OTTAWA - The Canadian economy is shrinking faster than at any time since the Great Depression and will contract 9.1 per cent in the current quarter, says a new report from Merrill Lynch on the heels of fresh evidence of how badly the auto sector has been hurt.
Merrill economist David Wolf issued the prognosis for the Canadian economy Wednesday after Statistics Canada reported that wholesale sales in the automotive sector fell 23 per cent in January.
As a result, the country's wholesale sales that month were down 4.2 per cent -- far more than economists had generally expected. Excluding the auto sector, the decline would have been a more moderate but still serious 0.9 per cent.
Wolf, long one of the most pessimistic of Canada's major forecasters, predicted the economy will shrink 9.1 per cent in the first three months of this year and a total of three per cent for 2009 as a whole.
Economists have warned that the first quarter of 2009, especially January and February, would likely post the current recession's worst numbers -- although few are as gloomy as Merrill Lynch.
Statistics Canada's most recent numbers are in line with those forecasts, however, and much worse than the Bank of Canada's prediction of a 4.8 per cent retreat, which was more pessimistic than private-sector economists when the prediction was made in January.
Since then, central bank governor Mark Carney has conceded that the Canadian economy is weaker than forecast, but has not issued a new projection.
Prime Minister Stephen Harper, speaking at an event in Toronto, said he would not get into the specifics of forecasts -- saying he has can't remember a time since he's been in public office where economists have been "so all over the map."
He said that the root problem that needs to be fixed is the global financial system which, he said, will be discussed by leaders at an upcoming meeting of G-20 countries.
"The Canadian economy cannot turn the corner on recession until we see a fixing or significant improvement in the American financial system, and the global financial system more generally."
Shortly after Harper's comments, the U.S. central bank announced that it will buy up to US$300 billion of long-term government bonds and buy more mortgage securities in an effort to shore up the American financial system.
The Federal Reserve also left a key bank lending rate at a record low of between zero and 0.25 per cent -- meeting expectations.
On Tuesday, former Bank of Canada governor David Dodge said he disagreed with his successor at the central bank, Mark Carney, in thinking that Canada's economy will start to recover quickly or rebound strongly in 2010.
But Wolf's forecast takes the doom and gloom to a new level in predicting a 9.1 per cent first quarter contraction and a three per cent retreat for 2009 as a whole. By comparison, the worst quarterly contraction during the 1990-91 slump was 5.9 per cent.
"The quarterly data only goes back to 1961, but this probably is the worst since the 1930s," Wolf said Wednesday.
"What hasn't gone wrong? Clearly we are in a period of unprecedented co-ordinated global slump. And while Canada has its structural merits, the fact of the matter is Canada is a small, open, commodity-producing economy that is highly sensitive to global economic conditions."
Wolf says the economy will begin growing again in the second half of 2009 -- and his 2.2 per cent growth projection for 2010 is actually rosier than many.
But by then, Wolf said, Canada will be in such a deep hole that the economy won't return to where it stood in 2007 until at least 2011.
Liberal finance critic John McCallum said the new forecasts show that Harper is "hopelessly out of touch."
McCallum noted that Canada lost over 200,000 jobs in the first two months of this year and said the government may have to do more than the $40-billion in stimulus spending over two years that's contained in the most recent budget.
Bank of Montreal economist Benjamin Reitzes also said the first quarter is likely to be worse than BMo's previous forecast of a 6.2 per cent retreat, noting the Statistics Canada wholesale sales report Wednesday showed a 4.2 per cent decline in January, worse than the consensus of minus 2.7 per cent.
The federal government tabled a $40-billion stimulus budget in late January, but spending won't begin in earnest until next month -- the start of the fiscal year -- too late to help the first-quarter.
Ministers in Ottawa and the Ontario government have also been poised to provide billions of dollars in assistance to General Motors of Canada and Chrysler Canada if the automakers meet certain requirements, including lowering their labour costs.
"The very weak wholesale numbers, combined with the record drop in manufacturing sales volumes, point to a second consecutive monthly decline in GDP (gross domestic product) of as much as one per cent," Reitzes said.
"The extreme weakness to start the quarter points to downside risk to our already below consensus call of minus 6.2 per cent (annualized) for quarter one real GDP."
In dollar terms, wholesale sales fell to $41.1 billion in January, as the automotive products sector fell to $5 billion from $6.5 billion, and motor vehicles crashed to $3.37 billion from $4.8 billion, a 30 per cent drop-off.
Other than the auto sector, wholesale sales fell a more moderate 0.9 per cent, Statistics Canada said.
Wholesale sales volume also fell 4.2 per cent, the agency said.
The agency says the sales decline reflected both lower export demand for Canadian goods and weaker sales in Canada.
