In the first quarter of this year, economists at the Conference Board of Canada began to revise down their economic estimates. In October last year, they had predicted that Canada would avoid a recession all together.

Chief economist Glen Hodgson admitted Friday that the board, using a mathematical model to produce its forecasts, had been not able to predict the economic crisis from which Canada slowly is pulling itself out.

“The first quarter was bad. It was the darkest quarter of the recession,” Hodgson said in an interview from Ottawa. “Our mathematical model could not capture the extent of the credit meltdown. This was an exceptional event, and it wasn’t built into the model.”

Now, however, Hodgson said the board is optimistic that its predictions are “rock solid” and it is correct in forecasting, along with the Bank of Canada, that economic growth will begin in the third quarter of this year. While the recovery will be “tepid,” the recession is indeed over.

It predicts, however, that the unemployment rate will reach a peak of 9.3 per cent in the second quarter of next year.

‘We are seeing a lot of evidence that the Canadian economy has hit bottom and it’s going to start to grow’—Glen Hodgson

Risk factors that may slow the recovery further include a possible resurgence of the swine flu virus, which Hodgson called a “wild card,” as well as financial sector turbulence and the impact of bad assets. He said growth will also be uneven among the provinces.

Southern Ontario, for example, was the “epicentre” of the recession, and recovery in some hard-hit areas such as the auto-making centres of Oshawa and Windsor will take time.

“We are seeing a lot of evidence that the Canadian economy has hit bottom and it’s going to start to grow,” he said.

“Our evidence indicates that people are starting to feel better, they are starting to spend a little more. There are still a lot of risks out there, but we will find out way out of this.”

According to the board, the third quarter of this year will see the impact of record-low interest rates and fiscal stimulus money currently being allocated by the federal government. It predicts growth will be more pronounced in the fourth quarter.

In 2010, it predicts growth of 2.7 per cent, with growth “levelling off.”

Rising consumer confidence

Current positive signs include an increase in house prices, an increase in demand for mortgages, an increase in auto sales, and a rise in the board’s consumer confidence index, which has been on the upswing since February.

The board reported in July that the index had climbed to 82.9 points, the fifth consecutive monthly increase.

One “lagging indicator,” however, is the unemployment rate. Hodgson acknowledged that many Canadians have lost their jobs and are continuing to suffer regardless of economic forecasts.

That suffering, he said, manifests itself in the numbers of people collecting Employment Insurance, filing for personal bankruptcies, carrying high debt loads and making trips to food banks across the country.

“We should never make light of a recession. It has a personal impact,” he said.

The board predicts that the unemployment rate will be 8.8 per cent in the third quarter of 2009, nine per cent in the fourth quarter, rising to 9.2 per cent in the first quarter of 2010, peaking at 9.3 per cent in the second quarter, and finally beginning to drop in the third quarter at 9.2 per cent. It predicts the rate will be 9.1 per cent in fourth quarter of 2010.

Why unemployment rises in recovery

“It’s a bit of a false indicator. It lags in the economic cycle. You have growth recovery before job creation,” he said.

‘The U.S. consumer is still feeling clobbered by the economy’—Glen Hodgson

The unemployment rate rises during a recovery period, he said, because discouraged workers begin looking for jobs again and their numbers are then included by Statistics Canada in the numbers of people unemployed.

Hodgson said there is no question the recovery will be gradual.

“When you have a sharp downturn, you expect a sharp rebound. This time around, though, it’s going to slow. You can say it’s a dampened, muted, tepid recovery.”

Hodgson said the recovery will be slow in Canada in large part because the U.S. economy is taking its time to regain strength. “The U.S. consumer is still feeling clobbered by the economy,” he said.

According to the board, U.S. consumers are saving five per cent of every paycheque, because of the “fear factor” now in their lives . The savings, while good for the economy longer term, is taking “a bite” out of the U.S. recovery.

Americans, he said, are still dealing with house prices that are down about 30 per cent across the U.S., among other things.

Hodgson said Canadians can “blame it on the Americans,” and despite lots of talk about the Canadian economy “decoupling” from the American economy, the truth is the two are still very closely tied, with more than two-thirds of Canadian exports going to the U.S.

“There was a weakening of the link,” he said. “There was never an absolute decoupling.”

As for swine flu, a potential second wave of the virus could temporarily disrupt the economic recovery, but Hodgson said it means “people won’t go to the store” while they are sick. The impact, however, will likely only be felt in one quarter before the recovery resumes.

“We are in a wait-and-see period. There are enough pieces of evidence to suggest that the recession is coming to an end, but we have to wait it out and hope that there aren’t any more sharp shocks,” he said.