World markets await U.S. interest rates decision

OTTAWA -- It will be tales of two shrinking economies next week, here and in the U.S., with analysts warning it won't be pretty whether viewed from north or south of the border.

But the focus for the U.S., here and the rest of the world will be on how far the U.S. Federal Reserve will go to in cutting interest rates to revive an economy that most analysts now agree is already in a recession.

"We see the Fed as having no reason to go light on its rate cut," said Avery Shenfeld, economist at CIBC World Markets, which expects a half-point cut on Wednesday after its two-day rate review meeting.

And that's even before economists see the third quarter gross domestic product (GDP) report, which comes out Thursday. The consensus among economists is that the report will show the U.S. economy contracted at an annualized pace of 0.5%.

"Even without the latest GDP data in hand, a steady stream of grim economic data, including nine consecutive months of non-farm job losses, has made it abundantly clear that the United States is in recession," said Meny Grauman, another analyst at CIBC, which projects the shrinkage will be an even greater 0.7%. "This makes the expected drop in third quarter real GDP growth less of a surprise and more of a confirmation of an open secret."

But the big picture report on the U.S. economy will be only one of a string of bad reports out of the U.S. through the week, which analysts say will include further declines in new home sales, house prices, consumer confidence, durable goods orders, and personal income and spending.

Canadians will get the bad news about their economy Friday, with analysts expecting a Statistics Canada report on August GDP to show a 3% drop in overall industrial output.

"We look for a significant retracement in August from the surprising surge in the prior month," said Douglas Porter, economist at BMO Capital Markets, which is more pessimistic than the consensus and is projecting a 0.5% contraction in GDP during the month.

"In fact, there has been a sea of red from almost all the preliminary indicators for August," he said. "Manufacturing sales were down 3.7%, wholesale trade fell 3.3% and retail sales were down 0.3%, all pointing to a marked decline in the broader economy."

While Canada, unlike the U.S., should continue to avoid a technical recession at least through the third quarter thanks to a strong start to the quarter, Mr. Porter warned the evidence since suggests the economy will go into recession in the final quarter of the year and continue to continue to shrink through the first half of the year.

Meanwhile, there will be a continuing stream of corporate earnings reports through the week that won't likely inspire any investor confidence, including those of oilpatch giant Suncor Energy and from bacteria battered Maple Leaf Foods.

The reading of the overall mood of corporate Canada, however, will come Tuesday when Statistics Canada releases the results of its latest quarterly survey of thousands of businesses.

Export Development Canada won't likely lighten the mood with its latest global export forecast, also being released Tuesday.

Eric Beauchesne, Canwest News Service Published: Friday, October 24, 2008

Canada: Alberta poised to hit 4 million people by 2031

By MARKUS ERMISCH

CALGARY -- Estimates of Alberta's population breaching the five-million mark are almost certainly exaggerated, but the province is poised for continued growth, says the research director of the Canada West Foundation.

Robert Roach told the 1,300 delegates at the Calgary Real Estate Forum yesterday that by 2031, Alberta's population will have grown by more than 880,000 people to reach 4.14 million, most of whom will flock to the province's urban centres.

Immigration especially is a "highly urban phenomenon," he said, noting that 8.4% of international migrants arriving in Canada move to Alberta.

Calgary, however, still trails Toronto, Montreal and Vancouver as a magnet for new arrivals in Canada.

Roach didn't explain what impact the growing population will have on Calgary's real estate market, but real estate professionals, including officials from the Canada Mortgage and Housing Corporation, consistently point to shifting demographics as one of the main underpinnings of the province's housing market.

Roach said that Canada's demographic weight, together with the economic weight, is gradually shifting toward the western provinces, most notably Alberta and B.C.

"That's where the action is," he said.

Bank of Canada warns of slumping economy, cuts interest rate one-quarter point

By Julian Beltrame, The Canadian Press

OTTAWA - The Bank of Canada trimmed its trendsetting interest rate by a quarter percentage point Tuesday, saying Canada needs the stimulus to ward off the headwinds from a global recession.

The reduction, following a surprise 50 basis point reduction two weeks ago, drops the overnight interest rate to 2.25 per cent, a hair above the record low two per cent level reached in 2004.

But the bank's failure to chop by at least half-a-point left economists disappointed given the gloomy prospects for the Canadian economy.

"The entire statement was written in a remarkably dovish way as if to justify a 50-or 75-point cut and they fell short on execution," said Scotia Capital economist Derek Holt.

"I think they should have stepped more firmly in front of the problems ahead and cut more aggressively."

With the economy sharply slowing, Canada's central bank did hint that it may have to cut further at the next scheduled announcement in December.

Bank governor Mark Carney characterized the headwinds hitting Canada from deteriorating global conditions as "profound" and now projects the economy will only advance 0.6 per cent this year and by the same amount in 2009.

That's as close to a recession as possible without actually falling into one and sharply lower than the bank's July forecast, which was for a one per cent advance this year and relatively robust 2.3 per cent growth in 2009.

The central bank now says Canada won't emerge from the malaise until 2010, when it predicts growth will rebound to 3.4 per cent.

"The weaker outlook for global demand will increase the drag on the Canadian economy coming from exports," the bank stated.

"Lower commodity prices will also dampen the outlook, working through a deterioration in Canada's terms of trade to moderate domestic demand growth."

As well, the bank said "tightening in Canadian credit conditions in recent weeks will restrain business and housing investment."

In Toronto, the main stock index fell Tuesday as a lower crude price depressed the TSX energy sector, lower bullion prices pushed down gold stocks and most of the bank stocks fell.

