Economy takes it on the chin as markets, loonie, oil price plunge

TORONTO — Falling oil prices, a plunging dollar, predictions of a big deficit next year and fears of a Big Three bankruptcy: a relentless barrage of negative news pounded stock markets Thursday, worsening a profound economic pessimism that has taken hold as the recession spreads around the world.

The Toronto stock market lost about nine per cent of its value and fell to its lowest level in five years as panicked investors who fear a deepening recession dumped stocks like Canada’s big banks, metals companies and energy producers.

On Wall Street, all the major markets fell by more than five per cent.

The loonie, meanwhile, fell more than 2.5 cents to close at 77.31 cents US, its lowest level in more than four years.

Stocks on Wall Street and Bay Street saw the most intense selling late in the trading day after hopes faded that U.S. legislators would quickly put together a multibillion-dollar aid package for U.S. automakers General Motors, Ford and Chrysler.

That raised the spectre of possible bankruptcy filings by the so-called Detroit Three carmakers that could devastate industrial communities in Canada and the United States and worsen the economic meltdown spreading across the world.

“Unrelenting gloom has taken over the markets,” said Dana Johnson, chief economist at Comerica Inc., a big U.S. Midwest bank.

“The economic news, the concerns about some major financial institutions, the concerns about the auto sector, earnings reports — everything is coming out in a way that is just provoking a massive selling.”

The speed at which economic fundamentals have changed is dizzying.

About four months ago, the economy looked bright, oil prices hit a record US$147 a barrel and commodities prices were high from solid demand for metals, coal, grains and other commodities.

But the Wall Street financial crisis, the collapsing U.S. housing sector and the drying up of global credit has changed all that.

On Thursday, crude oil hit a level not seen in more than three years, falling to US$48.50 a barrel on the New York Mercantile Exchange. Metals prices have also dropped sharply, leading many Canadian miners to cut jobs and shut down mines.

While lower oil prices mean good news for drivers desperate for relief from what was the sky-high cost of gasoline, it’s a bad omen for the energy-rich Western Canadian economy.

Job creation in Alberta, B.C. and Saskatchewan propped up Canadian economic growth in recent years as the manufacturing heartland in Ontario and Quebec shed hundreds of thousands of jobs.

Now, Alberta appears headed for a dramatic slowdown as the province’s oil and gas companies ratchet down exploration, drilling and expansion because of lower oil prices.

In other economic news Thursday:

— Parliament’s budgetary officer, Kevin Page, predicted the federal government would record the first deficit in more than a decade with a $3.9-billion shortfall in the 2009-10 fiscal year. Under a worst-case scenario that economists say is not so far-fetched, the federal deficit could hit $13.8 billion next year and $50.6 billion over the next four years.

— The U.S. Congress prepared to adjourn with no agreement on helping the battered auto industry. Democratic leaders said they could return to Washington in mid-December to vote on rescue loans if the GM, Ford and Chrysler first present a plan on transforming and modernizing their operations.

— Financial stocks on the TSX plunged 12.2 per cent after TD Bank (TSX:TD) disclosed $350 million in quarterly credit trading losses.

— Metal stocks slid 12.1 per cent as copper, zinc and coal giant Teck Cominco Ltd. (TSX:TCK.B) plunged 21 per cent after it suspended dividends on its common shares to help cut its massive debt.

— The U.S. Labour Department reported a jump in weekly U.S. unemployment claims at a 16-year high, the latest sign of rapidly escalating unemployment in the United States.