prices go down, but if the demand is so soft in the U.S. that people won’t buy at any price, that is a problem,”Leonard says. “But the depreciation is still help in the right direction.”
Leonard does not expect the downward trend in exports to turn around until the U.S. economy hits its bottom.
Canadian industrial MRO distributor Source Atlantic’s Steve Drummond says the same: “The dollar impact will always have a positive effect on our exporting businesses, but the severity of the decline in demand is not allowing that to be that beneficial.”
The Bank of Canada forecasts the Canadian dollar will average its current value, around $0.85, through 2010.
Even though energy prices have gone down, many energy projects are still on tap to move forward. One distributor tells MDM he has not seen energy prices affecting long-term energy-related projects yet, such as new refineries and nuclear plants.
The forest products sector in Canada has seen some of the deepest cuts in prices, leading the downward trend in the resource sector. “It is much more sensitive to what is happening in the U.S. housing sector,”Leonard says. He says the sector will likely “lag”the industrial recovery in Canada.
In Canada, construction markets have started to decline, but will not hit the lows seen in the U.S.
“There is no sub-prime mortgage market up here to speak of, and so we just didn’t see the run-up in housing prices over the past couple of years that the U.S. saw. The run-up in prices we did see was due to underlying fundamental demand,”Leonard says. The extent of the decline in Canada depends on the area of the country.
The other persistent weakness in the Canadian economy continues to be the automotive sector. A decrease in North American vehicle sales has hurt Canadian suppliers to that industry.
The Bank of Canada’s business outlook survey shows that firms in Western Canada are tempering their expectations for sales growth. The survey says that “some in the West noted that previous high rates of sales growth could not be maintained.”
Firms in other regions expect little change in sales growth over the next 12 months.
In the survey, more firms reported that the U.S. economy’s weakness was negatively affecting sales prospects. Expectations for investment spending were down, but still remain positive due to the long-term outlook for commodity prices and new export markets.
The Bank of Canada survey shows that hiring intentions are “slightly below levels in recent surveys.”Companies in Central and Eastern Canada are less optimistic about hiring than those in Western Canada.
RBC Economics forecasts that weak growth from tight credit and slow demand for the U.S. will continue to put downward pressure on prices. The Bank of Canada forecasts core inflation will remain below 2 percent though 2010. Core inflation does not include food and energy prices.Canadian economists are saying the country will follow the U.S. into a recession. The severity of that recession -which is currently expected to be short -is dependent on how far the U.S. falls. Here’s an overview of the current situation.
While conditions in Canada no more than a few months ago pointed to a downturn, a recession was not necessarily yet in the cards thanks to strong domestic demand and high commodity prices.
But with the U.S. economy officially in a recession, Canada is facing the same prospect. Demand for its products in the U.S. continues to fall despite a weakening of the Canadian dollar -which in any other year might make Canadian products more attractive to U.S. companies.
What’s more, commodity prices and demand for raw materials have softened, putting a damper on the historically strong resources sector. And though Canada’s banking system has not seen the same turmoil as in the U.S., more businesses are reporting tighter credit conditions in the final quarter of the year.
We are in for a couple of rough quarters looking forward,”says Jeremy Leonard, economic consultant for the Manufacturers Alliance/MAPI. Leonard is based in Montreal, Quebec. He sees Canada going through a “short and shallow recession”from the fourth quarter 2008 through the middle of 2009.
Still, GDP will not decrease by a lot -probably between 0.5 percent and 1 percent, he says. Most forecasts show the Canadian economy moving back into positive territory in the second half of 2009.
That said, if the U.S. economy goes off a cliff, so to speak, Canada could see a much more prolonged downturn. Forecasts say the country’s GDP could go down 1.5 percent from the end of 2008 through the end of 2009. Leonard says that is the most pessimistic scenario for the U.S.’s northern neighbor.
The most recent GDP numbers -third quarter -showed that goods-producing sector declines were offsetting gains in service sectors. Third-quarter GDP was stronger than expected due to a decline in imports and rise in inventories.
Driving the Downturn
Leonard attributes his and others’forecasts to current U.S. conditions and resource price deflation. “Prices have declined rapidly over the past few months,”he says. Not only oil but the price of key industrial metals has gone down.
The Canadian resource sector -with strength in oil, metals and wood products -makes up about 10 percent of its economic output, a significant part of the overall economy.
Though China’s growth is decelerating -forecast to be in the 6 percent to 7 percent range this year -the country will continue to use Canada’s raw materials in its many heavy construction projects. “Given our resource concentration, the strength or weakness of emerging markets is going to be critical over the next year,”Leonard says.
Canada’s dependence on certain export markets has limited its growth, Leonard says, but the country has started looking to new markets to help buoy itself when the U.S. economy falls.
Its abundance of natural resources critical to growth in countries like China has helped start that diversification process. Canada has just signed a free trade agreement with Colombia, and there has been talk about an agreement with South Korea.
The export markets -a key element of Canada’s economy -have over the past couple of years been hurt by a high Canadian dollar, which increased the prices of Canadian products in the U.S. About a third of Canada’s GDP is based on exports to the U.S., according to Leonard. Recent weakness in exports was concentrated in energy products, automotive products and industrial goods.
The Canadian dollar has recently depreciated and is currently worth around US$0.80. But distributors and manufacturers in Canada have yet to see a positive impact. “It’s one thing to have