The Canadian dollar was down 1.05 cents to 82.72 cents US at midmorning.

Carney surprised some observers by declaring that the U.S. is already in recession - something Washington has only hinted at - and that the global economy is heading there.

Given the gloomy outlook, labour economist Erin Weir of the United Steelworkers union said there was no reason for Carney's cautious monetary policy.

He added that the federal government has a role to play through its fiscal policy.

"The Government of Canada should rebuild the country's infrastructure, enhance employment insurance benefits, and invest more in other public priorities," he said.

"Fiscal policy can stimulate the economy regardless of whether chartered banks are willing to reduce borrowing costs or of whether households and businesses choose to borrow from them."

When the Bank of Canada cut its key rates by half a point on Oct. 8, banks initially balked at dropping their prime rate by the full amount until the federal government agreed to inject more liquidity into the system by buying up mortgages on their books.

But inter-bank funding rates have eased somewhat since and Tuesday's more modest quarter-point cut is expected to make it easier for chartered banks to follow through this time.

The central bank noted Tuesday that not all recent developments have been bad for Canada's economy.

Positive factors include the recent slide in the value of the Canadian dollar, which will make exporters more competitive in the global market, and efforts by major economies to bail out their banking sectors and stabilize financial systems.

BMO economist Michael Gregory said it may have been the uncertainty about how all the factors will impact on Canada that convinced Carney to take a more cautious approach.

But most economists said Tuesday's action increased the chances of another cut on Dec. 9, the next time the bank is scheduled to set interest rates.

The Bank of Canada's principal objective in adjusting interest rates is to keep Canada's inflation rate within a one-to-three per cent range, and as close to the two per cent target as possible.

It now says inflation has ceased to be a significant problem.

Although the consumer price index remains slightly elevated above three per cent, the bank said excess supply will bring price increases down to about one per cent by the middle of 2009 before returning to close to the target by the end of 2010.

"In line with the new outlook, some further monetary stimulus will likely be required to achieve the two per cent inflation target over the medium term," the bank said.

U.S. jitters

Buy if you intend to stay in the home for a long time

Imran Syed, Citizen Special

Published: Saturday, October 18, 2008

Q: My wife and I are thinking about buying a larger home in Ottawa, but are concerned with the recent financial crisis in the United States.

Do you think that it will spread and do you advise holding off?

A: I'm sure if you are like most people you are concerned about the volatility in U.S. markets and the potential for it to spread across the border to Canada.

As you may be aware, this is a result of the subprime crisis in the U.S. banking sector.

The latest studies indicate that most Canadian banks would have very little, if any, exposure to subprime debt. As well, Canadian banks are very heavily regulated and subject to strict capital reserve and lending requirements. Unlike many of the U.S. banks affected, our banks generate much of their revenue through retail banking profits. Many of the U.S. banks are very active in investment banking.

So even though most of our financial institutions should not be exposed to the U.S. subprime situation, expect a fair amount of volatility as the uncertainty in the market sorts itself out.

At this stage it's hard to predict what the impact will be on residential real estate values.

One leading economist predicted a decline in real estate values, while another mentioned that in most of Canada, although real estate values are high, they are not necessarily over-inflated.

If you are buying this home as your principal residence and plan to live there for the long term, then perhaps, like your long-term stock market investments, short-term price volatility shouldn't concern you.

I do recommend that you consider other factors, including job stability and your debt service ratio before making a final decision.

This article provides general information. Please seek independent advice before implementing any of the strategies discussed.

Imran Syed CFP CFSB is an independent fee-based Certified Financial Planner and can be reached at feebasedadvisor.ca.

© The Ottawa Citizen 2008

Dealers predicted the Bank of Canada will lower interest rates next week

By Frank Pingue

TORONTO (Reuters) - Nearly all of Canada's primary securities dealers predicted on Friday that the Bank of Canada will lower interest rates next week as the slowdown in the global economy shows little sign of easing.

Six of Canada's 12 dealers, surveyed by Reuters, forecast Canada's central bank would cut its key overnight rate by 50 basis points at the next rate-setting date on October 21. Three called for a 25-point cut, and three expect no move.

The bank's key overnight rate is now 2.50 percent.

Most dealers agree that the bank will lower its key rate by at least 50 basis points by the end of the year, but some differed on whether it would come in one 50-point cut on Tuesday or in a 25-point cut on Tuesday and then another in December.

"It's clear that some rate-cutting does need to occur and I don't see what the motivation would be to drag that out over the span of months," said Eric Lascelles, chief economics and rates strategist at TD Securities. "I think they are much better suited getting there quite quickly."

Just last week, the Bank of Canada unexpectedly cut its key interest rate by 50 basis points in a coordinated move with other central banks to help calm ailing financial markets.

But with concerns that the global economy is teetering on the verge of a recession that would cut demand for major Canadian exports such as oil, rate cuts in Canada remain firmly on the table.

"The U.S. outlook is really darkening day by day ... they are in a recession and now the question is how deep of a recession is the United States in," said Carlos Leitao, chief economist at Laurentian Bank of Canada in Montreal.

"So if the Bank of Canada is going to act, it's now. There is no point in waiting until December. Why wait? Do it now."

In the past two weeks a pair of Canadian banks have forecast the Canadian economy will slide into a recession during the first quarter of 2009 as the global financial crisis saps growth.

Seven dealers said the Bank of Canada would move to cut rates on December 9, the bank's subsequent scheduled policy announcement date. Four expected a 25-point cut, three called for a 50-point cut, and five dealers expected no move.

For the January 20 policy announcement date, 10 of the dealers expect the Bank of Canada to leave the key rate steady, while two expect a 25-point cut.