Canada’s housing ‘like the fountain of youth’ — for now

John Greenwood Oct 14, 2011 – 12:50 PM ET
Canada’s banks, which emerged from the financial crisis mostly unscathed, stole the spotlight as they were recognized as the world’s strongest, but there’s a good argument to be made that our real estate market deserves some glory, too.
Consider: for the better part of a decade house prices have been on the rise — apart from a brief decline in early 2009 — in most major cities across the country. If you zoom in on certain regions like Calgary or, say, Ontario cities like Windsor that have been hit by troubles in the auto industry, the curve gets a bit bumpy, but on a national basis Canadian real estate looks pretty good. Compared to the rest of the world, it’s a bastion of stability.
The U.S. market is a basket case. Since 2006 prices have tumbled more than 30% across the country and even now distressed sales account for more than one-third of total transactions, according to Moody’s.
In Europe the numbers are even more dramatic. In Spain, prices almost doubled between 2000 and 2006 but over the past three years they’ve fallen as much as 25% in some regions. House prices in Ireland have fallen below the level they were at in 2003, according to Bloomberg. Meanwhile, the U.K. market has been treading water since 2010 with some economists calling for a steep decline as the troubled economy begins to bite.
The Canadian housing market “is like the fountain of youth,” said one analyst. Rising real estate values, he explained, have helped drive consumer spending and provided fuel for the home building industry, a major source of jobs. According to the CMHC, residential development represents about 20% of the domestic economy.
Importantly, residential mortgages are the biggest single asset on bank balance sheets. When the global meltdown that started in 2008 began to threaten the banks in this country, the federal government stepped in by buying up billions of dollars of mortgages from lenders while the CMHC boosted its securitization program. The move effectively moved the risk of default from the banks to the government, providing banks with incentive to increase mortgage lending. Which they did.
But by boosting the level of securitization the government provided a buffer between the housing market and the banks, allowing them to benefit from rising prices but at the same time protecting them from potential losses in the event of a correction.
The good news is that at least for the moment a correction does not appear to be in the cards.
“The housing market is quite healthy,” said Mathieu Laberge, deputy chief economist at the CMHC. “Despite the financial uncertainty in global markets, economic fundamentals remain supportive of the housing market in Canada.”
Indeed, according to Capital Economics, things are about to heat up again. Growth in housing investment “appears to have re-accelerated again in the third [quarter],” the research group said in a recent note, adding that overall residential investment could get a boost for at least one or two more quarters and possibly more.

