OTTAWA - After 16 consecutive years of growth and improving prosperity, is the party finally ending for the Canadian economy?
Far from it, according to Finance Minister Jim Flaherty. Ever since his Oct. 30 fall economic update, Flaherty has been talking up the economy as if this was the best of times, with nary a discouraging word.
"Like the North Star, we are a bright light for others to follow," Flaherty enthused in his fall economic update and in many speeches following.
The numbers do sound impressive. The second-longest expansion in Canadian history after the great 1958-1980 advance, unemployment at a 33-year low, wages rising at about double the inflation rate, runaway federal surpluses, a falling debt burden and low, stable inflation.
And to top it all, the Canadian dollar's gravity-defying 29 per cent ascent against its American cousin. Already on a steady upward trajectory since 2002, the dollar took flight, shooting from just over 85 cents US at the start of the year to an all-time high above 110 cents US on Nov. 7.
Although the loonie has backed off of late, many economists believe it will hover around parity for some time and U.S. currency analyst Dennis Gartman is especially bullish, forecasting a return to the $1.10 US plateau before 2008 is over.
But even Flaherty will concede that dark clouds are gathering. While few economists are uttering the R-word, 2008 is expected be the closest Canada comes to dipping into recession -- defined as two consecutive quarter of negative growth -- since 2001 when growth barely peaked above the waterline.
"I am worried about the U.S. housing market and what it does to consumer confidence," Flaherty told The Canadian Press.
"It's not just subprime, it's much bigger than that. We can expect reduced demand (in the U.S.), which is going to hurt exports, particularly the auto sector and forest products."
And Flaherty added that while Canadian banks are well-capitalized, the fallout of the $30-billion asset-backed commercial paper crisis in this country will see more financial institutions take "hits," although an agreement in principle to rescue the short-term debt reached in December should help mitigate the damage.
Still, Flaherty and Bank of Canada governor David Dodge are loath to discuss recession, as if uttering the word might bring it about.
The closest the Bank of Canada gets to forecasting negative growth is in the final quarter of 2007, when it calls for a 1.8 advance in gross domestic product, followed by an anemic 2.1 per cent in the first three months of 2008.
But on Dec. 4, it cited increased downside risks in surprising the market by cutting interest rates one-quarter of a percentage point.
That was not seen as a panic move -- a half-point slice would have. Yet it raised eyebrows among economists, coming in the face of third-quarter growth that was slightly higher than expected.
"We're not at recession, but we're definitely in the same room," said Douglas Porter, the Bank of Montreal's deputy chief economist.
"We have seen Canada avoid following the U.S. into a recession before, but we can't completely go in the opposite direction. It will have an impact on our economy."
The dark clouds are not only coming from the U.S.
A spending binge combined with no-questions-asked credit terms - particularly in the subprime mortgage market - has metastasized into a spreading cancer on world financial markets and depressed economic prospects everywhere.
The Toronto-Dominion Bank downgraded it's forecast for global growth next year to 4.2 per cent, potentially bad news for the Canadian economy.
Global Insight now forecasts U.S. growth will shrink to zero in the fourth quarter of 2007 and 0.8 per cent in the first quarter of 2008, certainly in recession's anteroom.
"We're going to have the weakest year we've seen in five years," said Global Insight Canada's managing director, Dale Orr.
"But I think it'll be better than the U.S. Still, it'll be below our potential, so it's not going to be a good year."
How bad is a matter of perspective. Certainly not recession - yet - but lower global growth is expected to slide oil prices below $80 a barrel, as well as temper prices for most Canadian commodities. That means Alberta's six per cent growth will likely be trimmed closer to three per cent.
Manufacturers, who shed 100,000 jobs this year, and the forestry industry - which has lost about 7,000 jobs - are headed for another lean year as they attempt to overcome both the continuing strength of the loonie and weaker U.S. demand for products.
TD Bank chief economist Don Drummond noted, however, that manufacturing production has not tailed off as dramatically as employment in the sector and the economies of Ontario and Quebec - Canada's manufacturing heartland - have continued to grow thanks in large part to healthy financial and technology sectors.
"I think we'll limp through it," said Drummond.
"We're seeing a greater decoupling of Canadian and U.S. economic events. The major risk in the U.S. is housing and if that spills over to consumption, it will spill over to Canada but we certainly don't have the same risk. Our key risk is what the exchange rate will do to exports."
If the past few months are any indication, will do it plenty.
Exports to the U.S. were down 2.3 per cent in October and are marginally down for the first 10 months of the year. And this is for a period when the U.S. economy was generally robust.
But Drummond also cautions against getting overly gloomy. While the tail end of 2007 and start of 2008 will bring some tough sledding, the economy is expected to start pulling up itself up by the bootstraps in the second half of next year and come in with a respectable two per cent or greater gain.
Gartman, who writes an investment newsletter from Virginia, says Canadians should realize they have a lot of advantages in the global marketplace.
"You are a country that has stuff the world needs. You have wheat, you have canola, you have oil, you have natural gas - you name it, you've got it. Canada has sanctity of contract, it has productive people, has great port facilities. Nothing has changed."
The U.S. economic slump will impact Canada, he agreed, but not as much as it impacts the U.S., adding that he expects the loonie to bounce back against the greenback next year.
"I find it amusing that Canadians don't like their own currency - you do call it the loonie, after all," he joked.
"You've have a correction (from $1.10 US), now I think the major trend goes into effect and I would be surprised if we were not trading well above parity, easily over $1.10 US, by the end of 2008."
