A Scotiabank report is forecasting recessions for both Canada and the United States that could last well into 2009.
But the report says a potential recession in Canada would not be nearly as bad as one in the U.S. The bank expects Canada's housing market to continue to slow, exports to the U.S. to drop, and unemployment to rise as companies cut back on expenses.
The economic report for the bank's customers, exclusively obtained by CTV's Ottawa Bureau Chief Robert Fife, also forecasts particularly gloomy news ahead for Canada's ailing auto sector.
"We expect 2008 U.S. passenger vehicle sales to fall to 13.7 million units -- the lowest level since 1993 -- from our previous estimate of 14.1 million. Our 2009 forecast has also been reduced to 13.5 million units, compared with an average of 16.7 million over the past decade," the report says.
The report predicts that September's job numbers, to be released this week by Statistics Canada, will show a "mild decline in employment."
While August proved to be a positive month with 15,000 jobs gained, the report says that June and July saw a steady decline in the job market. About 5,000 jobs were lost in June and 55,200 jobs in July.
September's employment numbers are expected to closely resemble June's data but the unemployment rate will see a slight jump to 6.3 per cent, say the bank's forecasters.
"As financing becomes more difficult, the risk of further layoffs increases as businesses cut back on expenditures as financing becomes even harder to obtain and more expensive," the report says.
"(The numbers) obviously don't bode well for the Canadian consumer, especially as average hourly earnings continue to moderate, but Canada's labour market is still in better shape than the U.S."
The bank is also forecasting that the Bank of Canada and the Federal Reserve will cut rates by a full percentage point, taking the overnight rates down to one per cent.
Soft housing market
The economy's downward shift will continue to affect real estate. The report says Canada's housing market should continue to slump going into 2009, but the impact will not be as severe as the sub-prime housing crisis in the United States.
"Canada's sub-prime market is only (five to six per cent) of outstanding mortgages whereas the U.S. is over three times that amount. Canadians are also more conservative and have lower debt tolerance than the U.S. while the funding model is also completely different," the report says.
Several data reports are expected out this week that will show moderate housing starts, a decline in building permits, a rise in inventory and softening prices on new and old homes.
"We expect these trends to continue into 2009 as the incentive to buy a home at this point has diminished as Canadians face weakening job prospects, increasingly difficult credit conditions and economic uncertainty - all factors that will lead to more moderate consumer spending," states the report.
The latest statistics on building permits was released Monday, while data on housing starts will be released Wednesday and the new housing price index will be released on Friday.
Trade balance
Canada's trade surplus keeps getting hit with soft commodity prices. A report on August's merchandise trade balance is expected to be released Friday. The report predicts the trade balance will drop to $4.6 billion.
Canada's strong dollar gave imports a competitive edge, according to Scotiabank, but the economy was weighed down by exports.
However, the report says that real trade surplus should continue to improve. The U.S. is expected to benefit from a stronger dollar value and lower commodity prices.
"While the weaker U.S. dollar provided some support to the trade balance, the sharp increase in crude oil prices over the past year offset some of this support, leading to a deterioration in the nominal trade balance since January.
"However, since higher prices have pushed the nominal trade deficit wider, it is not a surprise that the real trade deficit has indeed benefited from the weak U.S. dollar, narrowing from a record low of -$61.4 in January 2006 to -$41.2 in June 2008," the report continued to say.
Global growth will continue to soften and the U.S. dollar will continue to gain strength which means that exports will "become a weaker engine of growth" for the American economy, according to forecasters.
Harper playing it safe: insider
The Scotiabank report could put Conservative Leader Stephen Harper in a difficult position during the last full week of campaign for the 2008 election.
Conservative insiders say that Harper has been playing it safe on the economy because he doesn't want to rattle the market. His opponents, however, have been playing up the economic slowdown as an election issue.
But as incumbent prime minister, Harper's words have more impact than his opponents and if he starts to say that the economy is in trouble, there could be an adverse reaction on the stock market.
Meanwhile, the report touches on the Wall Street rescue package, calling it a "milestone but insufficient for the sake of the economy."
On Sunday, a prominent American economist told CTV's Question Period that Washington's massive bailout for Wall Street will not stop a recession from hitting the United States.
"This is the most serious economic crisis I've seen since the 1970s," said Peter Navarro, an economist at the University of California.
He said the bailout has stopped a "global depression," but "we're not going to avoid a recession here in the U.S."
