Canada is headed for a severe recession in the next three quarters, and even a major fiscal stimulus package from Ottawa would not help the economy, economists said on Thursday.

Speaking to members of the Investment Funds Institute of Canada in Toronto, TD Bank Financial Group vice-president and chief economist Don Drummond said he expects Canadian GDP to contract by a nominal 3% in 2009, which would mark the first ever annual decline.

“Canada has never had an annual decline in nominal GDP,” Drummond said, “there was always enough inflation to offset the decline in real output.”

The key difference this time around is the rapid drop in commodity prices, which Drummond expects to drop by another 20% on average next year. He expects the price of oil to fall to US$30 per barrel.

Furthermore, there is little the government can do about the bleak economic outlook. “There’s not an awful lot that you can do.”

Drummond expects further cuts to interest rates by the Bank of Canada, including a 50-basis-point cut next week, and another in January. But he warns that a fiscal stimulus package is not likely.

History shows that fiscal stimulus measures typically take two years or more to have any impact on the economy, so any action taken now would not likely have any tangible benefits until 2011 or 2012, according to Drummond. By that time, the economy will most likely have improved independently.

David Laidler, a fellow in residence at the C.D. Howe Institute and an economics professor, agrees. He warned that the accelerated infrastructure spending the government is proposing would need to be implemented at the municipal level across the country, and would be slow to generate employment.

“It’s going to take forever to get the funds down and get those things working,” Laidler said.

He added that there are certain areas where government spending could benefit the economy in a more timely way, but they must include policies very specifically targeted at local problems. These could include aid for specific sectors, such as the auto industry and forestry. The government could also help by improving the employment insurance system to even out the way benefits are paid across the country, since unemployment is set to rise sharply in the next few months, according to the economists.

But Laidler said any effective fiscal stimulus measures would need to coincide with more liquidity injections and other monetary policy measures.

“There’s a lot of evidence suggesting that fiscal policy by itself does not do much,” Laidler said.

“You need the creation of large amounts of liquidity by the central bank to keep the financial system functioning,” he added. “There appears to be more of that to come.”

Ultimately, however, few actions by policy makers could sufficiently restore the consumer confidence necessary to improve economic performance next year.

“If there is a crisis of confidence, then somehow that mentality needs to change, and it may not just be a policy tool that does that,” said Paul Masson, research fellow and adjunct finance professor at the University of Toronto’s Rotman School of Management.

Regulatory changes to come

The economists agreed that regulatory changes to financial systems would result from the current crisis.

“I have no doubt we’re going to get all kinds of regulatory changes brought in,” said Laidler.

But the implementation of widespread changes to regulation at the international level is unlikely, according to Masson. He said it’s clear that the financial problems originated in the U.S., and largely reflect a lack of regulation in that country.

“Regulators there could have done their job,” he said.

“The regulators need to be closer to the institutions that they’re supervising, and you’re not going to get that from a global regulator.”

Masson added that shifting powers to a supranational level would not be acceptable to many countries, including the United States.

Still, he said collaboration between national regulators would rise as a result of the crisis. He also calls for the International Monetary Fund to do a better job at identifying problems in the global financial system before they occur.