09/15/2011 11:46 EDT | Updated 01/12/2012 02:10 EST

Canada feels impact of global economic slowdown, but no recession in sight yet

OTTAWA - The economic recovery has nearly ground close to a halt in big industrialized economies -- and slowed in Canada -- but a recession seems to have been averted for now, according to fresh data and a new forecast released Thursday.

Canada's slumbering manufacturing sector awoke in July, jumping 2.7 per cent after three straight monthly declines, according to a Statistics Canada report.

And the Organization for Economic Co-operation and Development predicted in its latest forecast that Canada will have modest growth rates of one per cent and 1.9 per cent in the third and fourth quarters.

By comparison, the United States economy will creep ahead by as little as half a per cent, the OECD estimates.

Canada's factory performance in July, in conjunction with strong export numbers released last week, drops the odds that Canada will have a second straight quarter of shrinking gross domestic product.

A recession is usually defined as two straight quarters of contraction.

If a recession does occur in Canada, said Bank of Montreal economist Douglas Porter, it will be because of a shock beyond its borders.

Scotiabank economists pointed out this week that Canada could trip into a technical, mild recession if it recorded a second negative quarter after the already-reported 0.4 per cent contraction in the April-June period, but stressed that was not the most likely outcome.

"I don't think manufacturing seals the deal on the third quarter, but it certainly suggests the economy managed to grind out some growth," Porter said Thursday.

"My concern is not Canada. My concern is Europe first and the weakness in the U.S. second."

In a move to ease fears over a financial crisis in Europe, the world's top central banks announced Thursday they would provide three-month dollar loans to European banks.

The announcement buoyed markets in Toronto and New York. As well, the Canadian dollar rose about three quarters of a cent to 101.64 cents US, as the American dollar weakened against other currencies.

Analysts caution that the respite is likely temporary, however. They say the measures taken in Europe so far are intended to push the coming reckoning of the sovereign debt crisis further down the road in the hopes banks will have had time to adequately recapitalize.

Many observers, however, still believe Greece will be unable to dig itself out of its debt and deficit hole and its government will have to default on loans.

The unfolding Greek tragedy -- and the uncertainty about contagion for the global financial system -- has already triggered a run on confidence for investors, business and consumers.

Along with the sovereign debt crisis, the OECD cited weak economic data, political gridlock in the United States and concern about the lack of "policy ammunition" to offset a new shock for the growing anxiety.

As if further evidence was needed, TNS Canada said its consumer confidence index dropped more than point in September -- to 96.4 from 97.6 -- after dropping two points in August.

"Confidence is continuing to drop even though the Canadian economy continues to perform rather well. We are reacting to the world situation rather than our own. The fear is that falling confidence will halt spending and that tends to be a self-fulfilling prophecy," said Norman Baillie-David, vice-president of TNS Canada.

OECD chief economist Pier Carlo Padoan urged nations with the fiscal and monetary room to act to stimulus activity. He praised U.S. President Barack Obama's US$447 billion proposed jobs bill as a needed policy response.

"The policy imperative is to rebuild confidence," he said.

To date, not all economic indicators reflect the doom and gloom sentiment. Jobs have been flat in North America, but not falling, and consumers continue to support the economy.

Also on Thursday, the Canadian Real Estate Association's August resale housing report showed sales of existing homes held steady in August compared with and posted a significant gain from year-earlier levels. House prices rose 7.7 per cent year-over-year to $349,916.

In the United States, a new manufacturing survey found industrial production picked up 0.2 per cent in August.

Most of the hard data, however, reflect a period before August's market turmoil -- following a slight downgrade of the U.S. debt rating and the European debt crisis -- and subsequent plunge in confidence indexes.

Analysts warned against declaring an all-clear over the manufacturing numbers, suggesting the sector likely got a temporary lift from the spring plunge caused by supply disruptions from Japan.

Going forward, the systemic weakness of the global economy, particularly the U.S., will dry up demand for Canadian manufactured goods.

"A weak profile for economic growth among Canada's key trading partners, in combination with a lofty loonie will continue to be a challenge for Canadian manufacturers," said TD Bank economist Leslie Preston.

Scotiabank's Derek Holt added another concern is that producers are carrying high inventories, which they will need to sell off into flat demand.

He welcomed that new orders continued to increase in the Statistics Canada report, but said was concerned firms would meet the demand by selling down inventories rather than pumping up production.

"July will probably be the best month of the third quarter," he said, "but then you could start to lose momentum."