Finance Minister Jim Flaherty is not expecting a U.S. recession. He does, however, admit there is a risk of one. He is also assuming that Canada will not follow in tandem if the U.S. does turn down.
Flaherty’s federal budget, brought down today, is based on a sluggish 1.5% increase in real gross domestic product in the U.S. in 2008, with Canada’s growth only slightly higher, at 1.7%. That was the consensus of 15-20 private-sector forecasts at the end of January.
Growth forecasts have been tumbling in recent months. That same group of forecasters was predicting Canadian growth of 2.4% last October and 2.9% in March 2007.
The question is whether growth will be even lower. The answer depends on the U.S.
Earlier assessments of the U.S. economy determined that the weakness was confined to the housing sector. Then, the global credit crunch hit last summer and economists started admitting that there could be more widespread weakness.
By early this year, few economists were ruling out at least a “technical” U.S. recession: two consecutive quarters of negative growth. Still, the majority continue to believe that the downturn won’t be severe.
The consensus forecast of 2.4% growth in both Canada and the U.S. in 2009 suggests a short-lived recession, although not a booming recovery. The 2009 forecasts have also come down, with the consensus, in March 2007, for 3.1% Canadian growth.
Assuming the consensus is right, unemployment is expected to remain below 6.5% while inflation remains tame at around 2% or lower. The average forecasts for three-month Treasury bills is 3.2% this year and 3.8% in 2009 while 10-year Government of Canada bonds come in at 3.6% and 4.2%.
If the consensus is wrong, the pain will be felt most severely in Central Canada, where the high C$ is hurting the important manufacturing sector. It will be felt least in the Western provinces, which are finding this slower-growth period welcome pause.
Budget assumes slower growth in Canada, U.S.
Most economists predict U.S. downturn won’t be severe
- By: Catherine Harris
- February 26, 2008 February 26, 2008
- 17:17