Financial Update

Close, but no recession for Canada, forecasters agree The International Monetary Fund, projected that Canada next year will have the fastest growing economy of the G7 major industrial countries, at 1.2%, (article below)

Home building stays resilient in Canada Housing construction in September moved unexpectedly higher, to an annualized rate of 217,600 new units, said CMHC. (Article attached)

· TSX +225.84pts after a coordinated move by central banks, including the Bank of Canada, the U.S. Federal Reserve, and for the first time China, to cut short-term interest rates by half a % point in hopes of preventing a further financial crisis
· Dow -189.01pts. U.S. stocks closed down for a 6th straight session after heavy and volatile trade amid uncertainty about whether the lower interest rates would avert recession. The equity sell-off has destroyed some $12 trillion of global stock market wealth in the past 12 months, according to the market capitalization loss on MSCI's main world equity index-$4.6 trillion in the past 3 weeks
· Dollar -1.25c to $89.06US. falling below .90c for the first time since Apr 07
· Oil -$1.11 to $88.95US per barrel
· Gold +24.70 to $903.10US per ounce

Close, but no recession, at least in Canada. Eric Beauchesne, Canwest News Service
That was the good news amid all the bad in economic forecasts Wednesday, including declarations by several that the U.S. economy is already in recession and one that without further action by authorities the U.S. faces a 1930s style depression.

The forecasts -- by a bank and a think-tank in Canada, and the International Monetary Fund in Washington and think tanks in New York -- were released as North American markets were gyrating between triple-digit losses and gains in volatile trading in the wake of a co-ordinated round of deep half-point interest rate cuts by half a dozen central banks, including the U.S.

Federal Reserve and the Bank of Canada.

"There are pre-depression conditions," New York-based High Frequency Economics in a report in which it joined other analysts in predicting a further half-point cut in U.S. rates later this month, and in which it called for near zero interest rates as well as a more activity fiscal policy by the U.S., such as a major increase in spending on infrastructure there as offering the most effective antidote.

Here, Bay Street's benchmark TSX eventually ended up with a gain of more than 225 points to back over 10,000, while the blue-chip Dow Jones industrial average in the final minutes plunged back into the red to end the day down nearly 190 points, and remaining well below the 10,000 mark.

The Canadian dollar, meanwhile, continued to lose ground to the U.S. dollar, slipping below 90 cents US for the first time in 18 months to close at 89.06 cents US as oil sank below US$89.

Finance Minister Jim Flaherty -- in comments to reporters in Toronto and a statement later -- applauded the united response of central banks to the deepening financial crisis.

"This significant action will provide timely support for the Canadian economy," Mr. Flaherty said, adding he will work with his G7 counterparts and central bankers at their meeting this week in Washington for further co-ordination in dealing with the crisis.

However, Canadian commercial banks -- instead of matching the Bank of Canada interest rate cut as they would normally do -- passed on only half the rate relief to their customers, and then only after a delay of several hours, with quarter-point reductions in their prime rates to 4.5% from 4.75%. That's the rate traditionally offered to blue-chip borrowers, and the rate to which other floating consumer loans and mortgages are tied.

"Continuing market turmoil has steadily driven up the cost of borrowing for financial institutions," said Tim Hockey, CEO of TD Canada Trust, which was the first financial institution to cut its prime rate by a quarter point. "This makes it challenging to match the Bank of Canada rate cut at this time."

National Bank of Canada economist Paul-Andre Pinsonnault, in warning that the commercial banks may not match the central bank rate cut, noted that the spread between the prime rate and a measure of what banks pay for funds has narrowed by about a third to 1.16 percentage points from a historical norm of 1.64.

The rate cuts by central banks in Asia, Europe and North America, as well as a £50-billion ($96-billion) financial sector rescue by the British government, came as forecasters were slashing their forecasts for economic growth around the world and here, although all predicted Canada will avoid recession.

RBC, Canada's largest financial institution, said the "persistent turmoil in financial markets and disappointing economic trends over the past two quarters" prompted it to cut its forecast for growth here to 0.9% from 1.4%, and project only a modest rebound to 1.5% in 2009.

"The U.S. economy now appears to be in recession with Europe, the U.K. and Japan also sinking fast," RBC said. "While Canada is in better position with its financial sector less heavily impaired, overall growth will be substantially weaker than previously anticipated."

"The continued weakness in the U.S. economy is expected to dampen growth in Canada," said RBC's chief economist Craig Wright. "However, this pressure on our growth will be tempered by strong commodity prices which are contributing to robust export revenues and providing support to Canadian domestic spending via a boost to incomes."

Canada has also enjoyed strong growth in national income, which have boosted consumer spending, business investment and purchases of imports and is benefitting from what are still relatively high commodity prices, it said.

Job growth has also slowed and Canada's housing market is cooling, but it is not expected to suffer a U.S. style meltdown as Canadian mortgage markets did not see the excesses that afflicted the U.S. housing sector, it said.

Global Insight, an economic think-tank, also cut its growth projections for Canada while declaring the U.S. is in recession.

"The U.S. economy is forecast to now be in recession," it said, adding that it's no longer just a "mild" recession and projecting the contraction in that giant economy will run from the third quarter of this year through the first quarter of next year.

Meanwhile, it cut its forecast for growth in Canada's economy this year to 0.6% from 0.8% and next year to 0.9% from 1.7%.

However, there will not be two consecutive quarters in which the economy contracts.

"While a recession is most often defined as two consecutive quarters of negative growth, we should not take too much comfort in the ‘no recession' forecast," it added. "This is a very weak forecast of economic growth."

The International Monetary Fund, meanwhile, projected that Canada next year will have the fastest growing economy of the G7 major industrial countries, at 1.2%, despite virtually no growth of just 0.1% in the U.S., Canada's main export market.