Economy took a ride in 2009

Considering where we started 2009 economically, things aren’t looking so bad as we enter 2010. As 2008 was turning into 2009, the Toronto Stock Exchange’s value had, in a matter of months, fallen 40 per cent from record levels seen the previous summer. It would fall another 15 per cent before hitting rock-bottom in March.

The economy was l osing about 100,000 jobs a month in the early part of the year, and the unemployment rate would gain two full percentage points within the first half of 2009. After ending 2008 at 6.6 per cent, Canadian joblessness was at 8.6 per cent by June.

After more than three decades of being a net exporter of goods, Canada was getting i nto a habit of turning i n monthly trade deficits.

Even the once-seemingly invincible housing market was faltering, with listed resales in January coming in 40 per cent lower than year-earlier levels and prices declining by more than 10 per cent.

In order to support the economy, Prime Minister Stephen Harper’s Conservative government had resigned itself to running multi-year federal deficits for the first time since the mid1990s.

Things were looking bad and getting worse. It was anyone’s guess how bad it would get. Comparisons to the Great Depression were aplenty.

For many places in the world, including the United States, this was the worst economic crisis since the Second World War.

For Canada, the downturn’s severity was relatively light. The ultimate cost was a three-quarter recession with a 3.3-per-cent chunk taken out of the economy. It was shorter and shallower than previous recessions in the 1990s and 1980s.

The Canadian recession officially ended in 2009’s third quarter, when the economy grew at an annualized rate of 0.4 per cent. Though tepid, the pace is believed to have picked up to as much as three to four per cent during these last months of 2009. The overall GDP loss for the year is expected to be about 2.5 per cent.

Most economists, and the Bank of Canada, expect the pace of economic growth to slow somewhat next year from the current pace — most forecasts are for GDP expansion of less than three per cent — for a variety or reasons, including a sluggish U.S. recovery, the potential for higher interest rates, continued strength in the Canadian dollar and more cautious spending habits among consumers.

The Canadian housing market has now fully recovered and is back to setting records in terms of sales volumes and prices.

The country’s stock market, while still far short of heights seen in the summer of 2008, is on track to finish 2009 with gains in the neighbourhood of 30 per cent.

More importantly for many thousands of individuals, the Canadian economy had gained more than 93,000 jobs between August and November after losing about 330,000 for the year up to that point.

Given the wide range of trends seen in 2009, Avery Shenfeld, chief economist for CIBC World Markets, says it’s hard to believe it all happened in the same year.

“This was almost two years, economically,” he says. “We were falling into an abyss in the first part of the year, and then staging a fairly nice recovery in the second half.”

Warren Jestin, chief economist with the Bank of Nova Scotia, sees two distinct economic periods for 2009 — one that started in September 2008 and extended to March 2009, and a different period from that point on.

“If I were looking at 2009 as a whole, it started off very ugly, and after the spring, we began to see the economic news get a little bit better,” he says.

Shenfeld says the global stock market recovery, which began in March, played a big role in helping people regain a level of confidence in the global financial system and prevented what could have been a far worse recession.

The CIBC chief economist gives much credit to the Bank of Canada for its quickness in bringing interest rates to historic lows, which proved to be a boost to the housing industry and consumer spending in general. Between October 2008 and April 2009, the bank knocked the key lending rate down from three per cent to 0.25 per cent.

“The Bank of Canada moved at an unprecedented pace to cut interest rates during the recession, and Canadians’ response to that was equally unprecedented,” Shenfeld says.

“I would say the Bank of Canada gets an ‘A’ for action in not underestimating the risks to Canada and providing the economy with the means to dig ourselves out of the hole.”

Shenfeld says it’s hopeful that 2010 contains less economic drama than 2009. He expects employment growth in the neighbourhood of two per cent in the coming year, which he says isn’t enough to get the unemployment rate back below eight per cent. It was most recently 8.5 per cent in November.

He also expects strength in the stock market and housing to continue, largely as a result of the Bank of Canada continuing with ultra-low interest rates. Shenfeld says the Bank of Canada will likely go well beyond its target date of mid-2010 before raising rates, as economic growth is likely to trail the central bank’s expectations.

Scotiabank’s Jestin says a ramp-up of government stimulus projects will help push along the economic recovery in the early part of 2010. By spring and into the summer, he expects consumer confidence to improve and business investments to pick up “so the economic recovery becomes more broadly based.”

Jestin, however, believes the central bank will start increasing interest rates in mid-2010, which will hold the economy back from going “gangbusters.” A high Canadian dollar, he says, will also hold the economy back somewhat.

He says the Canadian job market should continue making gains in the coming year. By the first half of 2011, Jestin figures the country will have gained back all of the jobs lost from this recent turmoil.

With this past recession in Canada caused by external factors — mostly structural deficiencies in the housing market and banking industry in the U.S. — Shenfeld says one of the key lessons learned is that Canada “is not an island onto itself” in the world economy.

That’s a point also noted by Don Drummond, chief economist for TD Bank Financial Group.

“We were very boastful in Canada in 2007 and even in 2008 about how the so-called economic fundamentals were strong here,” he says. “We had budget surpluses here, trade surpluses. … We had a very stable housing market. We had very stable mortgage conditions. And yet we got whacked, and we got whacked hard.”

Drummond finds it interesting how “synchronized” the economic downturn was throughout the world, noting it was the first time since data has been available that the global economy as a whole shrank.

“If you look at the 10 leading stock markets of the world, representing every corner of the globe, nine of the 10 had their trough in March 2009, which is really quite staggering when you consider that [Japan’s] Nikkei [index] and the TSX have almost nothing in common [in terms of sector makeup],” Drummond says.

The global recovery is happening in a fairly unified manner as well, says Drummond, adding that Canada is a beneficiary to that and will continue to be for the coming year.

However, Drummond says a difference between this economic recovery and past ones, in terms of the strength of rebound, is that consumers in Canada and elsewhere, particularly the U.S., are saving more of their money rather than spending it. Longer term, it would be a good thing for people to save more, Drummond says, but “it will dull the pace of recovery.”

(prepared by Derek Abma/Financial Post/Vancouver Sun)