It's hard to be sufficiently bearish in today's climate of outrageous writedowns, layoffs and stock market declines. As soon as you make a prediction, the deteriorating economy tends to wash it away with worse-than-expected data.
David Wolf, economist and strategist at Merrill Lynch (Canada), has hardly maintained a sunny disposition in recent months - but he, too, has been forced to revisit some of his earlier forecasts. Gone is his earlier forecast for the Canadian economy to contract by 1.2 per cent in 2009, after inflation. Now, he believes it will contract 1.7 per cent, considerably worse than the prediction from his economist peers and the Bank of Canada. In the first quarter, he expects Canada's gross domestic product will plunge 5.2 per cent, with the unemployment rate surging to 8.6 per cent by the end of the year.
"Sectorally, the revision comes from weaker final domestic demand, particularly consumer spending, which appears to be declining at an alarming pace," he said in a note.
He also expects the Bank of Canada will get even more aggressive with interest rate cuts as it attempts to fight back against the deteriorating economy and sagging inflation.
"In that vein, we revise down our forecast for the overnight rate target to 'effective zero', a stance which we expect to remain in place until it becomes evident that the cumulative stimulus put in place is finally gaining traction in the economy," he said. On the upside, he believes that traction will occur in 2009.
He still expects the S&P/TSX composite index will fall to 8000 by the end of the year, thanks in part to a 35-per-cent drop in earnings on a per share basis. The index fell to about 8600 on Monday morning, implying that Mr. Wolf sees another 7 per cent dip for the benchmark index.