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Special Reports


Canada's economy falls into recession, says RBC

Rocky road ahead as global economy falters and commodity prices slide

TORONTO, December 19, 2008 — Weaker U.S. growth and tight credit conditions have resulted in Canada's economy falling into recession according to a report by RBC Economics. The country's economy will grow by 0.6 per cent in 2008 and then experience no growth in 2009, the report said.

"The U.S. economy has fallen into a deep recession that will likely push the Canadian economy into recession as well," said Craig Wright, senior vice-president and chief economist, RBC. "However, we expect the slowdown in Canada not to be as severe as in other countries since the imbalances plaguing other countries are more pronounced. We expect to see a moderate, though sustained, recovery in the second half of 2009."

The report noted that the sharp decline in commodity prices over the past three months will likely cut Canada's domestic income in 2009, after six years of solid gains. This income supported consumer, business and government spending - the lifeblood of Canada's strong economic performance for the past several years. For 2009, the combination of falling domestic income growth, tighter credit conditions and a rising debt-to-asset ratio is expected to curb consumer spending. However, residual support from Canada's strong terms of trade gains should help limit the erosion of investment and consumer spending.

Despite the fact that negative economic growth is only expected to continue for the next two quarters, its impact will be far reaching as Canada's unemployment rate will climb to a near-term quarterly peak of 7.4 per cent in 2009, the RBC report says.

With growing concerns about the economy and the likelihood of a recession, the Bank of Canada cut the overnight rate by an aggressive 75 basis points in early December to 1.5 per cent, following a cumulative 75 point drop in October. With the economy entering the weakest period for growth another cut in the policy rate to one per cent is likely early next year. However the combination of a weakening Canadian dollar and an expected fiscal stimulus package from the federal government may ease concerns that the central bank could cut rates even further in 2009.

The U.S. economy contracted by one-half of a percentage point in the third quarter, with consumer spending falling at its steepest pace in 28 years. The combination of slower export growth and widespread weakening in global economic activity has set the stage for a much more marked deterioration in the final quarter of this year. RBC expects that U.S. real GDP growth will decline by about 1.5 per cent in 2009 and recover to grow by 2.1 per cent in 2010.

From January to November 2008, U.S. companies cut almost two million employees and the unemployment rate jumped to 6.7 per cent in November, compared to 4.7 per cent a year earlier. The steady deterioration in U.S. labour market conditions is taking its toll on consumer confidence, which slumped to an all-time low in October though recovered modestly in November. Additional fiscal stimulus is likely to come in early 2009 as the new Obama Administration takes office, to help boost both consumer and business spending, the RBC report says.

With the U.S. economy in recession and inflation pressures receding, the Fed aggressively cut its policy rate again in December and committed to keeping policy accommodative and use all tools in its arsenal to support the financial system and promote economic growth . "The Fed's commitment to low interest rates and directly supporting markets that are in distress will ultimately lead to narrower credit spreads," noted Wright.

A complete copy of the forecast is available as of 8 a.m. E.S.T., at www.rbc.com/economics/market/pdf/fcst.pdf. The RBC Economics Provincial Outlook assesses the provinces according to economic growth, employment growth, unemployment rates, personal income growth, retail sales, housing starts, and the consumer price index.


- 30 -

For more information, please contact:
Craig Wright, RBC, Economics, 416-974-7457
Jackie Braden, RBC, Media Relations, 416-974-2124


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12/19/2008 09:46:27