Expect rebound

There's light at the end of the tunnel. So say reports from two major banks forecasting the Canadian economy will begin to rebound in the second half of this year from the worst global decline since the Second World War.

Despite growing pessimism that such a recovery will materialize, the Bank of Montreal and National Bank say the combined might of dramatic rate cuts worldwide, massive stimulus plans, a turnaround in the battered U.S. housing sector and a weakened Canadian dollar will turn the tide.

"Virtually all major economic players have launched fiscal stimulus plans of unprecedented magnitude. This megadose of global stimulus is likely to make itself felt by later this year," said Yanick Desnoyers, National Bank Financial's assistant chief economist.

In a separate report, Douglas Porter, deputy chief economist at BMO Capital Markets, said that however brutal the downturn is, Canada is much better positioned through early interest rate cuts and quick stimulus measures than it was in previous recessions.

For a populace constantly inundated with sharp stock-market declines and gloom-end-doom predictions, Porter said the sky isn't falling.

"Looking at some of the global economic numbers, you have to wonder," he said. "But Canada does have a lot of relative advantages. While it may not feel like it, it is cushioning the blow.

"Policy-makers have responded aggressively around the world and I think that eventually that will halt the decline and stabilize things late this year and lead to at least a mild recovery in 2010."

However, he cautioned that what an economist sees as a recovery can still feel very badly for the average person, at least in the early stages.

He also warned that no recovery will be sustainable without a turnaround in the U.S. and that considering the severity of the decline -- the worst in postwar history -- Canada's economy still has to go through some tough quarters before a serious turnaround can take hold.

Nevertheless, Desnoyers points to "a ray of hope" emerging from the U.S. housing sector, which was at the epicentre of the global downturn and which will be central to any recovery.

For one, he said, median home prices, previously inflated by the easy subprime money that greased the U.S. housing bubble, have returned after 30 months of steep declines to the historical average of 2.9 times household annual income.

With mortgage rates at the lowest level in more than 40 years, he added, affordability is at an all-time high.

At the same time, the stock of single-family homes on the U.S. market has now dropped to 8.7 months of sales, and housing starts have plunged to an annual rate of 500,000, a number too low to sustain demand for the 1.2 million homes that population growth will create.

"All this puts the housing market on the road to balance. Prices could stabilize in 2009 despite job losses," said Desnoyers.

Porter, meanwhile, said a fundamental difference between the most recent downturns in the early 1980s and 1990s and the current one is the speed with which policy-makers have acted to lower rates and pump dollars into the system.

Also easing the pain in Canada is the fact that corporate balance sheets were in much healthier shape heading into the recession than they were in those previous downturns.

And while a 20-per-cent decline in the dollar in the past year may hurt consumers, it will help exporters weather the slump in the U.S., Canada's largest trading partner, Porter and Desnoyers agreed.

(prepared by John Morrissy/Vancouver Sun)