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Could Canada be first to stumble? Print E-mail

Sep. 17, 2011 John Shmuel Postmedia News

TORONTO - Canada could become the first developed economy to stumble back into recession as businesses pull back on investment and inventory accumulation in the third quarter, Bank of Nova Scotia economists said on Tuesday.

Scotia Capital economists Derek Holt and Karen Cordes Woods said that while they don't forecast a return to recession, Canadian businesses have lost momentum in equipment investment in recent quarters, which could create a drag on growth in the third quarter. That makes the risk of another recession very real, they said.

``A reasonable scenario could well have the economy facing another contraction this quarter that cannot for a minute be ruled out,'' Holt and Cordes Wood wrote in a note Tuesday morning.

Their outlook follows a surprise contraction in the Canadian economy in the second quarter, when GDP shrank 0.4 per cent. That left Canada as only one of two G7 countries (the other being earthquake-ravaged Japan) that saw their economies contract in Q2.

While Scotia Capital highlighted recession risks Tuesday, another bank trimmed its outlook for the Canadian economy. Toronto-Dominion Bank said it now expects growth of only 2.2 per cent this year and 1.9 per cent in 2012, a half- point downgrade from its previous forecast.

``The U.S. debt downgrade, European debt crisis and heightened worries about a double-dip recession in the U.S. economy have muddied Canada's near-term economic outlook,'' TD economists said in a report.

The Royal Bank of Canada cited those factors as well in its own downgrade of Canadian economic growth Monday. RBC, however, was slightly more optimistic in its outlook. The bank said it expects Canada's GDP will grow by 2.4 per cent in 2011, a downward revision of 0.8 percentage points from its previous forecast.

The picture is not entirely bleak. Toronto-Dominion Bank predicts that despite the challenges Canada's economy faces, GDP will expand in the third quarter, avoiding a return to recession for the country.

``Preliminary third-quarter readings on manufacturing production, employment and homebuilding activity have pointed to a moderate rebound in real GDP early in the July-September period,'' TD economists said.

Scotia Capital's Holt and Cordes Woods, meanwhile, said net exports and consumption will be the main drivers of GDP growth in Q3. But a slowdown in business investment, following two consecutive quarters of inventory gains in the first two quarters of the year, could outweigh those growth drivers.

``An inventory pull-back has always happened at least (once) over the past two decades following two quarters of inventory contributions to GDP growth as large as we have seen,'' the economists said.

So Q3 will likely see economists biting their nails over whether exports and consumption can lift Canada's economy into growth. If not, the country will become one of the first developed nations to slip back into recession following the country's surprise second-quarter contraction.

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