Deafening, thundering, crashing, did you hear it? There were no shortages of ominous descriptions for the losses the Toronto Stock Exchange faced on Jan. 21 when the S&P/TSX composite index dropped 4.75 per cent – its biggest one-day loss since 2001. If you missed the clatter and clang, surely you’ve heard the buzz about recession. The “r-word” has amplified the fear spurred by America’s declining economy and left global stock markets in a frenzy. But don’t lose your nerve just yet, economic experts say.
Finance Minister Jim Flaherty said Canada will weather the economic storm. At the epicentre, President George W. Bush has described the U.S. economy as facing “uncertainty.”
Metaphors aside, debate continues about whether our southern neighbour is already entering a recession — a decline in a country’s GDP for two or more consecutive quarters.
No matter which side you take, the U.S. economy is slowing down. Since the country is our largest trading partner, to which we export about one quarter of our national output, it might be hard not to panic. But take a deep breath, there are many competing factors to consider.
Here are a couple:
On one hand, commodities such as oil and precious metals are in continuing demand from countries such as China and India.
On the other hand, the forestry sector in particular has taken many hits, largely due to the lack of demand from home builders in the American market.
Manufacturing is also suffering losses, partly due to the rise of the Canadian dollar.
While commodities are just a small part of the Canadian economy, they make up a large chunk of the S&P/TSX composite index, and are tossed by the winds of global uncertainty.
Locally, business leaders remain confident that tourism will continue to draw Canadian and other international travelers to counterbalance fewer American visitors coming to the capital.
Tech firms too have diversified their market and are expected to stay strong in the face of a weakening U.S. economy.
“People’s opinion keeps shifting as to whether the world’s going to end or if this is normal, and as a result, stocks everywhere are jumping up and down,” says Carleton economics professor Nick Rowe, a member of the CD Howe Monetary Policy Council.
To counteract the fear of recession, public officials are trying to calm the populace in two ways, with monetary and fiscal policy.
Monetary policy examines the liquidity of funds circulating in the market and the value of those funds. To this end, the Bank of Canada is continuing to monitor and set interest rates to control
liquidity and to keep inflation under control – at around two per cent.
Government officials use fiscal policy to give the economy a jump start when recession threatens; they might cut taxes or boost spending.
North American leaders are taking action. Prime Minister Stephen Harper plans to provide a billion-dollar aid package to support communities and workers already affected by layoffs from the slowdown.
Bush has introduced a $150-
billion stimulus package of
individual rebates and business tax cuts. Treasury Secretary Henry Paulson said this week that if Congress acts within the next couple of weeks, cheques could be mailed out in May.
But, timing is crucial, says Rowe. U.S. stimulus packages have often arrived just months after past recessions have ended.
“Canada got absolutely lucky with timing though with the January GST cut,” Rowe says. “It was sheer dumb luck.”
Should Harper’s aid package pass, it would help laid-off workers train for new jobs in other sectors.
Whether Bush’s stimulus package gets passed at all, or the cheques are sent out in time to do anything of value, remains unclear.
Regardless, experts across the board appear to be optimistic for Canada in the long run. Don’t let the short-term crashes rattle you.
“People’s nerves need to get stronger,” says Rowe. “It’s hard not to panic until you’ve experienced a crash and survived it.”