Canadian economy could be first to stumble in 2011: Scotia Capital

Report authors Derek Holt and Karen Cordes Woods said Canada could contract again in the third quarter of this year after contracting 0.4% in the second quarter. A recession is defined as two consecutive quarters of decline in real gross domestic product (GDP).

“This wasn’t supposed to happen,” said Scotia Bank report authors. “Many of the world’s troubles were supposed to be focused upon Europe and the U.S. Yet we’re faced with the distinct possibility that the Canadian economy could be the first to stumble.”

A similar prediction was made by TD Economics last month. Economists there said that while the U.S. will likely avoid a recession in 2011, any unexpected downward shift could still lead to a Canadian recession of its own.

Holt and Cordes Woods went further, saying the Canadian economy could enter a recession even without a further unexpected drop in the U.S. economy. An inventory pull-back, flat housing contributions to GDP, and decline in machinery and equipment could be enough to tilt the overall GDP downwards, they said. The Scotia Capital economists also criticized positive forecasts of the U.S. and Canadian economies made late last year.

“The bulls have a lot of work left to do in explaining once more why their 3% to 4% growth views for Canada and the U.S. didn’t pan out – yet again – either in their numbers that serve multiple audiences, or more importantly through their rhetoric that said they actually believed what they were forecasting,” wrote Holt and Cordes Woods.

While the Scotia Capital report didn’t name names, a December 2010 forecast by TD Economics predicted U.S. real GDP growth to reach 3% in 2011, while also predicting the Canadian economy to expand by 2.6%.

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