Markets plunge
Published Tuesday October 7th, 2008
Economy Global economies said to be heading into a recession; Bank of Canada injects $2.4B in cash into domestic credit markets; building permits fell 13.5% in August
OTTAWA - Stock markets in Canada and around the world plunged Monday as the global financial crisis widened and several financial institutions warned that global economies - including here and in the U.S. - are heading into a recession.
However, at least Canada is going into the downturn with solid economic fundamentals and the fiscal ammunition to stimulate its economy, said one economist. And the federal and provincial governments should not let the fear of deficits deter them from using that ammunition, said another.
Bay Street's benchmark S&P/TSX composite index was, at one point, down a record of more than 1,000 points in morning trading and Wall Street's blue-chip Dow Jones industrial average was off nearly 500 points in the wake of recession warnings, reports of banks around the world hoarding cash and driving interest rates higher, and announcements in Europe of more bailouts and takeovers of financial institutions.
Meanwhile, the Bank of Canada made another short-term $2.4 billion cash injection into domestic credit markets Monday morning in an attempt to keep them from seizing up.
By midday the TSX had rebounded but remained more than 600 points down.
The TSX was especially hard hit by the plunge in commodity prices, with oil slipping below $90 US a barrel, which also weighed on the loonie which fell to an 18-month low of less than 91 cents US.
"We're now forecasting that both the Bank of Canada and Federal Reserve will cut rates by a full percentage point," Scotiabank said in a report in which it announced that it was also "now forecasting recessions in both countries."
It wasn't alone.
"In the wake of a continued deterioration in U.S. and global economic fundamentals, the UBS research team has announced widespread reductions in the outlook for economic growth as well as commodity prices," the Swiss-owned financial institution announced Monday.
"Canada too slips into official recession," UBS said. "The Canadian economy, which has been only barely above water for nearly a year, does not escape the global undertow, and is now expected to post an official recession with declines in the fourth quarter if 2008 and the first quarter of 2009.
It warned Canada will be hit by a slump in exports and falling commodity prices and that its long-running surplus in its dealing with the rest of the world will slip into a deficit for the first time in over a decade.
UBS, however, said Canada is in better shape than most other countries to deal with a recession, UBS added.
"An important point of distinction for the Canadian economy is that, for the first time most can surely remember, the underpinnings are sound going into a downturn," it said, noting that the debt burden on Canadian consumers is not elevated, the government budget is in balance and government debt levels are less than the half U.S. and European levels. "Accordingly, the economic risk in Canada is far lower, and there is more ammunition available to undertake counter-cyclical initiatives, if so desired," it said.
And CIBC World Markets economist Avery Shenfeld said governments here should not be afraid to use that ammunition and go into deficit if needed to stimulate the domestic economy.
"If we try to avoid deficits at all costs at all levels of government, we're only going to prolong the slowdown," Shenfeld said.
However, Finance Minister Jim Flaherty has been adamant that the federal government will not go into a deficit to bail out the economy.
The Canadian economy, meanwhile, also has a relatively high level of consumer confidence going for it, or at least it did just prior to the eruption of the latest financial crisis in mid-September, according to the Conference Board of Canada.
The think-tank reported Monday that its index of domestic consumer confidence increased for the third straight month in September, rising 2.6 points to reach 85.7.
Consumers indicated they were feeling much more optimistic about future job conditions in their communities and showed improving sentiment toward their current and future financial conditions, the conference board said. Meanwhile, the balance of opinion on the question of major purchases was largely unchanged.
Regionally, the largest gain in confidence was realized in Ontario, with smaller gains for the Prairies and British Columbia, while confidence fell in Quebec and plunged in Atlantic Canada, according to the survey conducted Sept. 4-10.
However, Canadian home builders and non-residential contractors appear a lot less confident, according to a separate report Statistics Canada report.
"Canadian building permits absolutely cratered in August," said TD Securities economist Charmaine Buskas, after Statistics Canada reported that building permits fell 13.5 per cent during the month, easily wiping out a 2.6 per cent gain in July.
Residential permits fell 9.3 per cent during the month while non-residential permits plunged an ever greater 19.3 per cent, with permits for industrial, commercial and institutional projects all falling.
"The take-away from this report is that overall economic activity is cooling," Buskas said.
"It is now not only a slowdown in the housing market, but also a slowdown in the non-residential sector," she said. "As fewer factories and warehouses are built, it suggests that underlying demand on the business side of the economy is weakening."
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