Fears of global recession deepen with more bad news in U.S.

OTTAWA – Canadian markets on Wednesday ignored the good economic news from home – a rise in Canadian home sales last month and a forecast that Canada will avoid recession – and joined markets around the world in giving back much of the stellar advance posted in the wake of the weekend's internationally co-ordinated financial market rescue plan.

Not surprisingly, more bad economic news out of the U.S. – including the third straight monthly drop in retail sales, as well as warnings that the rescue plan won't prevent a global recession – continued to weigh on the minds of investors.

"Now that the credit and banking crisis is getting to be 'old' news, the markets are turning their attention to what's next – the deepening global economic recession coming hard at us," Custom House, a Victoria-based international payments firm, said in an analysis issued before U.S. markets opened but as those in Asia and Europe as markets were selling off sharply.

Here, Bay Street's benchmark composite index plunged more than 630 points, as prices for most commodities fell, including a near $5 US a barrel drop in oil to less than $74 US, virtually half the $147 US peak reached earlier this year, while Wall Street's bluechip Dow sank more than 730 points. The drop in commodity prices also hit the dollar hard, sending the loonie down 1.91 cents US to 84.18 cents US.

"Data out of the U.S. this morning confirms that as far as the business cycle goes, we have not yet hit the bottom of this trough," it noted. "It's great that the central banks have injected tons of liquidity into the banking sector but because of the economic downturn the banks are in no rush to give this money to businesses they consider to be high risk as the economy slows."

However, the Conference Board of Canada forecast that while the U.S. financial crisis and economic slump will weigh on Canada's economy it won't push it into a recession.

"The turmoil in the United States is limiting Canadian economic growth to 0.8 per cent in 2008, but Canada will avoid a recession," it said, adding that growth will rebound to 2.2 per cent next year.

The U.S., with its financial market crisis and its struggling economy, is taking its toll, conceded Glen Hodgson, chief economist at the board, which is forecasting that turmoil in housing markets will hinder U.S. consumer spending until the second half of 2009, limiting growth there to two per cent this year and then 1.7 per cent in 2009.

The U.S. housing crash and the ensuing financial market crisis is also affecting investor and consumer confidence and tightening credit conditions on a global scale, while, slower global economic growth is taking the shine off commodity prices, which will weaken the real income gains that have sustained the domestic economy, the board said.

"Still, the domestic economy has enough momentum to keep Canada out of a recession," Hodgson said, adding that income from the fading resources boom still provides plenty of domestic momentum, which has been reflected in strong after-tax incomes and profits over the first half of this year.

Regardless, there was no shortage of advice for Prime Minister Stephen Harper and his new Conservative minority government on how to deal with the threat of recession.

Global Insight chief economist Dale Orr said the "newly elected government must act: Immediately, to ensure effective workings of financial markets; within a month or so, to update the fiscal outlook; and early next year, to implement policies to ensure job security and economic growth for the medium term."

Harper said he will recall Parliament this fall and bring down an economic statement by the end of November.

However, Orr said the update must contain contingency plans to deal with eroding fiscal conditions, warning that because of the sharp deterioration in the economic outlook and plunging oil prices the "government's current plan for a small fiscal surplus in 2009-10 is at serious risk."

"The Conservative government has pledged to not raise taxes, not cancel any planned tax reductions, and not present a budget with a planned deficit," Orr noted. "It therefore must attempt to identify currently planned spending for 2009-10 that can be postponed."

Scotia Capital also warned that the new government will be "challenged" to implement its $8.7 billion in election promises, noting that the weakness in the economy, which will squeeze tax revenue.

However, not everyone wants the new government to cut spending.

The Federation of Canadian Municipalities urged the new government to counter the slowdown by providing local government with increased funding to repair local infrastructure, like roads, bridges, and sewers.

"Infrastructure investment is an effective recession-fighter, creating new jobs while providing badly needed improvements to roads, bridges, public transit water, and sewer systems," it said.

Meanwhile, the Canadian Real Estate Association reported that sales of existing homes rebounded three per cent last month.

However, the seasonally adjusted three per cent rise in sales from August may have reflected a rush by buyers to get in under the wire before Wednesday's elimination of mortgage-insurance availability for those with less than a five per cent down payment, one of several restrictions imposed by the federal government on the industry to avoid a U.S. style housing market bubble and collapse.

And the average selling price of a home, at $315,461, was down 6.2 per cent from a year earlier, though the industry association said that the steepness of the drop was due to weaker sales in some pricier markets, which dragged down overall prices, and that prices actually rose in most cities.

"Price declines in some of Canada's more expensive housing markets will outweigh further price gains in other markets and continue pulling the national average price lower over the rest of the year and into 2009," said association chief economist Gregory Klump, citing recent other recent measures by the government to protect the market, including its planned $25-billion investment in secured mortgages here and the limiting of the amortization period for a government insured mortgage to 35 years.

The news out of the U.S., meanwhile, was not reassuring, especially that retail sales there fell 1.2 per cent in September, the third straight monthly decline, something not seen in 17 years, and with virtually all types of retailers being hit.

"Bad news is piling up in the United States," said Desjardins Group economist Francis Genereux. "Unfortunately, this morning's figures reveal that the state of affairs is even worse than anticipated."

Once adjusted for inflation, real consumer spending in the U.S. is poised to decline in the third quarter for the first time since the 1991 recession, and given how important the consumer is to growth, that will result in an overall contraction in the economy.

"The recession now seems to be a fact," Genereux said, adding that while the U.S. Federal Reserve may cut rates again, it is running out of room to cut them much further.

And Federal Reserve chairman Ben Bernanke conceded in a speech that even if financial markets stabilize, a "broader economic recovery will not happen right away."

© Canwest News Service 2008