Global crisis could persist longer than most are predicting: DBRS

The recession could last longer than many market watchers expect, warns DBRS.

In its review of 2008 and outlook for the year ahead, the rating agency says that the aftershocks of the global financial crisis “will be felt for years to come”, and it cautions that “The global crisis could persist longer than most are predicting.”

“Recovery will not occur until we see evidence that fiscal and monetary stimuli have worked and consumer confidence has stabilized,” says Peter Bethlenfalvy, DBRS co-president and author of the report.

“The global crisis could persist longer than most are predicting, and historians looking back may well refer to this period as the ‘Great Recession’, less than a depression, but greater than a recession.”

DBRS doesn’t see many reasons to be optimistic in the short term. “For instance, we expect that credit will remain tight, unemployment will continue to rise, GDP will contract, corporate defaults will rise, the value of commercial and residential real estate will continue to fall and pension shortfalls will make headlines. We will see continued ratings pressure in numerous sectors such as forest products, manufacturing, automotive and part suppliers, real estate, metals and mines, oil and gas exploration and development, media, retail, financial and non-bank financials, pension funds and public finance.”

Policymakers are doing the right things to stimulate growth and rebuild confidence, it says, “but this is unlikely to have a perceptible impact this year. Recovery will not occur until we see evidence that fiscal and monetary stimuli have worked and consumer confidence has stabilized. In fact, we expect global economies to struggle through 2009 and into 2010.”

DBRS maintains that investors will likely remain focused on capital preservation, and that a drift away from lower yielding government securities will be slow to materialize. It expects investors will return to the market “when the global economic outlook stabilizes and the need for government intervention subsides.”

The rating agency is not forecasting positive rating trends for any of the sectors it rates. “In part, this is due to adverse structural changes to industries, caused by a more severe economic downturn than in a normal economic cycle, the severity of the financial crisis and the continuing contraction of global credit markets.”

Yet, it adds that Canada is on relatively solid ground, thanks to years of strong prudent fiscal management and sizeable debt reductions. “The prudent management of Canada’s balance sheet over the past decade positions Canada well to weather the impact of global economic forces on fiscal results,” Bethlenfalvy says. “In addition, the Canadian banking system, with a high degree of domestic focus, has demonstrated remarkable resilience during tough global economic times.”

IE