Canada's Housing Bubble

Sep 22, 2010 Michael Babad theglobeandmail.com

Will hit growth in consumer spending, economists warn in new report

Revisiting trends of the slump

Canadian house prices and consumer credit are "revisiting recessionary trends," which will dampen consumer spending that is so key to the economic recovery, CIBC World Markets warns in a new report. "It's no secret that house prices have been falling recently, but less noted is that the performance of the housing market is already approaching levels seen during the recession," economists Benjamin Tal and Krishen Rangasamy said. "... Even a modest 5-per-cent additional drop in average price in 2011, on top of the 6 per cent it already shed from its peak, will lead to a negative wealth effect of $10-billion, stripping growth in consumer spending by more than a full percentage point."

Housing, credit conditions

Their outlook is equally bleak for consumer credit, which has driven spending and is also "mimicking recessionary trends" on a month-to-month basis. Growth in consumer credit will dip to 3.5 per in the next 12 months, on an annualized basis, compared to 6 per cent, also annualized, in the first half of the year.

"Not surprisingly, the Canadian recovery didn't play out as advertised," they wrote. "While we did see a spike late last year and early 2010, the momentum has faded lately, largely as a result of a strong [Canadian dollar] and a softening U.S. economy."

CIBC World Markets economists believe that fears of a double-dip recession "look overdone." But in an overall global forecast, Avery Shenfeld noted that "the Great Recession that shattered global growth in 2008-09 is now water under the bridge, but the Great Disappointment of a subpar global recovery will be with us for a good while longer." Among other highlights of the report:

• Global GDP growth will run "well below" the 5-per-cent pace of the prior expansion.
• Emerging Asian economies still have room to grow but will feel some of the chill.
• Canada's trade sector will underperform the domestic economy this year and next.
• The recent improvement in business investment in Canada won't last.