OTTAWA - The Bank of Canada has been darkening its outlook on just how deep a hole the economy is digging for itself. Now some economists are saying the central bank will soon have to concede it's going to take a lot longer to climb out of the pit.
With the U.S. financial sector lurching from crisis to crisis, the accelerating plunge that some have taken to calling the Great Recession of 2008-09 is entering uncharted territory for which recent historic precedents no longer apply.
Canadian Auto Workers economist Jim Stanford called it a "hum-dinger of a recession."
"I don't call it a depression yet, but that depends on how we get out of it. The stock markets seem to have priced in a depression, but in terms of gross domestic product and jobs, it's too early to say that," Stanford said.
There's little doubt that conditions are deteriorating at a faster pace than all but the doomsayers had envisioned.
But the chances that a faster and deeper downturn will mercifully result in a quicker and sharper rebound - as recent slumps suggest should happen - are receding, say economists.
If there is a quick turnaround, they say, it will be a "technical rebound" that will exist only on paper.
Merrill Lynch Canada chief economist David Wolf doesn't put much stock in historical precedents when it comes to the current crisis. History often repeats itself, but not perfectly.
"Indeed, the deeper we go, the more scope there is to bounce back because pent up demand builds. But this is clearly a very different recession than the ones we saw in the early 1990s and early 1980s," he argues.
Canada's two previous recessions were largely policy-generated slumps caused by central banks tightening the money supply to rein in runaway inflation, Wolf explained.
The current crisis is more structural, dealing with an excess of credit and excesses in the financial sector - as well as massive global trade imbalances - "that now have to be unwound, and that tends to take longer and cut deeper."
Wolf's analysis is not controversial.
In a statement Tuesday on his decision to cut the bank's overnight rate for the seventh time in a year to an unheard of 0.5 per cent, central bank governor Mark Carney said stabilization of the global financial system was a "precondition" for recovery in Canada and around the world.
But Carney is still holding out hope that Canada will enjoy a "more rapid recovery than ... most other industrialized countries," starting in the second half of this year, because of massive monetary and fiscal stimulus being injected into economies.
Ironically, he is more optimistic about the impact of the Barack Obama US$787-billion stimulus - and other measures - than U.S. central bankers.
In a dire report Wednesday, the U.S. Federal Reserve Board declared that the U.S. is still on a downward trajectory.
Looking ahead, business people rated the prospects "for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010," it said.
Talk about the Great Depression often draws accusations of scare-mongering. And there is something to the criticism; every major slump has raised fears of reliving the nightmare of the 1930s.
Economist Doug Peters, a former Chretien-era junior finance minister, says the wildly different outlooks stems from the fact there is no precedence for today's situation.
"We've never had a world financial collapse as we've seen with all the regulation and all the back-stops we have in deposit insurance today, so we're really not sure how we're going to get out of this one," Peters said.
"(On the other hand), we've never had zero central bank interest rates either, so we don't know how the models will work."
On that score, Carney may prove right if overly optimistic, says TD Bank chief economist Don Drummond.
He stresses that during the Great Depression, U.S. policy makers "did everything they could possibly do wrong," including allowing the money supply to decline, tightening fiscal policy and implementing trade protection around the world.
"We're not seeing that, we're seeing the opposite on every single score," he points out.
"There are signs of improvement. They're not convincing enough to make me think we're going to get a sharp snap-back, but I don't think we're going permanently to hell."
Most private-sector economists expressed skepticism in January when the Bank of Canada first forecast Canada would rebound to 3.8 per cent growth next year, and now they say that is looking even more dubious.
However, Carney may prove correct in predicting the end of the contraction in the second half of this year, admits Wolf. But that will be the equivalent of creating 50,000 jobs after losing 500,000, a technical, not real-life, rebound.
The economy is falling so far down the rabbit hole, Wolf says, it won't be until the end of 2010 at the earliest before gross domestic product in Canada is back to where it was.
