Harper doesn't rule out recession

Globe and Mail Report on Business

INUVIK — Prime Minister Stephen Harper, who is expected to call an election as early as next week, did not rule out the possibility the Canadian economy may have slipped into recession but said Thursday that if so it would only be in a technical sense.

Mr. Harper was speaking on the eve of the release of second quarter GDP data, which will show whether Canada has had negative growth for two successive quarters – the most popular technical definition of a recession.

Most analysts expect slightly positive second-quarter growth after the first quarter's annualized reading of -0.3 per cent, but many say there is a risk it could be negative.

“People talk about a technical recession. Even if that's true, I don't think it's a real recession,” Mr. Harper told a news conference in the Arctic town of Inuvik, without confirming whether growth did in fact come in negative for two quarters.

“Somebody said a recession is when people start losing their jobs, and when your neighbour loses his job. There are job losses, but overall employment is pretty stable,” Mr. Harper said.

The economy remains strong and while employment numbers have softened they remained very high, he said.

Sensitive to the political ramifications if there is a recession, Mr. Harper said: “Look, I'm not trying to sugarcoat this. I said a year ago, and I said as we moved into the new year, that 2008 would be a year of significantly slower economic growth, because of the circumstances we have in the global economy and in the American economy.”

But he added: “At the same time I believe the fundamentals of Canada are strong, will get us through this [slow] growth, and if we make the right policy choices we will actually emerge from it with a very strong economy.”

He said it was not a time to go back to policies in the style of former Liberal Prime Minister Pierre Trudeau and impose taxes.

This was a reference to the Liberal Party's current proposal to introduce a carbon tax to fight climate change and offset it with income tax cuts and help for the poor.

Conservative sources have said that Harper would like to trigger an election next week, before Parliament returns from its summer recess on Sept. 15.

Statistics Canada will release the gross domestic product data on Friday at 8:30 a.m. EDT

Financial worries knock Toronto stocks lower

· TSX -158.33pts (Reuters)prompted by weak financials, as worries over growing fallout from the credit crisis rattled investor confidence. Home-grown anxiety also weighed on the large financial sector as the major Canadian banks are set to report quarterly results this week.

· Dow -241.81pts In New York, stocks fell sharply on credit concerns, while global growth worries stung big technology and industrial companies.

· Dollar -.21c to $95.16US A negative tone in North American equity markets hurt the Canadian dollar, as financials sold off on both sides of the border on credit market fears, and the heavyweight energy sector of the Toronto Stock Exchange fell as oil prices fluctuated

· Oil +$.52to $115.11US per barrel

· Gold -$7.80 to $819.90US per ounce

Data on gross domestic product for the second quarter will be released on Friday. That will also be the last major piece of data before the Bank of Canada makes its Sept. 3 rate announcement.

Existing U.S. home sales up in July

MARY ANN CHASTAIN, THE ASSOCIATED PRESS

The Associated Press

The listing agent has boldly stated a change in the sales price to attract buyers to this home in a neighborhood in Columbia, S.C. Monday Aug. 25, 2008. Sales of existing homes rose 3.1 percent in July, surpassing expectations, as buyers snapped up deeply discounted properties in parts of the country hit hardest by the housing bust. (AP Photo/Mary Ann Chastain)

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Deeply-discounted properties being snapped up in parts of the country hit hardest by the housing bust

August 26, 2008 Alan Zibel The Associated Press
Sales of existing homes in the United States rose 3.1 per cent in July, easily beating Wall Street's expectations, as buyers snapped up deeply discounted properties in parts of the country hit hardest by the housing bust.

However, the number of unsold properties hit an all-time high, the latest indication that the worst housing market slump in decades is far from over.

The National Association of Realtors reported yesterday that sales rose to a seasonally adjusted annual rate of five million units. Sales had been expected to rise by only 1.6 per cent, according to economists surveyed by Thomson/IFR.

Home sales were 13.2 per cent lower than a year ago and prices were down dramatically. The median price for a home sold in July dropped to $212,000 US, down by 7.1 per cent a year ago.

