Double-dip recession still a long shot

OTTAWA — Warning signals are appearing on the economic horizon in both Canada and the U.S., with two new reports projecting the second half of this year won’t be nearly as rosy as the first.

OTTAWA — Warning signals are appearing on the economic horizon in both Canada and the U.S., with two new reports projecting the second half of this year won’t be nearly as rosy as the first.

The Conference Board said Wednesday that Canada’s economy will slow appreciably from the rocket-like surge of the first quarter, when growth was a decade-best 6.1 per cent.

Meanwhile, in a gloomy report, the U.S. Federal Reserve downgraded growth for this year by two-tenths of a point to between three and 3.5 per cent, and suggested the risk was for even softer numbers.

“Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad,” the Fed said in reporting comments from its meeting in late June.

And it suggested more monetary easing might be necessary down the road, stating that: “In addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.”

The Fed’s warnings coincide with a surprisingly weak June retail sales data coming out of the U.S. Commerce Department, showing consumers slowing spending a further 0.5 per cent, following a 1.1 per cent plunge in May.

The European debt crisis and growing concerns about the strength of the global recovery has in recent weeks raised the spectre that some countries, including the U.S., might be in store for a double-dip recession if governments move too fast to restrain spending.

The signals are not so ominous in Canada, which continues to mostly avoid the worst of the fall-out from the financial and economic crisis, thanks to a robust domestic economy and a sound banking sector.

That has allowed Canada to lead most of the world in both the timing of the recovery and pace, but recent indicators suggest growth has already begun to brake.

In April, the economy failed to expand for the first time in eight months, putting in a flat performance.

Many analysts expect the Bank of Canada to temper its own expectations about the economy next week, but not so much to dissuade governor Mark Carney from taking interest rates up a quarter-point to 0.75 per cent.

In the last policy review three months ago, the Canadian central bank projected the economy would grow 3.7 per cent for the year.

That is not far from the Conference Board’s new forecast of 3.6 per cent, made of advances of 3.6 per cent in the just completed second quarter, 3.3 per cent in the third, and finally to 2.9 per cent in the final three months of 2010. It expects 2011 to average 2.9 per cent.

“It’s not a double-dip recession, it’s growth not as strong as in the past,” says economist Pedro Antunes, director of forecasting for the Conference Board.

The think-tank says Canadians should also expect job creation to slow, although it believes the unemployment rate will continue to decline if more slowly from the current 7.9 per cent to 7.8 per cent by the end of 2010 and average 7.4 per cent in 2011.

The pace of recovery so far has surprised many, and while it has not taken economic activity all the way back to pre-slump levels, it has improved the lot of many.

Employment during the first half of this year has risen by 309,000, more than earlier forecasts had projected for the whole of 2010.

New figures from the federal bankruptcy office also show Canadians’ finances have improved significantly, with consumer bankruptcies in April dropping 21.1 per cent compared with the same month last year, while business failures declined 17.8 per cent.

Antunes says the growth spurt was the result of a strong domestic economy boosted by robust consumer spending, government stimulus spending and restocking by companies that drew down inventories during the recession.

But consumers couldn’t continue their spending spree for long, especially with interest rates rising, he said, noting that Canadians have been increasing spending beyond the rate of income growth.

“In terms of sustaining gross domestic product growth going forward, it’s really on the trade side and (business) investment, and that depends on the rest of the world and that’s where we think much of the risk still lies,” Antunes said

The big danger, he said, is if another crisis occurs that saps confidence and undermines world trade and business investment, much like the fall of Lehman Brothers did in 2008.

Prospects from the U.S. remain weak and the European debt crisis has added a volatile unknown into the forecasts, he said.

“We don’t think it will happen, but these risks are real.”