Recession here, PM ready to open wallet

Canada is slipping into recession and an "unprecedented" fiscal stimulus is being considered, Prime Minister Stephen Harper warned yesterday as he admitted he is both worried and surprised by the depth of the global financial crisis.

Speaking at the Asia-Pacific Economic Co-operation summit in Lima, Mr. Harper joined other world leaders in conceding governments will have to spend their way out of the crisis, saying that "there are occasions in which deficits are not necessarily bad, but in fact, they are essential."His distinctly pessimistic tone was echoed by Finance Minister Jim Flaherty, who is preparing for Thursday's economic and fiscal update amid the rapidly worsening economy.

"The most recent private sector forecasts suggest the strong possibility of a technical recession the end of this year, the beginning of next," Mr. Harper said.

"Yes, I am surprised at this. I am also further surprised, more importantly, by deflationary pressure that we're seeing around the world. This is a worrying development, one of the reasons why it may well be necessary to take unprecedented fiscal stimulus."

The fact that Canada is headed into a recession was forecast by many. But the use of the R word - and the reference to deflation - is a sign of how dramatically the Conservative government's tone on the economy has shifted since the recent election.

On the campaign last month, Mr. Harper and his ministers spoke of the sound fundamentals of the Canadian economy. Now, with the auto and forest industries bleeding badly and millions of jobs on the line, federal authorities accept that the global credit crisis has washed ashore.

It was Mr. Flaherty who first used the word "recession" yesterday, during an appearance on CTV's Question Period, and he described what that could mean for the economy and the government.

"We are likely to see more unemployment in Canada. We are likely going to have to provide further stimulus to the economy," the Finance Minister said.

"We will outline where we are, what the best estimates of where we are going to be. The government will get on with the business of preparing the actual budget, which will be delivered early next year."

But with other countries moving more quickly to offer specific relief packages, and economists like Sherry Cooper with BMO Nesbitt Burns calling on Ottawa to implement a stimulus package as soon as possible, the Conservatives risk looking like they don't have a plan. The International Monetary Fund has also suggested countries put together stimulus packages worth 2 per cent of the size of their national economy.

Mr. Harper spoke about the Great Depression during a speech in Lima, and warned that politicians can't repeat the mistakes that of the past.

"The world is entering an economic period unlike, and potentially as dangerous, as anything we have faced since 1929," Mr. Harper said, pointing out that he has studied economics and began his political career two decades ago in part to campaign for eliminating the federal deficit.

"Let us remember what led to the Great Depression. It was not caused by a stock market crash. That was only the beginning," he said. Governments of the time made a number of serious mistakes, including attempting to balance the books at all costs, he said, raising taxes and cutting spending at a time when a fiscal stimulus was "absolutely essential."

During the election, Mr. Harper ruled out the possibility of running a deficit. If Ottawa runs a deficit in the 2009-10 fiscal year, as bank economists have predicted, it will be the first in 13 years. It will also be the first time Ottawa has slid into the red from a surplus since 1970-71.

Deflation is a broad, sustained decline in consumer prices. It's dangerous because consumers react by refusing to make purchases now, in anticipation of prices being lower in the future - exacerbating the tendency for prices to fall.

A recession is two consecutive quarters of negative growth.

Opposition critics said Mr. Harper was overconfident during the campaign, when he suggested the time was ripe for buying into the market. Prices have continued to fall sharply since that comment.

"Having told us that the land is strong, he is acknowledging for the first time that we are likely to be in recession. They said 'never, never, never' on a deficit. Now they are changing their tune," said Liberal finance critic John McCallum.

Mr. Harper wasn't the only politician talking about running a deficit on the weekend. Ontario Premier Dalton McGuinty warned Saturday that a bailout of the auto sector could drive the province's deficit into dangerous territory.

"The auto-sector demand alone could cause our deficit to dramatically balloon," Mr. McGuinty said after a speech to a Liberal policy conference.

"When it comes to the deficit, some people say, 'Well, what difference does it make?' Well it makes a big difference. If we get caught with a major structural deficit, it becomes difficult if not impossible to get out of it."

In Lima, Mr. Harper explained that attempting to balance the books given the current economic crisis could repeat one of the mistakes that triggered the Depression.

"As we enter a period we have not seen in the memory of virtually anyone alive today, we must be good students of history - and not just recent history."

Both Mr. Harper and Mr. Flaherty used the term "technical recession," perhaps to suggest the downturn will be shallow or short-lived.

Mr. McCallum wasn't impressed.

"You can call it a technical recession. A recession is a recession. It means loss of jobs and higher unemployment."