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It's the first time Bank of Canada has said economy could stall

Julian Beltrame The Canadian Press OTTAWA

The Bank of Canada acknowledged for the first time that the Canadian economy could be headed for a recession, adding that more stimulus and lower interest rates are needed to cushion the steep fall.

Bank governor Mark Carney said in a speech before a London, England, business audience that the Canadian economy has deteriorated more quickly than he had anticipated even only a month ago, hinting strongly he will cut interest rates at the next opportunity Dec. 9.

While Carney did not talk about a recession in his speech, he later told reporters it was a distinct possibility.

"Starting from flat growth in the first quarter of 2009 and the second quarter of 2009 . . . recession is a possibility for Canada,'' he said at a news conference.

Recession is technically described as two straight quarters of economic shrinkage.
The Canadian economy grew smaller in the third quarter ended Sept. 30 and is expected to contract again in the current quarter ended Dec. 31.

In his speech, Carney said the economy was slowing faster than what the bank had forecast last month, when it projected a 0.4 per cent gross national product contraction in the last three months of 2008, and a meagre 0.6 per cent average growth in 2009.

But other voices have been marking down Canadian growth ever since.

Recently, the International Monetary Fund downgraded Canadian growth to 0.3 per cent next year, while several private-sector economists have predicted the economy will in fact shrink in 2009 for the first time in 17 years.

October was one of the worst months in the history of North American stock markets, with trading losses in Canada of nearly 20 per cent, wiping out hundreds of billions of dollars of stock value and eroding consumer and business confidence.

As well, prices for oil, metals and other commodities have dropped sharply in recent months, weakening the resources-based economies of western provinces.

Meanwhile, Ontario and Quebec's manufacturing companies have lost tens of thousands of jobs this year through plant and mill closures and layoffs.

In his speech, Carney said that despite having already cut official interest rates in half over the past year, "some further monetary stimulus will likely be required to achieve the inflation target over the medium term.''

Several private-sector economists are forecasting the bank's short-term trendsetting rate will be sliced by half a point to 1.75 per cent, the lowest ever targeted by the central bank.

In his speech, Carney blamed external forces for Canada's predicament. While the country's sound banking practices have acted as a buffer, the headwinds from the global slowdown and steep American slump are hitting Canadians.

Not only have commodity prices tumbled and the availability of credit tightened, he said, but the nature of the U.S. slowdown -- with its pressure points in the housing and auto sectors -- affects key Canadian exports of lumber, vehicles and parts.

The Canadian economic situation was a sidelight to the main message Carney delivered in London, but it underlined a key point -- that even countries like Canada that have their finances in order were helpless to fend off the carnage from the breakdown in U.S. and global financial markets.

He said the crisis developed in part because of a lack of effective international surveillance. He said Canada's experience -- with strong asset-to-capital ratios, less securitization of mortgages, and required insurance on risky mortgages -- shows that reforms urged at recent meetings of G7 and G20 leaders would work.

To get key markets such as interbank lending and commercial paper working again, he said, central banks may have to inject enough liquidity to in effect become "market makers of last resort.''