BUSINESS
08/09/2011 06:55 EDT | Updated 10/09/2011 05:12 EDT

Canada Economy May Run 'On Minimal People Power' If Double-Dip Recession Hits U.S.

Flickr: Dylan Passmore

TORONTO - Canadians could see a rise in unemployment as businesses scale back growth plans if the United States heads back into recession, analysts said Monday.

After a massive selloff on North American markets Monday triggered by fears of a worsening U.S. slump, the analysts said Canadian businesses won't be in much of a mood to hire in an uncertain environment.

That could make it difficult to push the 7.2 per cent jobless rate much lower.

John Stephenson, vice-president of Toronto money manager First Asset Funds worried that corporate Canada may run "on minimal people power."

"Even if businesses are profitable and successful and could hire somebody, they choose not to because they think 'I don't know where this world is going to,' so why be committed to somebody not only for their salary but for their benefits?' "

Even if the Canadian economy is performing better than the U.S., Canadians "are going to feel like it's a recession," he said.

S&P credit rating agency downgraded the U.S. debt from the coveted AAA status for the first time in history late Friday, sending already plummeting markets further into lows not seen since the 2008 credit crisis.

The actual impact of the downgrade is minimal — Canada saw its debt downgraded in 1993, and the stock market rallied the following year. But it has had severely negative psychological effects on investors already reeling from the European debt crisis and other U.S. indicators that signal its economy is weakening.

A TD Economics report said Monday there is now a 1-in-3 chance of a renewed U.S. downturn.

Canada is stronger economically than the United States — with booming oil and mineral sectors and a solid housing market — but the countries are so interconnected it cannot avoid fallout from a slowdown south of the border.

Louis Gagnon a business professor at Queen's University, said a U.S. double dip recession would hammer business confidence and could prompt them to tighten expenses rather than hire.

"The U.S. is our major trading partner, so if they stop consuming, they stop purchasing goods from us and our already battered manufacturing sector is not going to improve."

Canadian manufacturers and resource companies — some of the country's biggest employers — will feel the brunt of the slowdown since 80 per cent of Canadian exports head to the U.S.

Exports have already been hit by a strong loonie, which is losing steam in the wake of the recent crisis, but still hovers above parity with the greenback. It fell about a cent and a quarter to 100.92 cents US on Monday.

Fears of a slumping U.S. economy have sparked a pessimism not seen since the Wall Street financial crisis three years ago.

Fearful investors are taking money out of the stock market and putting it into perceived safe havens such as gold, which hit a new record high Monday of over US$1,700 an ounce.

The Toronto stock market has lost more than 10 per cent of its value since the beginning of the year, but in six months that could grow to as much as 30 per cent, Stephenson said.

The factors scaring investors now aren't going away any time soon and Stephenson expects further U.S. debt downgrades and interest rate hikes down the road in that country, as well as further European bailouts and the potential deterioration of the euro zone.

The Toronto Stock Exchange lost nearly 500 points Monday, extending a streak of losses that Bank of Montreal economist Robert Kavic said could continue for some time.

Wall Street's key Dow Jones industrial average dropped more than 630 points.

With the most recent market drops, average investors are losing money each day, affecting consumer confidence and spending. That could deter many from making big purchases like homes and undermine prices in the influential housing market, especially in Vancouver and Toronto.

Any deterioration in home prices would further deplete consumers' assets.

Consumers should also be concerned about reduced investment income from stock losses, especially at a time when Canadians have racked up debt at cheaper borrowing rates, said Stephenson.

However, those who have paid down their debts could benefit from depressed asset values, he added.

"They'll be able to pick up assets, whether it be houses or whether it be stocks or bonds, at fire sale prices."

Gagnon said many people are growing worried about their retirement savings as the value of large pension funds and their own investments plunge on the stock markets.

"I think people have to brace themselves for tougher years ahead and it may very well be that many of us who want to retire will have to retire much later than anticipated because we can't count on the stock market to produce the returns they did in the past."

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