Despite the third monthly sales jump this year, the number of unsold single-family homes and condominiums rose to 4.67 million, the highest number since 1968, when the Realtors group started tracking the data.

That represented a 11.2 month supply at the July sales pace, matching the all-time high set in April.

Sales were up in all regions of the country except the South, which posted a 0.5 per cent decline. Sales rose by 5.9 per cent in the Northeast, 0.9 per cent in the Midwest and 9.7 per cent in the West.

Analysts say that until the inventory level is reduced to more normal levels, the housing slump is likely to persist. The inventory level is being driven higher by a massive wave of mortgage foreclosures.

Despite the rise in sales, Lawrence Yun, the Realtors' chief economist, was reluctant to conclude that the U.S. housing market has hit bottom.

While buyers are pouncing on lower prices -- especially in places like California, Florida and Nevada -- sales are sluggish in formerly stable states like Texas.

"People are responding to lower prices,'' Yun said, but there is "too much uncertainty'' about the housing market's future to mark a definite bottom.

One key unknown is the ability of mortgage finance companies Fannie Mae and Freddie Mac to supply money for loans. The two government-sponsored companies have cut back the availability of mortgages significantly as they cope with mounting losses from foreclosures and officials ponder whether to shore up the two struggling companies.

Financial crisis taking toll on U.S. economy, Bernanke says

Financial crisis taking toll on U.S. economy, Bernanke says

MANUEL BALCE, THE ASSOCIATED PRESS

1

Jeannine Aversa
The Associated Press JACKSON, WYO.

Federal Reserve chair Ben Bernanke said yesterday the financial crisis that has pounded the United States -- coupled with higher inflation -- is taking a toll on the economy and poses a major challenge to Fed policy-makers as they try to restore stability.

"Although we have seen improved functioning in some markets, the financial storm that reached gale force" around this time last year "has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment," Bernanke said in a speech at the annual Fed conference.

While Bernanke welcomed the recent drops in oil and other commodities' prices, and believes inflation will moderate this year and next, he also warned the inflation outlook remains highly uncertain.

The Fed, he said, would monitor the situation closely and will "act as necessary" to make sure that inflation doesn't get out of hand.

The current financial and economic environment is one of the most challenging to Fed policy-makers "in memory," Bernanke said.

Given those duelling economic cross-currents -- weak economic growth and higher inflation -- many economists believe the Fed will leave rates where they are at its next meeting on Sept. 16.

"They won't act until the coast is clear on financial stability and the state of the economy," said Allen Sinai, chief global economist at Decision Economics Inc.

Many fear the economy will hit a rough patch later this year as the bracing effect of the government's tax-rebate cheques fades.

However, the bulk of Bernanke's speech dealt with the need to bolster oversight of the nation's financial system to make it better able to withstand future shocks.

To that end, Bernanke recommended that regulators work on ways to assess the health of the entire financial system, rather than the condition of individual banks, Wall Street investment firms or other financial companies -- as is currently the focus.

He also repeated his call for the U.S. Congress to provide new regulatory powers to insulate the economy from damage if a Wall Street firm collapses.

He again urged legislators to give the Fed explicit authority to oversee systems that process payments and other financial transactions by investment firms and banks.

Many Canadians oppose tougher mortgage rules But then again, many don't understand them, says survey

Eric Beauchesne, Canwest News Service

Published: Wednesday, August 13, 2008

OTTAWA -- Nearly one-quarter of Canadians do not agree with the federal government's mortgage lending crackdown, a proportion that rises to nearly a third among non-homeowners, survey results done for a mortgage lending firm suggest.

And only 45% agree with the tighter mortgage lending rules and that the federal government needs to protect Canadian homeowners, a level of support for the changes that falls even further to just one-quarter among non-homeowners, according to the online survey conducted by pollster Angus Reid for ResMor Trust Co.

In an effort to avoid a U.S.-style housing market meltdown, Finance Minister Jim Flaherty last month tightened up the rules governing mortgage lending practices in Canada, including limiting the amortization period for government insured mortgages to 35 years from 40 years, requiring a minimum down payment of 5% for such mortgages, virtually eliminating zero-down mortgages, and requiring that anybody with an insured mortgage have a minimum credit score.

