Background
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What some a year ago or so were hoping would remain a problem confined to the U.S. mortgage market is rapidly degenerating into a global economic recession. The leading index of OECD economies fell for the thirteenth consecutive month in August, its worst performance in more than 30 years. Weakness has spread among the main industrialized countries and is starting to take its toll on emerging markets.
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Conditions in financial markets have not been favourable to public corporate financing in recent months and bank lending conditions for households and institutions have tightened further. These financial headwinds are flattening economic prospects even more.
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The deterioration of credit market conditions has elicited unprecedented actions from governments, including inter-bank loan guarantees and equity participation in banks. Meanwhile, central banks have been very active providing liquidity to financial institutions and, in a coordinated effort on October 8, 2008, cut their respective policy rates.
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Although we remain hopeful that initiatives by fiscal and monetary authorities will bear fruit and succeed in normalizing credit markets over time, economic prospects for 2009 look sluggish. Our 2009 growth forecast for the United States of only 0.4% reflects a slow recovery in consumer spending. In Canada, a larger trade drag, weaker commodity prices and sagging consumer confidence are all factors dimming the economic outlook. We now see Canada expanding by 0.6% in 2009.
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Given the economic developments in recent months, provincial finance ministers have been hard pressed to come up with either revised budget estimates or a contingency plan to prop up their respective economies.
