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Special Reports


Canada's economy under greater pressure from a deepening U.S. recession and weakening commodity prices, says RBC

Aggressive policy actions will foster recovery in 2010

TORONTO, March 12, 2009 — As the recession in the U.S. economy intensifies, Canada's downturn deepens with no uptick in growth expected until the second half of the year, according to a report by RBC Economics.

"Canada's economy is definitely feeling the weight of the U.S. recession with the biggest quarterly contraction in growth in 17 years in the final quarter of 2008," said Craig Wright, senior vice-president and chief economist, RBC. "Canadian and U.S. policymakers have become increasingly aggressive in implementing measures to reverse the downturn and boost growth. In response to these aggressive steps, we expect Canada's recovery to start in second half of 2009 and gain momentum in 2010."

RBC notes the deepening U.S. recession and ongoing pressures on financial markets have weakened both the Canadian business and consumer sectors, reflecting the higher cost of capital, reduced demand for motor vehicles and falling commodity prices.

Canada's weakening labour market has added to the pressure on consumer confidence as Canadians worried about the implications of a deepening U.S. recession and financial market crisis on Canada's growth prospects, said the report. This erosion in confidence weighed heavily on housing market activity with sales falling and prices slumping.

The Bank of Canada slashed the policy rate to 0.5 per cent in March 2009 and vowed to maintain it "at this level or lower" until the economy is growing sufficiently to close the output gap and thereby mitigate the downside risks to the inflation outlook.

The U.S. recession deepened markedly in late 2008 with real GDP contracting at a 6.2 per cent annualized pace. The retrenchment of both consumers and businesses, combined with a sharp pull-back in trade flows, caused the serious decline in economic output.

RBC forecasts another significant contraction in the first quarter of 2009 at a 4.8 per cent annualized pace with substantive improvement unlikely until late in the year.

On a positive note, the Obama Administration passed the $787 billion American Recovery and Reinvestment Act. The Act provides tax relief, funds for infrastructure spending and money for states, health and education and is aimed at limiting the downturn in the labour market by boosting spending.

The Federal Reserve set the funds rate at a target range of zero to 0.25 per cent in mid December and reconfirmed their commitment to supporting the financial system and the economy. The Fed also committed to maintaining "exceptionally low levels of the federal funds rate for some time." RBC expects that this range will be maintained throughout 2009 and most of 2010.

A complete copy of the forecast is available as of 8 a.m. E.D.T., at www.rbc.com/economics/market/pdf/fcst.pdf. The RBC Economics Provincial Outlook assesses the provinces according to their projected growth in real GDP, employment, and retail sales, as well as their unemployment rates and housing starts.

- 30 -

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


Jump To
National Forecast
(pdf, 9 pages, 136kB)
Provincial Forecast
(pdf, 13 pages, 165kB)
British Columbia

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03/12/2009 08:50:17