Canada’s economy goes on a slower path

jeremy torobin – OTTAWA— From Wednesday’s Globe and Mail

Europe’s debt quagmire, a flagging U.S. rebound and slowing growth in China are taking the steam out of Canada’s economic outlook.
Canada’s top policy makers said the country’s prospects for this year and next have deteriorated as a slowing global economy weighs on exporters and cuts into confidence at home.
Consumer and business spending is expected to slow and unemployment is expected to hover close to the current 7.1-per-cent level for years, factors that will likely keep interest rates near emergency levels until as late as 2013.
Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty insist Canada and its top trading partner, the United States, won’t slide back into another recession. However, both suggested that outlook depends on European leaders to contain a debt crisis before it pushes the region into a serious slump.
Mr. Carney on Tuesday left the Bank of Canada’s key interest rate at 1 per cent for a ninth consecutive decision. Canada will feel the effects of weak U.S. growth that will persist until mid-2012, and a “brief recession” in the euro zone, he noted.
The bank chopped its forecasts for 2011 and 2012 and said the Canadian economy will not return to full capacity until the end of 2013, 18 months later than policy makers had projected in July. And Mr. Flaherty said the economic projections that underpinned his latest budget face a “significant downgrade.”
The gloomier outlook comes ahead of a crucial gathering of European leaders on Wednesday and a Group of 20 summit next week in France, both aimed at stemming the euro zone debt mess before it engulfs the continent’s banking system and tips the world economy back into recession. The slowdown is already affecting Canadian financial conditions, consumer and business confidence, and trade, the central bank said, also warning that while its forecast assumes the European crisis will be contained, that notion is “clearly subject to downside risks.”
Even if the European situation doesn’t worsen, through the end of 2012 Canada will see “very modest” growth that’s just enough to “keep the unemployment rate treading water,” said Leslie Preston, an economist at Toronto-Dominion Bank.
The Bank of Canada said the economy will grow 2.1 per cent this year instead of its July call of 2.8 per cent, and 1.9 per cent in 2012, down from 2.6 per cent. In 2013, the economy will grow a healthier 2.9 per cent, roughly equal to the average for the two decades before the crisis.
In the meantime, household spending will “grow relatively modestly,” the bank said Tuesday, as lower commodity prices and volatility in markets weigh on Canadians’ sense of financial well-being. Business investment will continue to grow but will also be “dampened” by the global outlook.
All of which means the bank will likely leave interest rates untouched for much of 2012 and possibly into 2013, economists said. Indeed, despite hotter-than-expected inflation readings in recent months, bank policy makers said Tuesday that the drop in energy prices since the summer and a slowdown in big emerging markets like China will tame inflationary pressures everywhere.
Some Canadian companies say they’ve come to accept that their traditional markets will be lukewarm as governments and consumers unwind the massive debt they incurred in recent years.
“These are marathon issues, they’re not sprint issues,’’ said Tom Schmitt, president and CEO of Purolator Courier Ltd., Canada’s largest courier company. “We’re probably talking about years of a little bit of bumpiness along the road.”
Similarly, Don Lang, executive chairman of CCL Industries Inc., a Toronto-based specialty packaging company, said a “pullback” in orders through much of the developed world is still better than a downturn.
“From our perspective, it’s business as usual,” Mr. Lang said. “Positive growth is positive growth, so there are still lots of opportunities for businesses that are well-placed.”

Stocks remain buoyant as European debt deal expected despite delay

By Pan Pylas, The Associated Press
LONDON – Markets were in a resilient mood Friday, remaining hopeful that Europe will come up with a comprehensive plan to deal with its crippling debt crisis, albeit a few days later than initially thought.
Europe’s main stock markets all opened higher despite the surprise news Thursday that a European debt deal won’t be clinched in time for a summit on Sunday. Germany and France said a second meeting will take place by Wednesday at the latest.
Sunday’s summit was supposed to deliver a comprehensive plan to finally get a grip on the currency union’s debt troubles by detailing new financing for debt-ridden Greece. It also was supposed to produce plans to make Europe’s banks fit to sustain worsening market turbulence and further empower the eurozone bailout fund.
It seems that Europe’s two biggest economies are at loggerheads over how to make best use of the bailout fund, the so-called European Financial Stability Facility, or EFSF. While France is proposing to turn into a bank, which would have access to unlimited credit from the European Central Bank, Germany appears reluctant to sanction such a move.
“The news of a delay in the announcement of a deal on resolving certain aspects of the eurozone debt crisis failed to dent confidence,” said Derek Halpenny, an analyst at the Bank of Tokyo-Mitsubishi UFJ.
However, he said the risks remain for assets such as stocks and the euro, as the delay “highlights the difficulties Europe is having in reaching a final resolution to the crisis.”
Traders will continue to monitor all talk surrounding a meeting of the eurozone’s 17 finance ministers later Friday in Brussels, ahead of the arrival of their leaders over the weekend.
For now though, stocks and the euro are holding their own, as they have largely done so over the past few weeks. Stocks have recovered a chunk of their losses for the year as investors became confident that the 17 countries that use the euro were preparing the three-pronged solution to the debt crisis.
In Europe, Germany’s DAX rose 0.7 per cent to 5,806 while the CAC-40 in France rose 1 per cent to 3,115. The FTSE 100 index of leading British shares was 0.8 per cent higher at 5,428.
The euro was also trading solidly despite the debt deal delay, up 0.1 per cent at $1.3778.
Wall Street was also poised for further gains — Dow futures rose 0.5 per cent to 11,524 while the broader Standard & Poor’s 500 futures rose by the same rate to 1,215.
Earlier, Asian gains were muted after a sluggish start of the trading day.
Japan’s Nikkei 225 index closed little changed at 8,678.89 while Hong Kong’s Hang Seng added 0.2 per cent to 18,025.72.
Mainland Chinese shares lost ground, with the benchmark Shanghai Composite Index falling 0.6 per cent to 2,317.28, its lowest close in 31 months. The Shenzhen Composite Index lost 1.6 per cent to 959.12.
In the oil markets, prices were steady. Benchmark crude for December delivery was up 7 cents at $86.17 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 22 cents to settle at $86.07 in New York on Thursday.

