Thursday, January 24, 2008

More Good News for Vancouver Real Estate - Central bank says Canada will avoid recession

The Bank of Canada is moving to reduce interest rates to help Central Canada's manufacturers which are highly integrated with the US manufacturing sector hit hard by reduced demand in the America.

Western Canada's hot economy is being driven by overall market demand for natural resources in Asia and to a far lesser extent the US (except oil). Natural resources are at an all time high from increased Asian demand. If there is a reduction in US demand there will still be Asian demand which has been growing at double digit rates and will continue to do so. Resources prices may come off their all time highs, but should remain high enough to keep Western Canada's economy in great shape.

The continuing reductions in interest rates here in Canada coupled with strong economic growth in Western Canada from high natural resource prices should result in rising prices for Vancouver real estate.

I would love to hear your thoughts.

Globe and Mail Update

OTTAWA — Canada's economy has stagnated, and it wouldn't take much to tip the United States into a recession, Bank of Canada Governor David Dodge says.

The central bank's official projection is for the U.S. economy to barely budge in the first half of this year, expanding by just 0.5 per cent an annualized pace.

In Canada, the central bank sees a 0.6 per cent pace right now, but picking up to 2.0 in the second quarter, and 2.3 per cent in the last half of the year.

“We will come through 2008 fine. It won't feel so fine,” Mr. Dodge told reporters in his final news conference before he retires. “There is a lot more adjustment to come in financial markets.”

“These numbers, it's hard to measure precisely. So that number of 0.5 per cent, when they report after the first quarter and after the second quarter, initially they could well report something less,” he told reporters. “Don't take this as some number that is cooked up with a huge degree of precision.”

Regardless, it won't be pretty.

“Our base case for the U.S is for incredibly slow growth,” he said.

He indicated that interest rates in the United States and in Canada will have to be cut in the near future, but he said this week's emergency rate cut of three-quarters of a percentage point by the U.S. Federal Reserve did not change his outlook.

“The major change is much weaker net exports,” the bank said, explaining why it had dramatically slashed its forecast from more upbeat projections just three months ago.

“While import growth is expected to stay robust over the projection period, the outlook for Canadian exports has been marked down, reflecting the weaker U.S. economic outlook.”

While the United States will narrowly skirt a recession in the first half of 2008, its economic recovery will be slow, and will not really take hold until 2009, the Bank of Canada predicts. (A recession is generally understood to be two straight quarters of contraction.)

For the entire year, Canadian gross domestic product will grow a sluggish 1.8 per cent, but pick up to 2.8 per cent in 2009, according to the latest forecast.

All told, the Canadian economy will need more support from monetary policy, the central bank said, reiterating that it would continue to cut its key interest rate in the near term. It did not indicate how deeply it would cut.

The report is Mr. Dodge's final outlook before ending his seven-year tenure at the end of January and ceding his position to Mark Carney, a former senior official at the Department of Finance, and before that, an investment banker.

The Bank of Canada trimmed its rate by a quarter of a percentage point on Tuesday, at the same time as the U.S. Federal Reserve was aggressively cutting its own rate by three-quarters of a percentage point, to put a halt to financial market freefall. The Bank of Canada made its own trim without knowing that the Fed was about to make such a bold decision, leaving many market-watchers to wonder whether the Canadian bank had done enough.

In Thursday's monetary policy report, however, the Bank of Canada expressed no regrets at not having moved further earlier this week, and suggested the Fed cut had not changed the central bank's long-term thinking. The report also indicated that bank officials had updated their report since the Fed move, and also assumed that the Fed would continue to stimulate the U.S. economy.

The slump in the U.S. housing sector is proving to be “deeper and more prolonged” than expected, cutting into household wealth. Credit conditions are also tightening. The result is a drop off in U.S. demand, hurting Canada's export potential.

Canadian exports for the entire year are expected to decline by 0.1 per cent, the central bank projected.

At the same time, Canadian households and businesses are facing borrowing rates that continue to climb, even though the central bank has cut its own target rate twice recently.

Since October, the bank's key rate has fallen 50 basis points, but the difference between the bank's rate and household borrowing rates has risen 20 to 25 basis points since then (a basis point is one one-hundredth of a percentage point). And the spread for non-financial businesses has risen 15 to 20 basis points since October.

“There has been a considerable widening in credit spreads in Canadian and global bond markets for financial and non-financial institutions,” the central bank recognized.

The report did not make any suggestions as to how the central bank could affect those spreads and narrow them so that credit conditions would more closely track monetary policy.

As for the Canadian dollar, the Bank of Canada seems satisfied that the current level a couple of cents below par is appropriate for what is happening in Canada's economy right now.

“After spiking sharply early in November, the dollar has since declined to trade around the level of 98 cents (U.S.).... This level is not inconsistent with fundamental factors.”

Indeed, the Canadian dollar has driven inflation down well below the central bank's expectations three months ago, the report said. Despite earlier statements that the exchange rate doesn't have much an effect on inflation, the psychology of trading near par with the U.S. dollar has had a significant impact, the bank said.

“It appears that the Canadian dollar's rise to close to parity with the U.S. dollar raised consumers' awareness of the considerable differences between Canadian and U.S. prices and led to a greater-than-projected downward adjustment of the prices of some goods, particularly automobiles.”

The Canadian economy is still operating above its production capacity right now, but that is quickly coming to an end. By the second quarter of this year, the economy will have a bit of excess supply, the report said.

Core inflation (which excludes the most volatile prices) is projected to remain well below the central bank's two-per-cent target for the rest of the year and most of 2009, the bank said. Total inflation should stick near the two-per-cent mark, however, because of an assumption of high oil prices.

Overall, the continuing troubles in the U.S. economy and the market turbulence that has accompanied the slump have forced the Bank of Canada to seriously slash their forecasts for growth and inflation in Canada and the United States.

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