A lukewarm recovery coming soon to an economy near you

After a reading of the entrails of the economy, the Conference Board of Canada has concluded that the slump is just about over. The think tank said in a report Monday that it expects real gross domestic product to grow by 2.7 per cent next year. That's a rosier outlook than that of most private forecasters, who anticipate lacklustre growth in the near term. TD Bank, for instance, sees average GDP growth of 1.4 per cent in 2010.

But the Conference Board believes the economy has already turned the corner. It says there could be an uptick in the current third quarter, following declines in February (0.1 per cent), March (0.3 per cent) and April (0.1 per cent). However, there may not be much cause for celebration. The three-month advance is likely to be an imperceptible 0.2 per cent, and the forecast for all of 2009 is a cheerless contraction of 1.9 per cent.

The Conference Board cast still more gloom on its own forecast, noting that post-recession recoveries are usually more robust but because the current recession is so widespread, its effects are expected to linger for longer than the typical business cycle.

Exports will decline by nearly 15 per cent this year and grow by only 2.8 per cent in 2010, it added. Although resource prices and exports are expected to recover somewhat next year, the main contributor to a rebound will be public infrastructure spending.

Still, a tepid recovery is better than no recovery, and business managers polled by the Bank of Canada are unabashedly bullish about the next 12 months. More than 60 per cent predicted faster sales growth in the bank's latest quarterly survey, compared with only 30 per cent in April and 23 per cent in January. It marked the first time since the third quarter of 2008 that a majority had a positive view of future sales. Moreover, nearly 40 per cent said they intend to hire workers, compared with 25 per cent in the previous survey. Another encouraging sign on the employment front was a labour force report from Statistics Canada last week that showed the pace of job loss has slowed dramatically, with 13,000 jobs lost in the second quarter, compared with the 273,000 jobs that vanished in the first. The bad news is that many forecasts call for the unemployment rate to rise from 8.6 per cent last month to 9.9 per cent next year, before it slips back to the 7.7-per-cent range in 2013.

Tight credit continues to be a drag on the economy. In a survey of financial institutions, the central bank found restrictions on credit remain severe but more selectively so, with automotive, transportation and forestry facing the strictest borrowing terms. Both the Federal Reserve and the Bank of Canada have pledged to keep interest rates at near-zero levels until mid-2010 in an effort to stimulate business and consumer spending.

Other recent glimmers of hope include a surprising increase in the value of building permits and an equally unexpected surge in Canadian housing starts.

Overall, housing starts were up about eight per cent in June from May, led by cities in Western Canada. Urban housing starts in British Columbia were up 25 per cent, with multiple-unit buildings responsible for all of the increase. Compared with a year earlier, of course, the latest housing starts are less than meets the eye. B.C. recorded 1,062 housing starts in June, against 2,635 in June 2008.

Besides its economic forecast, the Conference Board offered some unsolicited advice to provincial governments in its report. And it's not what they wanted to hear. In order to eliminate budget deficits, it said, they'll either have to cut spending or raise taxes.

(Source: Editorial/Vancouver Sun)