2009: The Year of the Recession

By HELMUT PASTRICK, Chief Economist Central 1 Credit Union

The most severe financial crisis since the Great Depression is spreading onto the real economy in ever wider and deeper ways with each passing month. The strong linkages between the financial system and the real economy ensure that when the flow of financing is constrained and more costly, it is only a matter of time before the production and consumption of goods and services is negatively affected. Policymakers now recognize the severity of the crisis and are taking more aggressive actions that ultimately should stem the negative forces and help turn around the economy.

Events are quickly unfolding but these policy measures take time to produce results and in the meantime, the economy enters a recession phase that lasts for most of 2009. The recession’s low point is still ahead and the economic fallout is accelerating. Declining production and company cutbacks, more layoffs and rising unemployment, higher unsold inventories and price reductions, falling consumer and business confidence, and postponed or cancelled investment and spending plans plays out for several more months.

The global economy is in a recession pulled down by the industrialized economies of North America, Europe, Japan, Australia, and others. The fast-growing developing or emerging economies of China, India, Brazil, Russia, south-east Asia and others are following their export markets and fall into a comparative slow-growth phase in 2009. Commodity prices have tumbled sharply since summer 2008 in response to falling demand and the resulting supply overhang.

Out of every crisis comes a silver lining and lower energy costs are helpful to users leaving more income for non-energy spending. Another benefit is lower interest rates for borrowers, though the financial crisis means the entire central bank rate cut is not always passed on since lenders face a high cost of funds in the market. In Canada, the sharp fall in the Canadian dollar to about US 80 cents is beneficial for exporters.
B.C.’s economy is in the early stages of recession, though some sectors such as forestry and housing are already in well-established downturns. Economy-wide job losses are now appearing and unemployment is rising; consumers are not increasing their spending and businesses are cutting back capital spending plans and realigning their production capability downward to current demand.

Some of the same economic signs are emerging in the East Kootenay region, and as in the rest of B.C., the economy is coming off an above-average growth performance in prior years. Mining and tourism activity data are not current but data through to the summer indicate some growth. However, recent labour market data are less positive since higher unemployment is evident in rising EI claimant counts.

Other local economic indicators are mixed but their future path is worrisome in this wider financial crisis and economic downturn. Business incorporations this year are down about 15% from 2007. Private non-residential building permits are down more than 50% from last year though new housing construction is holding up – at least for now. With housing sales down 35% this year and listings on the market at a high level, downward price pressure is considerable and these market conditions bode poorly for future investment in new housing.

The spreading economic recession hits the East Kootenays in greater force in 2009 as it does in rest of B.C and Canada. Tourism from Alberta, the U.S., and Europe slows and coal mining production declines. The 2009 coal contracts will reflect current market realities and incorporate substantially lower prices for metallurgical coal and lower shipments. No recovery in U.S. housing starts during the year and with Canada’s housing market entering a downturn; lumber production remains low if not lower than last year. Pulp and newsprint production cutbacks become more prevalent in 2009.

Fewer exports of forestry and coal products and tourism services have a direct impact on those businesses and workers as well as a negative spinoff effect on the rest of the region’s economy. It affects a wide variety of providers of local goods and services. The public sector – health, education, and government services – is least affected, though not immune from 2009’s downturn.

Current expectations are the global cyclical downturn ends in 2009 and growth surfaces in 2010. A strong robust recovery next year is unlikely due to ongoing risk aversion by consumers and businesses and low pent-up demand. Fiscal stimulus – more spending on infrastructure and programs and tax cuts – aids the recovery process. Near-term forecast risks are on the downside until more signs emerge that credit markets are returning to normal, investors see more opportunities than failures, and policy measures begin bearing fruit.

The East Kootenay region survives the economic downturn and realizes more of its considerable long term potential in tourism and mining when conditions allow. But in the meantime, successfully navigating through 2009 is the immediate challenge and it is fitting that 2009 is the year of the Ox, which is renowned for its hard work, perseverance, and pragmatism – qualities that are needed during a recession.