Those who disagree with the measures said they reduce options for people wanting to buy a home.

However, the results also indicate that 17% do not understand the changes, including 25% of non-homeowners.

Further, the findings suggest that the higher the level of understanding, the lower the level of opposition to the new rules.

"I was surprised that 23% do not agree with the measures," Darren Thompson, vice-president of lending for ResMor Trust, said in an interview.

"This survey clearly demonstrates a need for industry professionals to educate Canadians about the new measures, specifically those entering the market for the first time," he said, adding that's something that the federally licensed trust company is doing.

"The measures are not seriously impacting the ability of consumers to get a mortgage," he said, citing as an example an industry finding that more than half of those who took out 40-year mortgages would have qualified for a 25-year mortgage. "It was just enabling them to get a lower monthly payment but at a much greater interest cost."

Mr. Thompson also disagreed with critics of the measures who have warned that the tighter rules will put an added chill on an already cooling housing market.

"There's still lots of financing out there," he said, adding that the measures protect the Canadian taxpayer from having to foot a large bailout if the market goes south as it has in the U.S.

The survey, meanwhile, also revealed a regional divide in the level of support for the tighter rules and the level of understanding of the rules.

Agreement with the new rules in the heated housing markets of the Western provinces and in Ontario is significantly higher than in the Eastern provinces and Quebec, the report said, noting support for the crackdown was 64% in British Columbia, 56% in Alberta, 47% in Saskatchewan and Manitoba, 46% in Ontario, but only 35% in the Atlantic provinces and 34% in Quebec.

The proportion indicating a lack of understanding of the new rules was highest in Quebec and Atlantic Canada, at 23% in both markets, and lowest in British Columbia at only 7%, followed by 13% in Manitoba and Saskatchewan, 18% in Alberta, and 16% in Ontario.

The online survey of at least 1,000 adults conducted last month following the release of the new rules is considered accurate within 3.1 percentage points 19 times out 20.

The Return of Six Percent Inflation

by Jeff Rubin, CIBC World Markets

We haven’t seen a 6% CPI inflation rate
posted in the US since 1990 and even then
only briefly for four months. You’ve got
to go back to 1982, in the midst of the
stagflation that followed the second OPEC
oil shock, to see the last time American
inflation was clocked at that kind of pace for
any sustained period. Yet within the next six
months, there is every reason to believe that
headline CPI inflation will once again reach
that speed.
Coincidence or back to the future? You be
the judge. There seems to be at least two
major differences between then and now.
How long they last remains to be seen.
One huge difference is labor markets. Back
in the 1980s they looked quite different than
they appear today. For one thing, no one
was looking over their shoulder to see if their
plant and their job were being moved to
China. Not that China wasn’t just as cheap as
today. It’s just that it didn’t matter back then
because of all the tariff and quota protection
around home markets. For another, most
collective bargaining agreements of the day
had cost of living allowances (COLA) built
into the wage scale. Those COLA clauses
largely became self-fulfilling prophecies by
ensuring that oil price-driven inflation would
largely become self-sustaining through a
wage-price spiral.
While that may seem light years from today’s
labor market, soaring energy costs are
rapidly turning global cost curves on their
head. As shipping costs soar with tripledigit
oil prices, the once omnipotent threat
of Chinese competition is growing fainter
every day. And the same energy costs that
now protect American workers with soaring
freight costs are, at the same time, eating
their paycheques at the gas pumps.
Both are powerful incentives for COLA to
make a triumphant return to North American
wage negotiations. Particularly in highly
organized industries like steel, where soaring
freight rates are the equivalent of doubledigit
tariff protection. High energy prices give
American manufacturing workers bargaining
power that they have lacked for over a
decade, while at the same time encouraging
them to ask for larger pay raises to keep
pace with the soaring price of gasoline. And
as more and more of OPEC’s oil is diverted
to meet soaring power demands throughout
the Middle East (see pages 4-7), American
pump prices will continue to rise.
If labor markets start changing, how high will
interest rates have to rise? The last time we
saw 6% inflation in 1990, the federal funds
rate was running at around 7½%—
over
three times today’s setting. And a 10-year
Treasury bond was yielding 8½%—over
double what it yields today.
We expect that the Federal Reserve Board
will raise interest rates no less than 200 basis
points by the end of next year. History says
we will be very lucky if they don’t have to
do more.

