Canada's economy

Canada's economy is within spitting distance of a recession, with every single engine of activity either sputtering or stalling out completely, the Bank of Canada says.

The country is contracting right now, will not show any growth at the beginning of 2009, and recovery won't begin until late next year, the central bank said in its quarterly update, released yesterday.

But even that grim forecast is laden with so many caveats that the central bank doesn't place much faith in it, warning that the dynamics of the financial crisis and global economy are changing so quickly that there are "significant risks to the projection."

"Growth could be higher or growth could be lower," said Bank of Canada Governor Mark Carney.

In a news conference after the release of the report, the governor sought to strike a reassuring tone, saying Canada is faring much better than other advanced countries, and could have fared a lot worse had it not been for the bank's early rate cuts and aggressive action to stabilize credit markets.

"The sky is not falling. The sky is still there, the sun is still coming up every day and the Canadian economy is still functioning," he said.

With further interest rate cuts to come, and central banks around the world doing whatever they can to keep the financial system afloat, Canada should be able to avoid the nasty downturn hitting families and businesses in the United States, he said.

Still, the bank's assessment of the Canadian economy shows weakness on all fronts.

The housing boom, which supported much of the spending by Canadian consumers over the past couple of years, has come to a sudden end, the bank report says.

Household net worth is declining as equity prices plunge and home prices slide.

Business investment is under pressure because the cost of credit has risen and the availability of credit is evaporating.

Trade won't be as much of a drag on Canada's growth as previously anticipated, but only because domestic demand is softening and Canadians aren't buying imports the way they have in the past.

The amount of money the country earns - which has surged in the past couple of years on rising commodity prices and a strong currency - is poised to contract steeply in 2009. Indeed, the bank now forecasts that Canada's gross domestic income will decline 1.9 per cent next year. That's more than six percentage points less than its last such projection.

The job market, which has chugged along despite the worsening financial crisis of the past year, will succumb.

But because Canada's banks, governments and households are confronting the downturn with strong balance sheets, the pain won't be deep, Mr. Carney said.

"We started from a very strong starting point," he told reporters. "We're going into this difficult period for the global economy with a number of fundamental strengths."

He said he is seeing signs of improvement in global credit markets, and is confident that lending in Canada will continue to function - with the help of the central bank if need be.

"It's going to mean that the damage and the potential freezing of the financial system in Canada is not going to happen, and likely will continue as before," he said.

"What matters is that the system continues to function. If [Canadians] go to get a loan, or they go to get a mortgage, they can do that and continue to do that on reasonable terms."

While Mr. Carney noted the recent volatility of the Canadian dollar with some concern, he said a weaker currency will generally help offset the harm that comes to Canada from softening global demand.

In addition, the Canadian economy should soon start feeling the beneficial effects of interest rate cuts initiated the central bank initiated over the past year, Mr. Carney added. The bank has slashed its key rate by a hefty 2.25 percentage points over the past 10 months, essentially halving it from last December.

Still, Mr. Carney stressed that the sources of Canada's economic woes all lie outside the country, and he put the onus on other leaders to create a more stable environment.

"These problems originated outside of our borders, and the primary solutions to correct them must take place there as well," the governor said in a prepared statement.

Whether the recovery in 2010 is quick - as the central bank foresees - or drawn out, as many other economists warn, the long-term prospects for Canada's prosperity are on shaky ground, the central bank report says.

Canada can't expect to grow any more than 2.4 per cent on average, without prompting the central bank to crack down on inflation, the report says.

(prepared by Heather Scholfield/Globe & Mail)