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Alan Toulin, National Post
OTTAWA - The Canadian economy is grinding toward a virtual standstill, slumping to its lowest growth in six years amid signs that consumers, whose spending had been a bright spot in an otherwise gloomy situation, are becoming cautious about the future.
The economy grew only 0.1% in the second quarter or at an annual rate of 0.4%, Statistics Canada reported yesterday. The swiftness and scope of the downturn caused the federal agency to revise earlier GDP growth numbers in the first quarter of this year to 2% from 2.5%.
"The Canadian economy is limping, battered and bruised by the economic slowdown south of the border," said Marc Lévesque, TD Financial Group senior economist. "More ominous is the fact that the weakness has now spread ... in contrast to the past couple of quarters, when exports and business investment bore the brunt of the pain."
Economists and analysts said the data indicate the Canadian economy is being hit by the full force of the downturn in the United States. As well, it points to a prolonged period of flat growth well into 2002 as the economic weakness spreads across a number of sectors.
The slump will also mean further interest rate cuts by the Bank of Canada, analysts said.
Paul Martin, the Minister of Finance, said Canada "is no longer immune from what is happening in the United States, Europe and Asia, particularly Japan."
The second quarter's decline in consumer spending, personal income and real gross domestic product, together with a sharp drop in manufacturing activity in June, will squeeze federal and provincial revenue, raise unemployment and threaten budget surpluses, Mr. Martin said during a press conference at his Montreal regional office.
But he refused to say the new data indicate Canada has entered a recession or to speculate when a turnaround may occur.
Canadian consumers are starting to feel some of the pain of the downturn. Statistics Canada reported that consumer spending was essentially flat. Disposable income -- the amount of money consumers have left over after covering basic costs such as taxes, food, clothing and shelter -- declined for the first time in five years.
StatsCan said slowing income earnings and the end of a heating-fuel tax break are behind the decline in disposable income.
"Incomes were pulled down by a drop in federal transfers, in the wake of a $1.5-billion payout for the relief of heating expenses in the first quarter. Labour income slowed sharply to 0.5% growth, following a two-year period of increases averaging more than 1%," the agency said.
Business investment, which had been dropping steadily for the past three quarters, was up slightly, while exports continued to slide.
The retreat of Canadian consumers is especially worrisome, said Adrienne Warren, Scotiabank senior economist.
"Now we're seeing the slowing in job growth and the slowing in income growth and the ongoing volatility in equity markets dampening consumer optimism even more so than we saw in the U.S.," Ms. Warren said.
The rapidity and depth of the slump has caught Canadian business and retailers with a large amount of inventory on hand, which could mean production cuts and job losses in the future, she said.
New Canadian employment figures are due next week.
Dale Orr, senior economist for DRI-WEFA, expects unemployment to increase and further rattle consumer confidence.
"There have already been significant layoffs, particularly in the information technology sector. There will be more layoffs in the coming months and they will spread from information technology and autos more widely throughout the economy," Mr. Orr said.
The government plans to have an update or mini-budget in October, and Mr. Martin said he is leaning toward a full budget in February to "allow time for full consultations across the country."
The political opposition has criticized the Liberal government for not bringing in a new budget or taking measures to offset the slump.
The last budget was in October, just before the government called an election.
"We've cut taxes by $17-billion or proportionately more than in the U.S., capping the Canadian victory over ballooning debt and budget deficits, and we mean to protect Canadians from the impact of the world slowdown," Mr. Martin said.
"The Bank of Canada has also cut interest rates six times and this should help cushion the economy together with the tax cuts. Also, from talks with business, I believe there is a readiness to invest more in plant and equipment."
There was an expectation Canada could escape the kind of bruising downturn seen in the United States.
At the Liberal party's summer caucus meeting in Edmonton, Jean Chrétien, the Prime Minister, gave an upbeat assessment of the Canadian economy, predicting it would grow by 2.6% to 2.7% this year.
David Dodge, governor of the Bank of Canada, estimated at the beginning of August that the Canadian economy would record growth in the range of 2.5% to 3% this year and above that level in 2002.
However, the Bank of Canada dramatically reversed course this week as it cut interest rates and admitted the economy would not return to full capacity growth until next year. The bank cut interest rates by 25 basis points on Tuesday to stimulate the economy, but it has been cutting rates at a pace just over half that of the pace of rate cuts in the United States.
Robert Spector, Merrill Lynch Canada senior economist, said Canada's economic fate rests with the United States.
"We can start talking about things showing a bounce back in the fourth quarter. But that is going to be heavily contingent on the U.S. and there isn't much so far to indicate a stronger U.S. outlook.
"The hope continues to be the U.S. will improve based on lower energy costs, tax rebates and lower interest rates."
