Its foundations urgently need shoring up to prevent a collapse
LEVIS, QC, Dec. 19 /CNW Telbec/ - Gloom is settling in around the world.
The recession will be fairly deep, while the recovery will be rather tepid. It
will take some time for the financial sector to completely rid itself of its
toxic factors, concluded Desjardins Group economists based on their latest
economic forecasts.
"Since mid-September, when the rapid-fire events started to unfold, one
piece of bad news after another has darkened the picture, to the point that it
is no longer possible to glimpse the faintest glimmer of hope on the horizon.
The economy's internal structures have been sorely tested and weakened. It
will have to be rebuilt on a more solid foundation-but very carefully, as
there is a real risk that the whole thing will collapse," stated Mr. François
Dupuis, Desjardins Group Vice-President and Chief Economist.
Damage will be limited in Québec
According to Desjardins' economists, Québec can be thankful that its
infrastructures are in such terrible condition that there was no way to put
off repairs. Thanks also to increased investment by Hydro-Québec, income tax
cuts and an industrial sector that is more focused on aerospace than on
automobile production, the province has been able to benefit from an economic
stimulus plan before the possibility of a potential recession was even thought
of. According to them, Québec's recession will not set any records; economic
growth will be flat in 2009 then climb to 1.6% in 2010. "The current recession
will be qualified as a technical rather than a classic recession, as in the
last few periods in which Québec recorded two consecutive pullbacks by real
GDP (1995, 2001 and 2003). The province should get through the recession
without too much harm," asserts Mr. Yves St-Maurice, Director and Deputy Chief
Economist at Desjardins Group.
At the global level, the industrialized nations are the most affected,
but emerging nations are also feeling the slowdown. Global economic growth
will be only 1.5% in 2009 and 3.3% in 2010. In 2009, the United States' real
GDP will pull back by 1.2%, then record modest 1.7% growth in 2010.
With Canada at the mercy of the American economy and the prices for oil
and raw materials, Desjardins' economists predict that the country will have
to trudge through three consecutive quarters of contraction, beginning with
the last quarter of 2008. Exporting businesses are being put to the test: the
less competitive businesses will disappear, leading to job losses. Investments
are being delayed by tightening credit conditions, economic uncertainty and
low commodity prices. However, Canada can congratulate itself on not having
succumbed to the profligacy of U.S. mortgage lenders. The Canadian financial
system has stayed in much better health, they stated.
Of the provinces, Ontario will be the most affected, according to them,
with its real GDP declining 0.7% in 2009 compared with 0.3% for Canada as a
whole. Performance will improve in 2010, with growth of 1.8% and 1.9%
respectively. New Brunswick and British Columbia are the two other provinces
that could feel the situation the most. Declining interest rates and highly
expansive budget policies from the governments should allow the economy to
slowly regain strength as of next summer.
Consumers must regain confidence
According to Desjardins' economists, consumers hold the key that will get
us out of this economic impasse, the only thing that can provide the impetus
needed to get the economy back on the road to growth. However, it is a
monumental task, especially in the United States. Household sentiment has
fallen to a historic low there. "It is hard to blame consumers: the value of
their real estate assets has fallen by an average of 21.8%, the value of their
stock market portfolios is down over 40%, and consumers are no longer able to
get credit to buy a new car or other durable goods. Not to mention the fact
that many Americans are worried about their jobs and have heavy debt loads
too," states Mr. Dupuis.
"To pull this off will take further action by monetary authorities and
budget policies that are both expansionary and targeted with surgical
precision. We must get the most out of every dollar that is injected into the
economy," adds Mr. Dupuis. The next economic stimulus plan will have to be
better conceived and tackle the current problem at its sources, the most
important of which are probably the still nosediving housing market and
accelerating job losses.
Not much leeway in terms of rates
With the target for the federal funds rate between 0.00% and 0.25% in the
United States, and a key interest rate of 1.50% in Canada, Desjardins'
economists can attest that the monetary policies are fairly aggressive.
Unconventional measures such as buying up toxic securities and huge liquidity
injections will continue, they claim. In Canada, key interest rates should end
their descent at 0,75 % in January 2009.
Financing spreads have shrunk but are still much too large to allow
financial institutions to relax their lending terms. Unless credit to both
business and consumers opens up, it will be hard for a recovery to emerge.
"Investors are looking for security first and foremost and they are ready to
sacrifice all of their returns to get it. It is clear that those who have the
liquidity are currently running the markets. Businesses are well aware of this
fact (especially the big three American automakers) and those who saved their
pennies in better days will have an easier time getting through this crisis,"
added Mr. St-Maurice.
Oil prices, stock markets and the loonie to bounce back around mid-2009
All eyes are now impatiently looking to the stock markets. They have
racked up colossal losses in recent months and, given that the markets are
generally the forerunners to economic growth, players are waiting for the
signal that the trend in the world's stock markets has changed. This will
probably not happen before mid-2009, and the stock markets' ascent will
probably be much less spectacular than their descent. Until then, stock
markets will be rather volatile. "Bargain hunters will have lots of time to
pick and choose the securities that will benefit them the most when the stock
market recovers," declared Mr. Dupuis.
Last summer's runaway surge by oil prices and the recession's onslaught
worldwide led to a surprising tumble in oil consumption, which threw the
market off balance. Oil prices are currently low and could even temporarily
drop below US$40/barrel. The same fate will afflict the market for other
commodities. The return of sustained economic growth worldwide is the only
thing that will be able to get prices back closer to levels that will
encourage renewed exploration to provide for a long-term supply that can
handle future demand evolution.
Desjardins' economists stress that fears that emerging nations will make
demand for oil and commodities re-emerge should be back towards the end of
2009. The stock market and the Canadian dollar should undergo similar
movement. The loonie could thus temporarily fall below US$0.75, recover in
early 2009 and climb back toward US$0.90 at the end of 2009. "Exporters should
thus capitalize on the current slowdown to overhaul their methods, identify
weak points in their production processes and correct them to increase
productivity," they concluded.
About Desjardins Group
Desjardins Group is the largest integrated cooperative financial group in
Canada, with overall assets of $150 billion, as at September 30, 2008. It
comprises a network of caisses, credit unions and business centres in Québec
and Ontario, and some twenty subsidiary companies in life and general
insurance, securities brokerage, venture capital and asset management, many of
which are active across the country. Drawing on the expertise of its 40,000
employees and the commitment of more than 6,500 elected officers, Desjardins
offers its 5.8 million individual and corporate members and clients a full
range of financial products and services. Its physical distribution network is
complemented by leading-edge virtual access methods. To find out more, consult
the Economic and Financial Outlook, Winter 2009, Economic Studies, Desjardins
Group at www.desjardins.com.
For further information: For journalists only: Nathalie Genest, Advisor,
Information and Media Relations, (514) 281-7275, 1-866-866-7000, ext. 7275;
François Dupuis, Vice-president and Chief Economist, (514) 281-7000, ext.
7322, 1-866-866-7000, ext. 7322; Yves St-Maurice, Director and Deputy Chief
Economist, (514) 281-7000, ext. 7009, 1-866-866-7000, ext. 7009
