Sharp drop in recession suggests pain will be short

Canada's recession is brutal. It could also turn out to be mercifully short.

Gross Domestic Product contracted at an annual rate of 3.4 per cent in the fourth quarter, the worst showing since 1991, Statistics Canada reported yesterday.

While doing nothing to dilute the pain being felt in every corner of the country's economy, the data support Bank of Canada Governor Mark Carney's contention that record-low interest rates and hundreds of billions in government spending around the world will spark a rebound by the second half of this year.

The glimmer of hope comes from the fact that Canada's descent into recession last year was faster and deeper than the two previous economic contractions in the early 1990s and the early 1980s.

That suggests a significant portion of the hurt that typically accompanies a downturn has already been felt. The unprecedented stimulus in the system promises to make it easier for companies and consumers to spark a recovery than at any time in history.

"I don't want to be too doom-and-gloom," said Yanick Desnoyers, assistant chief economist at National Bank Financial in Montreal. "The prompt responses of Canadian government and the central bank will induce a recovery, provided the U.S. recession doesn't persist."

Still, there remains doom and gloom aplenty.

In Toronto, the country's main stock exchange plunged 435.51 points, or 5.35 per cent, to 7,687.51, its lowest level since fall of 2003, in part in reaction to the GDP figures.

The Canadian dollar fell 1.16 cents to 77.44 cents, the weakest in three months.

That kind of volatility will do nothing to ease the consumer anxiety at the heart of the recession.

Household spending fell for the first time in 13 years in the fourth quarter, even as income increased, suggesting consumers are too fearful of the future to do the spending that's necessary to spark a recovery.

"That's the fear factor," said Glen Hodgson, chief economist at the Ottawa-based Conference Board of Canada and a former official at the Finance Department. "People are worried about their futures and their jobs."

Unlike the downturn of the early 1990s, which was concentrated in manufacturing, the pain this time is being felt more broadly.

Factory production declined 4.7 per cent in the fourth quarter and exports dropped for the sixth consecutive quarter, the longest slump since Statscan started keeping records more than 60 years ago.

The output generated by financial advisers, consultants, retailers, baristas and others in the services industry fell for the first time since 1991. Corporate profits collapsed 20 per cent. Residential investment and spending on plants and equipment also plunged.

In the House of Commons, John McCallum, the Liberal finance critic, said the GDP figures showed the government was too slow in coming up with the $40-billion economic stimulus program that Finance Minister Jim Flaherty presented at the end of January.

Prime Minister Stephen Harper responded that Canada is doing much better than other nations, and called on the opposition parties to speed passage of Mr. Flaherty's program.

"Our economy remains in a position of relative strength," Mr. Harper said. "I would urge the opposition to focus on that and to pass the important measures we have to sustain this economy through these difficult times."

Statscan noted yesterday that the U.S. economy contracted at an annual rate of 6.2 per cent in the fourth quarter, the European Union registered a decline of 5.9 per cent and Japan's economic output deteriorated 12.7 per cent.

In Canada, Mr. Carney, who is expected to reduce the Bank of Canada's benchmark lending rate again today, also predicted in January that the current recession would last only nine months, with growth resuming in the third quarter of 2009.

That's short by contemporary historical standards.

The previous recession began in the second quarter of 1990, when the economy shrank at an annual rate of 1.7 per cent. The deterioration of the economy gradually picked up speed, contracting at an annual rate of 5.9 per cent when the downturn ended in the first quarter of 1991.

The recession of 1981-82, which lasted six quarters, began when GDP shrank 2.8 per cent over the autumn months of 1981.

Mr. Desnoyers said he's optimistic the worst of the U.S. recession is over because of recent indicators that suggest the collapse of the housing market is finding a bottom, which would boost confidence and steady financial markets.

Still, until that happens, it's up to the Canadian government to get the economy going, he said. In the fourth quarter, public spending was the only source of growth, according to Statscan.

With Mr. Flaherty's stimulus program set to pass Parliament by the end of the month, there's much more on the way. The faster it's spent, the better the chances the recession will end quickly.

"For the first time in many years," Mr. Desnoyers said, "we are counting on policy for the recovery."

(prepared by Kevin Carmichael/Globe & Mail)