Canoe

Sunday, May 6, 2001

Economic state waits on jobless reports By SANDRA CORDON-- The Canadian Press

OTTAWA (CP) -- Canadians may want to take a few Gravol tablets to combat the motion sickness they'll likely be feeling before the current economic upheaval settles.

Surprisingly poor jobless numbers just released in the United States set a very bad tone for Canada's unemployment report, which will be updated later this week.

American authorities are also warning they may dramatically cut a previously upbeat report on U.S. economic growth to reflect losses instead of gains.

All in all, say analysts, the outlook is grim.

"I don't think things look very good, frankly," said Marc Levesque, senior economist with Toronto Dominion Bank.

"It's not good news at all."

Analysts are in a funk over last Friday's report that the powerhouse U.S. economy lost 223,000 jobs in April -- the biggest decline in a decade -- pushing the unemployment rate up to 4.5 per cent.

That's bound to spill over into Canada, which sells more than 80 per cent of its exports south to the U.S.-- $1 billion a day in cross-border trade.

If American businesses and consumers feel too broke or financially insecure to buy Canadian goods, it bites this economy hard.

"That smacks of a broader slowdown in the economy that could, in essence, derail Canada's prospects," for a quick rebound in growth, warned Mario Angastiniotis, economist with Standard and Poor's MMS in Toronto.

That may become more evident in this Friday's jobless report for Canada.

After gains in March, analysts predict the April report will show little employment growth and in fact, the jobless rate could rise slightly to 7.1 per cent from seven per cent in March.

And that's bad news for consumers, whose confidence may begin to waver under these bleak jobless reports.

Spendthrift shoppers have been a key factor in keeping the economy going since it suddenly hit the brakes late last year, weighed down by too-large business inventories, slower corporate earnings and plunging stock markets.

Even the latest survey of business conditions among Canadian manufacturers released Friday was much weaker than forecasters expected.

All this data paints quite a different picture from that outlined in a report last week from the Bank of Canada.

It continues to predict an economic recovery by summer, for total annual growth of two to three per cent -- much slower than the 2000 expansion of almost five per cent, but better than a recession.

However, the central bank has hedged its bets by warning that its outlook for a second-half recovery annual is predicated on a quick U.S. recovery.

That looks less likely after U.S. officials warned Friday they may cut previous estimates that their economy grew by two per cent in the first three months of this year.

That surprising strong news had buoyed many into thinking a "V-shaped" recovery was in sight -- a dip down in growth and just as suddenly, a rebound.

Not likely, analysts say.

"Even the optimists would have to hope for a 'W'-- a second drop in growth in (the second quarter) with the rebound to come later," said Avery Shenfeld, senior economist with CIBC World Markets.

"Chances are, however, that two other letters...will vie to be the actual outcome."

One possibility? A "U" shaped recovery, with no growth until January's tax cuts and recent interest rate reductions kick in, he said.

"The other, now realistic risk, is that we will have to dust off the 'R' word again," said Shenfeld, referring to recession.

Markets will also be watching reports this week on building permits and housing starts as well as Ontario's provincial budget due Wednesday.

The only good news out of all this is that central banks will clearly have to continue slashing interest rates during May, says Levesque, who doesn't expect to see an economic recovery until year-end.

Three cuts in Canada this year have lowered rates by one percentage point to five per cent.

Those followed four cuts for a total two percentage points by the U.S. Federal Reserve, anxious to try to kick-start the sluggish American economy.

The Fed is widely expected to cut another half-percent when it next meets May 15, matched by the Bank of Canada at its next interest-rate session on May 29.

Another half-percent cut by both central banks will likely follow later this summer, says Levesque.

-- Rachel Gibson (rgibson@hotmail.com), May 06, 2001