Thursday, September 25, 2008

Canada and the Housing Crisis in the U.S.

There is increasing concern among Canadian economists regarding the effect of the U.S. financial crisis and ensuing bailout on the Canadian economy. Over the past weekend, I attended a meeting of the Canadian Institute for Advanced Research which was attended by both David Dodge and Mark Carney (the latter attended only for a short period, having the crisis to deal with).

One of the biggest concern is in regards to the effect of the crisis on Canadian exports to the U.S. Of particular concern is the exports of Canadian lumber which is a prime input in the U.S.'s struggling housing market. As reported by Bloomberg:

"The current situation poses particular problems" because it affects "areas that matter most for Canada," such as demand for cars and lumber, Carney, 43, said in a speech today at the Canadian Club of Montreal. Policy makers had already identified tighter credit conditions "as the main risk to a modest U.S. recovery next year" and recent events make that possibility "more probable," he also said.
As a result, many economists expect the financial crisis in the U.S. to result in a strong slow-down in Canadian economic growth:

LEVIS, Que. — Canada's economy faces a long period of stagnation as several risks, including softening housing construction and a tougher credit market, will force a quiet and slow recovery, says a Desjardins Group economist.

The firm's projections for Canadian economic growth were trimmed from one per cent to 0.6 per cent this year, and from 1.8 per cent to 1.3 per cent next year.

"With economic projections this low... we are clearly going to see a long period of quasi-stagnation, especially given that there are several major downward risks looming," chief economist Francois Dupuis said in a note Tuesday.

"The recovery will be slow and progressive, with no fireworks."

Dupuis pointed to "fragile" consumption in the United States and a U.S. housing market that shows no signs of recovery as two factors that have impacted Canada's exports.

He coupled that with weakening housing construction in Canada, tough credit conditions and a deteriorating labour market as factors that are taking a toll of the local economy.

"Along with government spending, personal consumption is the only factor that is allowing Canada's economy to keep its head above water," he said.

"With confidence at a low ebb, the hope of avoiding a recession is holding on by a thread."

The report noted that oil prices which skyrocketed throughout the year were fairly devastating to the world's economy.

Desjardins predicts that the global economy should advance by about 3.7 per cent this year, down one percentage point from 2007.

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