In the past year, the value of most stocks and mutual funds has dropped at least 20 percent.
Corporate earnings in North America have been disrupted and are expected to decline in 1999.
Although many market participants are in denial, all signs show a global recession is afoot, said Randy McDuff, a vice-president at Canadian brokerage firm Nesbitt Burns.
“This is a bear market by any stretch of the imagination,” he told an audience of agrologists last week.
With its export-focused economy, Canada may be bit hard by the bear of global recession, said McDuff.
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Nesbitt Burns researchers believe the market hasn’t hit bottom yet. McDuff said other investment experts share the gloomy view.
Merrill Lynch is forecasting a one percent decline in United States corporate earnings next year, the worst decline since 1974.
Deutsche Bank, the fourth largest bank in the world, said there’s a 70 percent chance the world will see a recession as bad as the 1973-74 downturn.
RBC Dominion Securities economists say the world financial system hasn’t been at this great a risk since 1929, and a North American recession is certain by the end of 1999.
The financial world has been reeling from a series of crises, said McDuff, listing the Asian crisis, Russian crisis, Bill Clinton crisis, derivative funds crisis and even the year 2000 crisis.
Excess expansion was worst in Asia, leading to a flood of cheap exports, made even cheaper by recently devalued currencies.
Now, the countries are starting to reduce or restrict imports, making it tougher to do business with them.
Only long-term structural changes will fix the Asian crisis, said McDuff, calling it at least a five-year problem.
In North America, the average wage earner has been spending $99.50 out of every $100 in take-home pay, said McDuff.
“Consumer spending is tapped out,” he said, explaining credit and debt are at an all-time high, while savings are at an all-time low.
Short- and long-term debt accounts for more than 40 percent of the average U.S. corporate balance sheet.
While analysts expected a 10.2 percent gain in the first nine months of 1998 for the prominent U.S. companies listed on the Standard & Poor 500 index, 306 of them had earnings drop one percent.
As profits in the U.S. decline, Canadian exports to its largest customer will drop.
Nesbitt Burns forecasts gross domestic product will drop to one percent in 1998 from three percent. When recession hits the U.S. economy, Canadian GDP could fall to negative two percent in 1999, its worst performance in 25 years.
McDuff thinks the Canadian dollar is overvalued by 10 percent, and forecasts it will drop below the 60 cent U.S. range when the American recession strikes.
While the global recession is not Canada’s fault, free trade agreements mean Canada is not insulated from global instability, he said.
He also cautioned that trade agreements won’t stop the U.S. from protecting its economy through import restrictions and quotas.
After 2000, corporate profits should start to improve, the recession will back off and the economy will pick up again, said McDuff.
