Financial Update for March 26, 2009

• TSX-51.95(Reuters)
• DOW +89.60
• Dollar +.22c to 81.40USD
• Oil -$1.21 to $52.77US per barrel.
• Gold +$12.10 to $935.40USD per ounce
• Canadian 5 yr bond yields+.18bps to 1.94 Four weeks ago it was at 2.03
• http://www.financialpost.com/markets/market_data/money-yields-can_us.html

Canada's budget officer sees 8.5% drop in GDP

Financial Post/Reuters OTTAWA -- Canada's independent parliamentary budget officer forecast Wednesday the economy would deteriorate at a historic rate, and much faster than the government had expected when it produced its budget in late January.

The budget officer, Kevin Page, said gross domestic product figures and unemployment levels would prove to be much worse than the minority Conservative government predicted on Jan. 26, providing fodder for opposition parties to demand more stimulus spending and aid for the unemployed.

Mr. Page told the House of Commons finance committee that, based on private-sector forecasts and his own assessments, he expected GDP to contract by about 8.5% in the first quarter of 2009 and by 3.5% in the second quarter.

In the budget, the government cited private-sector forecasters as saying GDP would shrink by 0.8% in 2009 as a whole.

"We provided a different, more detailed outlook for the first half of this year because we think that what we're seeing now is actually historic, in terms of quarter to quarter declines," Mr. Page told the committee.

Liberal finance critic John McCallum said the forecast, if true, would mean that Canada would post its worst economic performance since at least World War Two.

"What we learned today is that we're in more trouble than the government believed at the time of the budget," Mr. McCallum told reporters after the testimony.

The Liberals are asking the government to improve the employment insurance system to allow laid off workers to access benefits more quickly.

Mr. Page, who complained the government was not providing enough data or funds to allow his office to do its job properly, also forecast nominal GDP would contract by 15% in the first quarter and by 4% in the second quarter.

The budget cited forecasts that nominal GDP would fall by 1.2% in 2009.

Mr. Page said the private-sector surveys "suggest that the current Canadian recession will be sharper than assumed in budget 2009, with real output expected to fall further below its trend potential than in either the 1980s or the 1990s recessions."

In the January budget, the government unveiled a two-year package of temporary stimulus measures that it said would result in a total of $64 billion in budget deficits in 2009-10 and 2010-11.

Mr. Page said the weakening economy and lower tax revenues meant the deficits over those two years would in fact total $73-billion. He also said employment levels would drop by around 2% this year from 2008 compared with the budget forecast of a 0.5% drop.

But he would not comment directly on whether more stimulus was needed to jumpstart the economy.

"The policy challenge faced by all Canadians, by parliamentarians, is much more significant because of what we've seen already in the first quarter of 2009," he said.