Canada's economy falls into recession, says RBC
Rocky road ahead as global economy falters and commodity
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
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,"
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.
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For more information, please contact:
Craig Wright, RBC, Economics, 416-974-7457
Jackie Braden, RBC, Media Relations, 416-974-2124