Canada could face ‘technical’ recession

OTTAWA—The Canadian economy could be on the verge of slipping into a “technical” recession, Finance minister Jim Flaherty warned yesterday.
In an interview on CTV’s Question Period, Flaherty said the current slowdown in economic growth could turn into an outright contraction in GDP over the winter and spring.

“We may well be in a technical recession the last quarter of this year and the first quarter of next year,” he said. “It’s quite possible that Canada will be below the line slightly in both of those quarters.”
Economists define recession as two-consecutive quarters of negative growth—a scenario that Canada has narrowly avoided so far, despite deteriorating conditions in the United States and other western nations.
“The American economy is clearly in recession, all the other G-7 economies are in recession,” said the finance minister.
“Canada is doing better than everybody else, but we’re not an island. . . . We’re likely going to see more unemployment in Canada, we’re likely going to have to provide further stimulus to the economy.”
The likelihood of Canada dipping into recession has been widely debated among private-sector analysts, and even Bank of Canada governor Mark Carney has conceded it’s a possibility.
Flaherty, by contrast, has been reluctant to use the politically-loaded ‘R’-word. But his new candour was echoed yesterday by Prime Minister Stephen Harper at an Asia-Pacific economic conference in Lima, Peru.
“The most recent private-sector forecasts suggest the strong possibility of a technical recession the end of this year, beginning of next,” Harper told reporters.
“I am surprised at this. I’m also further surprised, more importantly, by deflationary pressure that we’re seeing around the world,” he added. “This is a worrying
development.”
The prime minister suggested—without going into detail—that the situation may require Ottawa to take “unprecedented” fiscal stimulus measures.
Flaherty is due to deliver a formal economic update to Parliament later this week.
He has warned it won’t include any detailed spending initiatives to boost economic activity or help the beleaguered auto industry. Those kinds of measures may have to wait for a full-fledged budget in February or March.
Flaherty has indicated, however, that the update to be presented Thursday will outline plans to reign in government spending—including a strategy to restrain the future growth of public service wages.
“I’ll be addressing the compensation issue,” he confirmed yesterday. “We should not have public-sector salaries and wages ahead of private-sector salaries and wages—particularly at a time of economic challenge, where businesses are challenged to keep their employees working.”
Flaherty appeared to rule out anything as drastic as a rollback in civil service salaries. “I’ll be looking forward, I won’t be looking back,” he pledged.
He reiterated that, in the longer run, the Conservative government is looking at a stimulus package that will include speeding up infrastructure spending.
And although he doesn’t want to run up continuing “structural” deficits, Flaherty said he won’t try to balance the budget “artificially” at all costs.
Kevin Page, the parliamentary budget officer, reported last week that Ottawa likely is headed for deficits of around $3.9 billion next fiscal year and $1.4 billion the year after.
Page warned, however, that if economic growth lags far enough, the deficit could go as high as $14 billion next year and continue in the double digits for another three years after that.