Recession stalking Central Canada (The article predicts interest rate cuts are on the way)

HEATHER SCOFFIELD

Globe and Mail Update

The Ontario economy has nearly stalled and, with the U.S. slowdown breathing down its neck, Canada's biggest province could possibly fall into recession, a new forecast from economists at Toronto-Dominion Bank warns.

“There is a chance of recession in Ontario. We have some numbers that are getting close to the line,” said Derek Burleton, co-author of the bank's latest provincial forecast.

A recession is typically defined as two successive quarters of economic contraction, and is frequently associated with rising levels of bankruptcy, company restructuring and job loss across many sectors.

The most likely scenario is that Ontario will grow by 1.8 per cent this year and 2.0 per cent next year, the TD forecast states. While those numbers are very low for a province that has traditionally carried the Canadian economy, they mask a steeper slowdown expected during the last half of this year and the first half of next year, Mr. Burleton said.

“It's going to be a difficult ride in the next few quarters.”

Ontario has already been struggling for a couple of years as a high Canadian dollar and rising energy costs have undermined its key manufacturing sector. However, the slowdown on the manufacturing side of the economy has largely been offset by a pickup on the services side, driven by strong consumers and a healthy job market.

But that delicate balance is being upset by the U.S. slowdown, which is only just beginning to be felt in Central Canada, he said. “Jobs will be the next shoe to drop.”

Auto production in southern Ontario will likely decline outright this year and next, the report says. The Canadian arms of Ford, General Motors and DaimlerChrysler are scaling back and a turnaround is not expected until 2008 when new production lines at Toyota, Honda and GM come on stream.

Quebec is in a similar bind. Tourism is suffering, the forest industry has been shedding jobs and the future looks dim for both those industries, the TD forecast argues, projecting 1.9 per cent growth this year and 1.8 per cent next year.

Neither province has much hope of a recovery to normal economic growth rates until 2008, TD says.

“For the manufacturing-based economies of Central Canada and some parts of the Atlantic [region] that have recently struggled under the weight of a high Canadian dollar and elevated energy prices, the dampening influence of weaker demand growth stateside has effectively quashed any hopes of a meaningful recovery until 2008.”

CIBC World Markets Inc. has a similar forecast for the Ontario economy, although it also expects the central bank to move decisively to revitalize Central Canada, economist Warren Lovely says. He projects that the Bank of Canada will cut interest rates four times in the next year, “not only to restrain the loonie, but also revive a badly sagging Central Canadian economy.”

He also sees manufacturing weakness spilling over into the broader economy — a repeat of the economic pain of the early 1990s.

Even the western provinces will feel a pinch from the global economic slowdown, economists say — although the divide between Alberta and the rest of the country will continue for a couple of years. “As the headwinds begin to blow from the south, the respectable overall growth trends in Canada are masking an increasingly skewed regional picture,” TD says.

“We not only concur that growth in the Alberta economy has passed its peak in the current cycle, but that the risks of a hard landing have been rising.”

The most probable scenario, however, is that the Alberta economy will be able to avoid the boom-bust cycle of the past, and coast gradually to growth rates of about 3 per cent a year, down from the 6.8 per cent expected this year. Prices for oil, gas and other commodities are sliding, the TD forecast says, and some capital spending plans will likely be delayed or cancelled.

“A softening in conditions in resource markets, including crude oil and forestry, will knock both Alberta and B.C. off their high growth horses over the next few years.”

CIBC, however, was far more upbeat about the prospects for the West, predicting that massive capital spending will continue, with commodities prices remaining high. Alberta's growth should continue to reach almost 7 per cent next year, Mr. Lovely forecasts.