Canada is sure to experience some of the economic problems currently afflicting the United States, and Ontario in particular will feel the pain, according to a report by TD Bank.
“The west will remain in the best shape to weather the economic headwinds, while Central Canada—and notably Ontario—will be in the worst,” said the bank’s chief economist, Don Drummond.
It was originally thought that the U.S. could avoid a recession, but with 10 of 15 industries posting year-to-date losses in jobs in January and February that view is now in doubt.
Bank of New York Mellon’s director of global strategy, Samarjit Shankar, echoed TD’s sentiments during a speech to CIBC Mellon staff on Wednesday. He explained that investor sentiment is negative and predicted continued weakness in the U.S. dollar. “The markets are screaming for a lower Federal [Reserve] rate,” he said. “The U.S. economy is in freefall.”
The TD report paints a negative picture with regards to United States’ housing downturn, saying that existing home prices have fallen for an unprecedented 18 months and the end is not yet in sight. Equity fell below 50% in 2007 for the first time since the Federal Reserve began keeping records in 1945.
In the meantime, the bank predicts that Canada’s economy will suffer due to two direct linkages between the two countries. “First, the current tightness in the credit cycle will act as a speed bump to investment by raising the cost of funding and restricting investment for a number of Canadian companies,” said the report. “Second, the lethal combination of a high Canadian dollar and weak U.S. demand will continue to drag export growth.”
The weakness in the trade sector will be most apparent in Ontario, where the economy is expected to display a meagre 0.5% growth in 2008, its worst showing in 16 years. Conversely, Saskatchewan is poised to outperform national growth three to one. According to the report, the disparity can be explained by trading patterns. TD estimates that the U.S. export share of GDP by province ranges from 40% in Ontario to 18% in British Columbia. Drummond said the sector mix is equally important since “the U.S. recession is consumer-led, related shipments will be hardest hit within the provinces, particularly auto and forestry products.”
He explained that exports such as energy, non-forestry commodities, and agriculture are expected to hold up well in 2008, which explains Saskatchewan’s expected growth.
While domestic spending levels are currently strong, TD expects employment in Central and Eastern Canada to flatten out by the second quarter of this year, lowering consumer spending and housing activity. However, Drummond believes Canada’s economy will generally weather the American storm and said: “Cooling domestic demand growth in Canada won’t change the fact that the underpinnings are day and night relative to its U.S. counterpart.”
Still, the outlook for 2009 is optimistic. “The adjustment underway in the U.S. is a necessary evil that will allow lenders and homeowners to work through oversupply, stagnating home prices, and the excesses of past lax lending standards,” he said. Drummond expects this will result in fewer restraints in consumer spending and lending practices which will contribute to a recovery by the autumn of 2009.
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