Worst likely behind us / BMO/ Globe and Mail article /dated Feb 26th ,2009

Worst likely behind us: BMO

Globe and Mail Update

February 26, 2009 at 4:16 PM EST

The Canadian economy is still in decline, but the rate of slippage appears to be moderating and a recovery will likely take hold by the end of this year, Bank of Montreal economist Douglas Porter says in a report Thursday.

"Some of the worst monthly numbers are already behind us ... It may well be the case that the worst declines were in November, December, January and February," Mr. Porter said in an interview.

"The fact that Canada and the global economy are mired in recession ceased to be a debate last year, but the depth and duration of the downturn are still very much in question," he wrote.

"Our current view remains that the Canadian recession will be somewhat milder than the past two major downturns ... We continue to maintain the view that a recovery will take hold by the end of the year, despite the recent wave of downbeat economic releases."

There has been no shortage of unnerving news, he wrote.

"The downturn first began in earnest in exports to the rest of the world, but domestic spending is now braking forcefully as well, with the upcoming [gross domestic product] release for the fourth quarter likely to reveal a hefty drop in consumer spending, housing and business investment."

However, Mr. Porter said he believes the recession will not be as deep or prolonged as the recessions of the early 1980s and early 1990s for a number of reasons:

"First, interest rates were cut early and often in this cycle and are much, much lower than in the past two downturns...

"Second, stimulative fiscal policy is kicking in relatively early in this downturn.

"Third, corporate balance sheets were in much healthier shape heading into this recession than in the past two cycles."

And, finally, the 20 per cent depreciation of the Canadian dollar relative to the United States dollar, "will offer some relief to industry," he wrote.

Mr. Porter said what differentiated the onset of this recession from prior downturns was "just how quickly global growth deteriorated and how uniform it was around the world.

"We were all in the same boat together, and it went down very quickly," he said in the interview.

On the plus side, the rescue efforts also kicked in quickly.

"I think there is a case to be made that because there have been very forceful, co-ordinated efforts around the globe, there is reason to believe that we will all come out of it together - not necessarily quickly, but in a shorter period of time than some might believe," Mr. Porter said.

He added that Bank of Montreal economists now predict a 2 per cent decline in Canada's gross domestic product this year, and project that the unemployment rate could average 8.2 per cent in 2009 - not as high as the unemployment rate of 13 per cent reached in December, 1982.

The recovery, when it does take hold, will be half-hearted and, to some extent, "will be force-fed by this wave of fiscal stimulus that we are seeing around the globe," he said.

But for the stimulus efforts to work, the United States must first stabilize its financial system, he added.

"If that doesn't happen, of course we have got to start over again with the forecast," Mr. Porter said.

"We don't need the U.S. consumers to go back to their free-spending ways, we don't necessarily need that. We just need the U.S. financial sector to sort of stabilize and we need their growth to stop falling before we can realistically look at a turnaround in Canada," said Mr. Porter, who noted that U.S. Federal Reserve Board Chairman Ben Bernanke has also projected that the economy could start to recover by the end of 2009.

Mr. Porter said an early indicator in Canada will be what happens with housing starts and building permits.

"In some downturns, you'll see housing starts fall fairly quickly early in the cycle and then start to bottom out. And that may be precisely what we are seeing this time. In other words, home building already has declined quite quickly in the last couple of months, and it could weaken a little bit further in the next few months," Mr. Porter said.

"But I would actually look for that sector to be one thing that does lead us out of this."


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