Calgary Herald Economic chaos

Central bank gives market $2B crutch

Eric Beauchesne, Canwest News Service

Published: Tuesday, September 16, 2008

DOW

-504

Biggest single-day decline since September 2001

A trader at the Chicago Mercantile Exchange reacts after global markets plummeted Monday as U.S. investment bank Lehman Brothers filed for bankruptcy protection and rival Merrill Lynch agreed to a takeover.

John Gress, Reuters

TSX

-515

Steepest one-day fall in almost eight months

Oil

$95.71

Lowest price for a barrel of crude since February

A deepening Canadian housing market slump, plus a flood of other worrisome economic reports from both sides of the Canada-U.S. border, added to fears of a widening U.S. financial market crisis that hammered stock markets around the globe Monday, including Bay Street’s benchmark TSX, which plunged more than 500 points.

Canadian home sales tumbled nearly 20 per cent last month from a year earlier, the second steepest decline in a decade, and prices were off more than five per cent, the Canadian Real Estate Association reported, doing little to reassure panicked investors.

The financial market meltdown, along with a further drop in world oil prices to $95.71 US, sent the Toronto Stock Exchange’s benchmark index plunging 515 points, the steepest one-day drop in nearly eight months.

It also prompted the Bank of Canada to issue a rare public reassurance that it will provide the liquidity needed to keep credit markets here functioning.

And the central bank reinforced that commitment with a more than $2 billion short-term cash injection into the domestic financial system.

The fall in oil prices also weighed on the loonie, which fell six-tenths of a cent to 93.64 cents US.

And Monday’s economic bad news day kept getting worse.

News of the further slump in the domestic housing market and the blood-letting on Bay Street and other stock markets, came amid a downwardly revised forecast for the Canadian economy by one of the world’s largest reinsurance companies, Statistics Canada’s confirmation that Canadians cut back on their purchases of new cars in July, and evidence of a steeper-than-expected plunge in U.S. industrial activity last month.

"Alongside the steady loss of jobs, the (industrial production) report provides further evidence that the U.S. economy is in recession," said BMO Capital Markets economist Sal Guatieri, adding that the renewed turmoil on Wall Street, which also plunged more than 500 points, opens the door to a further cut in U.S. interest rates.

Action Economics, an online think-tank, said evidence of further U.S. weakness "will add to market fears following the deluge of weekend financial news" that culminated in giant U.S. investment bank Lehman Bros. seeking bankruptcy protection.

The Canadian economic reports did nothing to ease market concerns either.

"The global slowdown has weakened Canadian economic activity," international reinsurance giant Swiss Re noted, in forecasting growth will slow to less than one per cent this year.

While job growth rebounded last month after declining in the previous two months, inflation remains elevated while the housing market is softening, it added.

The softness in the domestic housing market was underscored by the news that home sale prices in August fell to 19.3 per cent below their year earlier level, with Calgary, Vancouver and Edmonton reporting the steepest drops.

The average price of a home sold in August was $316,052, down 5.1 per cent from August 2007.

"Canada’s housing market continues to face strong headwinds from declining confidence, low affordability and an upward trend in new listings," said BMO Capital Markets economist Robert Kavcic. "While we highly doubt that the downturn in Canadian housing will reach U.S. proportions, slower sales activity and softer prices are still ahead."

Industry association president Calvin Lindberg noted, however, that the year-to-year decline in sales was from what was a record year in 2007 and that the decline in prices was limited to the five most expensive markets in the country, Vancouver, Victoria, Calgary, Toronto and Edmonton.

"The challenge is for sellers to price their home to meet the local market realities, and for buyers to realize there is no real estate bubble that will burst and send prices to new lows," Lindberg said.

"The Canadian market fundamentals are still solid," he said, echoing the reassurance about the health of the overall economy issued earlier in the day by Prime Minister Stephen Harper.

"The Canadian economy’s fundamentals are solid," Harper said, stressing that Canada is in better shape than the U.S. to withstand the current financial turmoil and suggesting that the worst of the crisis has already passed. "Our household sector, our government sector, and our financial institutions have solid economic fundamentals."

However, Liberal Leader Stephane Dion charged that were it not for the policies of the minority Conservative government, the economy would have been in better shape to withstand the U.S. slump.

"The difficulties in the United States are something we worry about," Dion said, adding "bad choices" by the government have resulted in economic growth being weaker in Canada this year than in the United States.

While most indicators -- especially job growth and housing market sales, prices and construction -- have been much stronger in Canada than in the U.S., overall levels of economic growth have been stronger there, with Canada’s economy barely skirting a technical recession of back-to-back quarterly contractions in total output of goods and services and an actual decline in the first half of the year.