Even though the slowdown in Canada and the United States is proving to be deeper and more protracted than originally expected, TD Economics are forecasting that a recession will be avoided and economic growth will bounce back in the fourth quarter of 2001.

“Not only has the Fed been cutting rates much more aggressively, but the level of the real Fed Funds rate is much lower now than it was in 1990,” says TD Senior Vice President and Chief Economist Don Drummond.

In Canada, the contrast between the current stance of the central bank and its stance at the beginning of the 1990s is even starker. During the early 1990s recession, the Bank of Canada not easing its monetary settings like the Fed. It was actually tightening policy to wring inflation out of the system, he says. “The Bank of Canada was actually raising interest rates in the second quarter of 1990 – at which point the recession was already underway,” says Drummond.

The TD economists highlight the importance of monetary policy because the split displayed by the U.S. and Canadian economies – a weak business sector along with a fairly buoyant consumer sector – is not new. “On close inspection, there remain some very chilling parallels between the current slowdown and the period prior to the 1990-91 recession,” says Drummond.

Drummond suggests that consumer spending is unlikely to continue to power ahead at the pace of the past few quarters. “Canadian consumers may have an easier time keeping the engine running than their U.S. counterparts. However, it is equally unlikely that business activity will snap back forcefully.”

“Nevertheless, the saving grace this time around is that both central banks have been much more aggressive in easing. This should prove to be enough to keep both the U.S. and Canadian economies out of recession territory. However, it will take until the final quarter of the year for a meaningful rebound to materialize.”