At this time in 2007, Canadians had every reason to feel economically smug.

CTV News' top story of 2007 was the high-flying loonie. It was a byproduct of our surging economy, which was being driven by global demand for our commodities. It was the only economic story on the list.

On Dec. 31, 2007:

• the Canadian dollar was worth US 99.13 cents
• a barrel of oil could be had for US$91.75
• the S&P/TSX composite index closed at 13,155.1
• the unemployment rate was 6 per cent (in the fall, unemployment dropped to 5.8 per cent, a 32-year low)

The loonie would rise slightly higher to reach about $1.03 U.S. on Feb. 28, and on July 11, oil peaked at a price of US$147.27 per barrel.

On June 18, the stock market hit a record high -- 15,073.1.

As 2008 ended, those indicators look much, much worse:

• the Canadian dollar was worth US 82 cents (it dipped to a low of US 76.88 cents on Dec. 5)
• Oil sold for US$44.60 per barrel -- it went for US$32.40 on Dec. 19, the lowest price since January 2004
• the S&P/TSX composite index closed at 8,987.7 on Dec. 31. It had declined to 7,724 on Nov. 20
• in November, the unemployment rate jumped to 6.3 per cent, with Ontario losing 66,000 of the 71,000 jobs lost across the country.

Consumer confidence has plunged to a level not seen since the 1982 recession. Analysts said the stock market lost 35 per cent of its value in 2008, the worst performance since the Great Depression.

"I think one of the most startling things for Canadians is just how stunning the reversal of fortunes has been," Patricia Croft, chief economist of the investment firm Phillips Hager and North, told CTV.ca.

"It wasn't that long ago that we were told everything was fine. I wouldn't say we were smug, but we were certainly hearing our housing market looks good, our banking system is sound. But we're now finding that in the era of globalization, the tsunami of the financial crisis is lapping at our shores, and I think the Canadian economy is headed into recession."

The federal government has admitted that we are in a recession, but Croft said the unsettling thing is no one can say for sure how deep it will be.

Warning bells

Some commentators did try to sound the alarm. The credit crisis, fuelled by the collapse in the U.S. subprime mortgage market, had percolated in 2007 but hit full boil with the collapse of the Bear Sterns investment bank in March. Sherry Cooper, chief economist of the BMO Capital Markets, wrote the following on March 17 in a note headlined 'Red Alert': "We are in the midst of the most pervasive financial crisis in a generation, which has destroyed untold sums of wealth in housing and financial assets and has driven the U.S. economy into recession."

The unfolding financial crisis in the United States went global as financial institutions around the world discovered they had bought worthless mortgages bundled in with other securities.

As financial institutions went wobbly and then started to fail, a "credit crunch" developed, meaning banks wouldn't even lend money to each other for fear the borrower would go under, leaving them holding the bag.

There was some unease among Canadian investors, but some advised them to not panic and sell at the bottom. On March 18, the TSX closed at 13,137.

In the U.S., the economic situation continued to deteriorate, with the housing market taking a beating and unemployment rising.

But this hadn't yet affected the wider "real economy" in Canada, although manufacturers in central Canada had been in a sectoral recession for some time. Forestry companies had also been suffering through hard times, in part because of the loonie's high value.

The collapse began in earnest in mid-September, with the weeks that followed becoming one of the grimmest periods in stock market history. Croft said many books will eventually be written about this episode, but she thinks Ground Zero will be marked as Sept. 15 -- the day Lehman Brothers filed for chapter 11 bankruptcy, citing the subprime mortgage crisis.

The Dow Jones Industrial Average in New York and the TSX would close down by 500 points that day -- New York's worst day since just after the 9/11 terror attacks. Worse would come.

Markets during the week of Sept. 15-19 went on a wild ride, with the TSX soaring more than 850 points on Sept. 19 on news of a financial system bailout in the U.S.

However, on Sept. 29, the markets went into another sickening dive. On that day, the TSX would fall 840.93 points, its worst drop in eight years.

The turmoil would continue through the Canadian election campaign. Prime Minister Stephen Harper looked tin-eared at one point when he suggested the dropping values on the stock market could provide some "buying opportunities" -- although he ultimately emerged on Oct. 14 with a strengthened minority.

The volatility continued for the rest of the year. Globe and Mail columnist Margaret Wente summed it up as follows in a Dec. 21 column headlined "The year we went kablooey": "Old thinking: Omigod! The TSX is down 400! New thinking: You mean the TSX is only down 400?"

Statistics Canada reported that in the third quarter, meaning from June 1 to Sept. 30, Canadians' net worth declined by $191 billion due to stock market losses and real estate declines. We'll hear about the fourth quarter declines sometime in January.

Bad, but how bad?

Croft said the U.S. is likely mired in its worst recession since the Second World War, with the world facing its toughest times since 1982.

For Canada, the uncertainty about "the contours of the downturn" is being reflected in the stock market, Croft said. "I think the jury's still out" as to how bad things could get here, but it likely won't be as bad as the United States, she said.

Canada rode a commodities boom the last six years, in part because of the surging economies of China and India. Croft said many analysts thought the growth in those countries meant the price of oil would stay in triple figures on a sustainable basis. "That's another myth that got exploded," she said.

Watching what happens in China, which has seen its economic output slow to the point where unemployment could rise, could provide some hints about a recovery in commodities prices, she said.

China has "very deep pockets" and could spend aggressively deal with its slowdown, she said.

Croft said Canadians also need to watch out for rising protectionism in the U.S. as its unemployment rate rises.

All this started with the credit crunch crisis, and Croft said Canadians really don't know whether those troubles are over.

There are some technical signs things are improving, but despite the central banks cutting interest rates, the banks still aren't lending or fully passing on those cuts to borrowers.

"That's why the Bank of Canada governor (Mark Carney) gave the banks a scolding," she said, although she didn't feel it was entirely fair.

Croft warned that comparisons to another 1930s-style depression or Japan's "lost decade" in the 1990s are misplaced.

The massive policy response from world government and the stimulative effect of lower energy costs will set the stage for a "tepid recovery in the second half of next year," Croft said.

"But the bad news is that things will get worse before they get better, so Canadians should brace themselves for some fairly nasty news on the economy as we head into 2009."