Housing and trade vulnerable

Housing markets in most of the major industrial countries, and especially in the United States, are in a tailspin that will act as a drag on the global economy through next year, a federal government economist is warning.

While Canada's housing market has so far avoided a meltdown, such as has occurred in the U.S., the market here could turn ugly, too, as Canada is still building more homes than it needs, Peter Hall, chief economist at Export Development Canada, said in an analysis yesterday.

"Canada has thus far avoided a housing adjustment," he said. "Starts are soaring on the strength of the domestic economy and a huge dollop of very well-timed fiscal stimulus. But Canada's turn may come soon," he added.

Although imbalances in the marketplace appear to be small, starts are currently well ahead of requirements, and are unlikely to continue indefinitely at today's pace."

The report comes in the wake of the federal government's move this week to avoid a U.S.-style housing meltdown by tightening up mortgage-lending practices, including limiting the amortization period for government-insured mortgages to 35 years, requiring a minimum down payment of five per cent for such mortgages, and requiring that anybody with an insured mortgage have a minimum credit score.

But even if there isn't a housing-market crisis here, Canada's trade performance will be hurt by the slump in housing in the economies of its trading partners, especially the U.S, but also in Europe and Asia.

The two-year housing-market crash in the giant U.S. economy is still garnering the headlines, given the spillover effect it has had on other sectors of that economy and is having on other economies -- including Canada's -- and the scant signs of recovery there, he said.

"The U.S. market is saturated with surplus housing, and it could take well over a year to mop up the excess," he said. "But the U.S. isn't alone anymore," he added, citing Britain, France, Germany and Japan as countries where housing markets are in varying stages of a correction.

"Housing markets are in a tailspin in the world's largest economies, and working off the excesses will take time," he said.

"They point to persistent global weakness through 2009," he said, noting that a correction in housing markets almost always portends a slowdown or recession in other parts of the economy.

That, in turn, suggests that Canada's exports -- not just to the U.S., but to other major industrial countries -- will weaken.

In fact, a separate analysis by the chief economist of a U.S.-based think-tank said that, with the loonie no longer appreciating, the already "decaying state of Canada's trade surplus" will become more visible as the value of imports rises.

"So not only are we thinking that the May trade report [being released today] will confirm an ongoing decaying trend in the trade balance, but we expect the cessation of Canadian dollar appreciation to further hammer the surplus," said Carl Weinberg, of High Frequency Economics.

Exports of manufactured products have already been pummelled, he said, adding that in the six months ended in April, the Canadian dollar value of energy exports increased by $11.4 billion from a year earlier while the value of manufactured exports were down by $16 billion.

"This is not a wash," Weinberg noted, suggesting instead that it's a symptom of the dreaded "Dutch disease," where a country's currency is driven up by a resource windfall to a level that hollows out its manufacturing sector.

While the rising dollar may be to blame, it's only when the currency's appreciation ends that the extent of the damage -- in the form of a depleted trade surplus -- becomes clearly visible, the analysis suggests.

(prepared by Eric Beauchesne/Vancouver Province)