Credit crunch deals blow to Canadian economy

“While we do not think the global economic expansion is at risk at this point, we do see a growing risk of contagion from a U.S. consumer slowdown,” it said, noting that many of the major central banks, including the Bank of Canada, have been forced to step in to provide liquidity in recent weeks to ease the worst credit squeeze in a decade for global financial markets.

However, investors continued to express confidence that financial authorities will do what is needed to contain the crisis, extending last week’s stock market rally with near triple-digit gains on both Bay Street and Wall Street.

While analysts agree that concern about the impact of the credit crunch on Canada’s economy will keep the Bank of Canada from going ahead on Wednesday with an interest rate hike that it had threatened only a month ago, some warn that it can’t afford to ignore the inflation threat either. “The polls are unanimous in calling for the Bank of Canada to stay steady tomorrow,” noted BMO Capital Markets economist Douglas Porter.

But given the underlying strength in the Canadian economy, inflation that is still above its two-per-cent target, a tight job market and still sizzling housing markets, it will likely continue to suggest that more rates hikes may be needed, he said. “However, they may soften the language to say something like ‘over time’,” he added.

Evidence of that recent strength of the Canadian economy, which has included above-capacity GDP growth through the spring and into the summer, record low unemployment, and record-high home sales and prices, continued Tuesday. Investment in residential construction hit another all-time high during the spring, Statistics Canada reported.

“Residential construction investment achieved a new record in the second quarter of 2007, reaching $22.8-billion, an increase of seven per cent over the same quarter in 2006,” it reported. “The housing sector has been positively affected by Western Canada’s dynamic economy, still attractive mortgage rates, appealing financing possibilities, strength in employment, and growing disposable incomes,” it noted.

“Strong immigration more evenly distributed across the country and inter-provincial migration have also been beneficial.” While the four westernmost provinces accounted for two thirds of the spending, Quebec posted the largest dollar increase, while declining slightly in Ontario. However, Canada’s booming housing market could feel the chill of the U.S.

real estate crash by year end, warned maverick member of Parliament Garth Turner, a financial author and former Conservative MP and cabinet minister, who joined the Liberals after being kicked out of the Tory caucus. “As up to a million and a half U.S. homeowners walk away from their houses and mortgages, the result has been a credit crunch, a construction bust, sagging car sales and an expected American recession,” Turner said in a release.

“Many people think that somehow Canada is immune to all of this but the likelihood is they’re wrong,” Turner said. is clearly struggling right now to contain a financial crisis and a meltdown in consumer confidence, and a recession in the States is going to have a significant impact on all of us.” And he cited the recent announcement of massive layoffs at General Motors in Ontario as evidence that the U.S. problems are already spilling over into the Canadian economy.

“This danger is approaching at a time when Canadian families have more mortgage debt than ever before, and as housing prices have hit a record high,” Turner said. “While we do not think the global economic expansion is at risk at this point, we do see a growing risk of contagion from a U.S.