Canada's Housing Bubble

Oct 14, 2010 Claire Sibonney Reuters

Canada’s economy will expand at a much slower pace this year than forecasters expected three months ago and cool further in 2011 as the struggling U.S. economy drags on growth, according to a Reuters poll.

The median forecast of more than 20 economists published on Thursday predicts the Canadian economy will grow by 3.0% this year, compared to 3.5% expected in the July poll.

Economists expect 2.4% growth in 2011, down sharply from 3.0% expected in the July survey.

The poll was conducted after reports on Friday showed the economy unexpectedly lost jobs in September and housing starts fell, adding to evidence the recovery is flagging and making an interest rate rise this month even less likely.

“The surprise was (the slowdown) came in a quarter earlier than we thought. It’s not simply the slowing pace of U.S. growth but also the deceleration in some of the domestic elements of demand including housing,” said Avery Shenfeld, chief economist at CIBC World Markets.

“Much of the drag on the Canadian economy is still the drag in net trade associated with soft global growth and an elevated Canadian dollar exchange rate.”

The Canadian currency was worth the same as the U.S. dollar on foreign exchange markets on Thursday, the first time it has hit parity since April. Traders have been dumping the U.S. currency on expectations the U.S. Federal Reserve will begin printing more money to help support the sluggish U.S. economy.

As well as a slowdown in the United States, its largest trading partner, Canada’s commodity-driven exports may be threatened by a deceleration in China.

“The U.S. dollar has been weakening and Canadian dollar has been appreciating, so it further reduces any share of export markets we would get,” said George Vasic, chief economist and equity strategist at UBS Securities Canada.

Canada’s unemployment rate will average 8.1% this year, according to the median forecast, slightly higher than the last poll. It is expected to drop to 7.8% in 2011.

“While Canada remained resilient to the economic downturn during 2008 and 2009, it’s not immune to weak U.S. demand and this time around the Canadian consumer won’t have the same capacity to help drive economic growth,” said Diana Petramala, economist at Toronto-Dominion Bank.

The poll forecast core inflation, which excludes volatile elements like food and energy prices, softening slightly to 1.7% in 2010, further away from the central bank’s 2% goal, before returning to 1.8% next year.

Housing starts were forecast to average 188,000 units in 2010, up from 182,000 in July, then dip to 175,000 in 2011.

Canada’s current account deficit is seen at $41 billion in 2010, up from $31.4 billion forecast in July. Forecasters expect it to narrow to $37.1 billion in 2011.

(Additional polling by Bangalore Polling Unit; Editing by Catherine Evans)