Double dip recession could mean job losses, more debt

There is mounting evidence the world economy is slowing, stoking concerns another recession is near. That could mean higher unemployment, slower income growth and rising household debt for Canadians.

A sharp slump could also wreck plans by the federal government to balance the books by 2014, or lead to even bigger cuts to public sector jobs and spending than the Harper government’s recent budget had forecast. The provinces would also feel the financial pinch caused by rising deficits and a slowing economy.

Finance Minister Jim Flaherty has warned of a second financial meltdown on the scale of 2008 if action is not taken by the world’s governments to deal with the debt crisis.

For Canada, the 2008-2009 recession cost more than 300,000 jobs. However, it was milder than slumps in other countries because the Canadian banking and housing sectors remained strong even as manufacturing restructured.

But Danielle Park of Venable Park Investment Counsel Inc. said a second downturn would actually hurt worse — and mean more job cuts, boarded up stores and tighter household finances.

“Canadians are more vulnerable going into this recession than going into the (last) recession because we didn’t have as much debt at that time.”

The Canadian household debt-to-income ratio has since risen to a record of 150% as consumers take on more debt and see their incomes squeezed. That means Canadians owe $1.50 to banks, credit card companies and other lenders for every $1 they earn.

“It’s like you’ve had pneumonia and now you get a cold. Your immune system is so vulnerable that when the recession hits, it hits you extra hard and consumers that can’t afford to miss a week of work start getting laid off.”

That would cause tighter money, weaker spending and selling off assets, including expensive homes that are no longer affordable, Park said. And that could drive down real estate prices, undermine the “wealth effect,” create more bankruptcies and worsen the downturn.

That’s exactly what has happened in the United States, where falling housing prices and rising foreclosures in the last four years continue to batter the American psyche and have dried up spending. That has kept the jobless rate at above nine per cent, with few signs things will get better.

Secondary downturns are a natural part of the economic cycle, Park said, and usually last about a year and a half.

Economic indicators suggest the economy is already in a recession, even though the government has not yet “pronounced the r-word,” said Mario Seccareccia, professor of economics at University of Ottawa.

On Friday, the Toronto Stock Exchange fell for the third consecutive day as investors sold off equities for fear of a second recession, leaving the main index 20% below its highs of early March and officially in what traders call a “bear” market.

There have been sombre predictions from world leaders and economists that the United States — the world’s largest economy, and Canada’s primary trading partner — is headed for another recession, as the government remains gridlocked over how to stimulate the economy and reduce its deficit.

There’s also a lack of a co-ordinated policy on the European debt crisis and indications point toward a potential recession in the European Union.

Private sector balance sheets are strong, but companies are not hiring as they watch macroeconomic indicators deteriorate, Seccareccia said. Any shortfall in demand from a slowdown of consumer spending would mean falling production and ultimately, more layoffs. That would raise Canada’s unemployment rate from the current 7.3%.

The corporate sector is sitting on cash as it waits for signs of certainty to make investments and start hiring, said Mike Michell, national director of small business at Royal Bank (TSX:RY).

“A lot of people are concerned that ‘I don’t want to hire up somebody to let them go down the road.”‘

On the other hand, another recession could cut the price of gasoline, as demand slackens, and keep interest rates at one per cent — or even cut them to reinvigorate consumer spending.

For new home buyers, a recession would likely produce lower house prices in cities, where buying a home has been unaffordable for years. Sellers, however, would face smaller profits on their house sales.

The best way forward is difficult to navigate and economists and politicians are divided over whether government intervention is required to stimulate the economy.

Seccareccia believes the government should take further steps to create jobs and shore up consumer demand— a key driver of the economy.

Government spending, not restraint, is the solution to create jobs and to make up for a lack of hiring in the private sector as businesses sit on their cash until they sense stability, he said.

“If the private sector’s not spending and the public sector’s cutting back, it just makes things worse,” he said.

“The reason we are cutting back is because somehow there was this belief that the economy is finally getting back in shape — the problem, though, is that it’s not happening now.”

But Park argued government action is a Band-Aid that artificially props up the economy in the short term and encourages weaker household finances.

The propensity toward growth at any cost has “driven the middle class into the dirt,” she said. Instead, consumers should take advantage of low interest rates to pay off debt and build up their savings, she added.

“That’s what sets off the next secular boom period.”