Fears mount about double dip recession, could mean job losses, more debt
September 23, 2011 by Sunny Freeman The Canadian Press
The prospect of a second recession two years after the last one has people worried that record Canadian debt and slower growth could make another downturn feel worse than before.
There is mounting evidence the world economy is slowing, stoking concerns another recession is near, which 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.
On the other hand, another recession could cut the price of gasoline, as demand slackens, and keep interest rates low for a quite a while.
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.
Finance Minister Jim Flaherty 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 lost jobs and led to a big streamlining of the country’s auto sector — the heart of the manufacturing industry in Ontario. 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. says a second downturn would actually hurt worse — more job cuts and 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 percent 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, you’re 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 the selling off of assets, including expensive homes no longer affordable. That could drive down real estate prices, undermine the “Wealth Effect” and worsen the downturn, Park said.
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 Americans’ psychology and have dried up spending. That has kept the jobless rate at above nine percent, with few signs things will get better.
Canadians have had a period of about 30 years of low interest rates in which they have increased their debt tolerance. The balance sheet situation spun further out of control when the Bank of Canada cut interest rates to ultra-low levels to stimulate the economy, she said.
Secondary downturns are natural, she said and usually last about a year and a half.
David Madani of Capital Economics says recession fears are understandable after second-quarter growth contracted. One more quarter of contraction, and the Canadian economy will officially be in a recession.
“Should the momentum in the global economy slow more abruptly and commodity prices fall more sharply, then economic growth in Canada could slow significantly, before we even get into 2012.”
There have been sombre predictions from world leaders and economists that the world’s largest economy, and Canada’s primary trading partner, the U.S. is headed for another recession as the government is in gridlock about 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.
Paul Taylor, chief investment officer at BMO Harris Private Banking, said he has never seen investors as bearish and gloomy as they are now.
“There is concern the issues are not being addressed in a thorough fashion and the markets will continue to weigh in with their verdict, which is obviously not favourable,” he said. “The risk of a meaningful slowing of economic activity is widespread.”