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UBS Strategist Predicts Recession In Canada By 2009

by: FP Trading Desk October 06, 2008    

FP Trading Desk

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Declining GDP in the fourth quarter of this year and the first quarter of 2009 will bring the Canadian economy into an official recession, UBS predicted Monday.

“The Canadian economy, which has been only barely above water for nearly a year, does not escape the global undertow,” strategist George Vasic told clients.

He cited weakness in exports and sharp reductions in commodity prices as where the impact is being felt most. While domestic demand has held up, UBS expects weaker confidence will put activity on hold.

Scotia Capital is also forecasting Canadian and U.S. recessions, along with 100 basis point cuts from the Bank of Canada and U.S. Federal Reserve "that could come at any time."

But for the first time in a long time, the underpinnings of the Canadian economy are sound going into the downturn, Mr. Vasic said, highlighting historically average consumer debt service ratios and a balanced budget.

“It is not always the case that when the U.S. catches a cold, Canada gets pneumonia,” he added, predicting that consumer sentiment should hold up better.

As a result, the strategist said the economic risk is lower in Canada and there is room to take on counter-cyclical initiatives. UBS expects the Bank of Canada to lower its overnight rate target from 3% to 2% by the end of the first quarter and sees the loonie falling to around $0.91.

Nonetheless, the Canadian economic outlook has been cut from 1.8% to 0.4% next year. UBS also cut its 2009 U.S. growth target from 1.2% to 0.3% and global growth from 2.8% to 2.2%.

It reduced its oil WTI price forecast from $120 per barrel to $105 and expects other commodities to be 5% to 30% below 2008 levels.

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