Stock Market briefing

· TSX -138.55pts to 13,203, pulled down lower again by resource shares, which fell with commodity prices

· Dow +48.03pts to 11,782

· Dollar -.17c to $93.52US Sharply lower oil prices and a broader correction among other major currencies against the greenback has helped push the Canadian dollar down almost 7% since last hitting par with its U.S. counterpart just three weeks ago. And if economic forecasts are correct, the loonie will decline further, boosting the prospects for industries like manufacturing, forest products, information technology and health care.

· Oil after falling $10 last week -$.75 to $114.45US per barrel falling to a new 3 month low as the U.S. dollar extended its rebound and more signs emerged that China's energy demand could be leveling off and traders monitored the conflict between Russia and Georgia that some believe could disrupt supplies

· Gold tanked 4% -36.50 to $820.85US per ounce to its lowest level in a year

· A strong US dollar also caused copper to hit a 6 month low

New home prices soften, construction plummets

Gary Marr, Financial Post

New home construction, fuelled by a major drop in Ontario, continued to decline last month confounding economists who now say the housing market is falling faster than expected.

Canada Mortgage and Housing Corp. said they were 186,500 new homes constructed last month on a seasonally adjusted annualized basis, a 13.6% drop from a month earlier. The pain was felt hardest in Ontario's condominium market where the construction of multiple apartment units was down 57.9% in July from a month earlier.

Paul Ferley, assistant chief economist with RBC Economics, noted the slide in housing starts was worse than many economists had estimated. The consensus was for 210,000 starts in July which would have been only a 3.6% decline from June.

"The weakness is occurring much sooner than we expected," said Mr. Ferley, adding no one is expecting the Canadian housing market to get as ugly as its United States counterpart.

"The drop in starts in July was likely slightly overstated with the weakness largely concentrated in Ontario. However, housing activity is definitely on a downward trend consistent with indications of deteriorating affordability through last year," said the economist.

Most of the country was hit by the sudden dip with Alberta and British Columbia the only exceptions. Starts rose 23% in Alberta from a month earlier and 5% in B.C. from June to July.

While much is being made of the fact that the condominium sector skewed the July numbers, construction of single family homes is also waning. CMHC said urban single starts dropped 6.6% in July from a month earlier.

Brian Johnston, president of Monarch Corp. a major developer in the Toronto region, said the problem is the housing sector just cannot compete with its own past record. Starts hit a 19-year in 2006 and dropped only marginally last year.

"I would suggest there is a worrying trend that we are seeing such significant drop offs," said Mr. Johnston. "Starts always follow sales and I can tell you sales are definitely trending down in 2008."

Mr. Monarch said the market is cooling and builders are feeling it because they are unable to raise prices at a time when some of their costs are going up. Market conditions for existing homes are the same, with sales dropping and prices flat or falling across the country.

"It's a tougher market out there. I don't think we are in panic mode, there isn't a huge concern but we are definitely slowing down to some extent," said Mr. Johnston.

CMHC said it still expects for the seventh straight year that starts will top 200,000, the strongest housing run in Canadian history.

"It's not that bad," said Bertrand Recher, senior economist with CMHC. "What you saw was a one-month blip due to the multiple starts in Ontario and that's mainly Ontario."

In the first six months of the year, condo construction soared in Ontario and now it appears that run is over. "This is a readjusting because of those strong months," said Mr. Recher.

Pascal Gauthier, an economist with TD Bank Financial Group, echoed those comments. "There will be a natural tendency to read too much into this monthly decline," he said. "We think it's important to caution observers against such knee-jerk reaction to this month's CMHC report. Residential construction is easing and should continue to do so."

Financial Post