Healthier housing market than U.S. helping Canadian recovery

Compared to the United States, Canada has healthier housing markets, labour markets and government finances, according to a recent report from the Conference Board of Canada.

The Conference Board forecasts real gross domestic product (GDP) growth of 2.7 per cent in Canada next year. This relatively modest growth coming out of the recession will be due primarily to the sluggish recovery in U.S. consumer spending over the next few years.

On the other hand, the Bank of Canada revised its April projections and predicted economic growth in 2010 of three per cent, while saying the recession had effectively ended in Canada. 

“The housing sector appears to be reviving, as suggested by the sharp rebound in the resale market, reflecting improvements in consumer confidence and affordability,” said the bank in its Monetary Policy Report July 2009.

“Household credit continues to grow at a pace near its average since 1992 and has picked up in recent months. This strength seems to be linked to an increased demand for mortgage credit, related to the recent rebound in the resale housing market.”

The bank’s base-case projection now sees growth in the Canadian economy resuming in the third quarter of 2009, a quarter earlier than anticipated in its April report. The somewhat more favourable short-term outlook reflects a more modest retrenchment in household and business spending, as negative effects on confidence dissipate, financial market conditions improve, and the terms of trade increase more quickly than previously anticipated. 

“The bank has acknowledged that pent-up demand from late last year and earlier this year, combined with low mortgage rates, has resulted in a stronger than expected recovery in the housing market,” said Canadian Real Estate Association chief economist Gregory Klump.

The U.S. economy will begin to grow again in the second half of this year, according to the Conference Board of Canada’s U.S. Outlook — Summer 2009, but the breadth of the recession will lead to a slow recovery.

“Recent indicators suggest that the severe recession gripping the U.S. economy since late 2007 is slowly winding down," said Kip Beckman, principal research associate of the Conference Board. 

“Canada was in a better position going into the recession and will post a comparatively stronger rebound in 2010,” he added. “But the deep hole that the U.S. economy dug for itself means that a full recovery from the current recession will take several years.”

Although growth is expected to resume in the second half of 2009, U.S. GDP will shrink by 2.5 per cent for the year, according to the Conference Board. Modest signs of a rebound in the housing sector, along with evidence that household spending is starting to stabilize, are expected to produce real GDP growth of 1.8 per cent in 2010 — still a tepid recovery.

Sales of both new and existing U.S. homes have rebounded in recent months due to lower interest rates and rock-bottom home prices that have enticed buyers back into the market. 

The major declines in U.S. consumer spending have also come to an end, and consumer confidence has partially recovered from the depths it fell to last winter. 

However, spending will be restrained while Americans cope with weak labour markets, huge losses in wealth and as they try to rebuild their savings.