Gadhafi captured…dead or alive?

SIRTE, Libya (Reuters) – Former Libyan leader Muammar Gaddafi died of wounds suffered on Thursday as fighters battling to complete an eight-month-old uprising against his rule overran his hometown Sirte, Libya’s interim rulers said.

His killing, which came swiftly after his capture near Sirte, is the most dramatic single development in the Arab Spring revolts that have unseated rulers in Egypt and Tunisia and threatened the grip on power of the leaders of Syria and Yemen.

“He (Gaddafi) was also hit in his head,” National Transitional Council official Abdel Majid Mlegta told Reuters. “There was a lot of firing against his group and he died.”

Mlegta told Reuters earlier that Gaddafi, who was in his late 60s, was captured and wounded in both legs at dawn on Thursday as he tried to flee in a convoy which NATO warplanes attacked. He said he had been taken away by an ambulance.

There was no independent confirmation of his remarks.

An anti-Gaddafi fighter said Gaddafi had been found hiding in a hole in the ground and had said “Don’t shoot, don’t shoot” to the men who grabbed him.

His capture followed within minutes of the fall of Sirte, a development that extinguished the last significant resistance by forces loyal to the deposed leader.

The capture of Sirte and the death of Gaddafi means Libya’s ruling NTC should now begin the task of forging a new democratic system which it had said it would get under way after the city, built as a showpiece for Gaddafi’s rule, had fallen.

Gaddafi, wanted by the International Criminal Court on charges of ordering the killing of civilians, was toppled by rebel forces on August 23 after 42 years of one-man rule over the oil-producing North African state.

NTC fighters hoisted the red, black and green national flag above a large utilities building in the center of a newly-captured Sirte neighborhood and celebratory gunfire broke out among their ecstatic and relieved comrades.

Hundreds of NTC troops had surrounded the Mediterranean coastal town for weeks in a chaotic struggle that killed and wounded scores of the besieging forces and an unknown number of defenders.

NTC fighters said there were a large number of corpses inside the last redoubts of the Gaddafi troops. It was not immediately possible to verify that information.

(Writing by Jon Hemming and William Maclean; Editing by Mark Heinrich)

The Mortgage Emporium supports Skate Canada

The Pickering Skating Club hosted their Spring Fling Celebration Gala, celebrating 200 years. Skaters performed solo and group numbers. Awards were given to the skaters to celebrate their hard work and accomplishments! Mayor Ryan also made an appearance. Barb Scott, president of the club, said they host this every year to give back to the parents. Special thanks to The Mortgage Emporium Corporation – President & CEO Justin Davidson, a parent of a skater who generously donated $5000 to the Club.

A Bad Website Can Hurt Your Business More than No Website At All

by Ilya Pozin –

Thursday, September 11th, 2008 – If you are going to have a bad website, you are probably better off having no website at all. It’s true. While a bad website at least gets your name in the search engines, it can also ruin your credibility. A hard to use website, for example, may push your potential customers over to the competition, while an amateurish website can convince potential customers that your business is simply not a serious one.

So how can you avoid these marketing gaffes online? Quite simply, by:

1) Making sure that you get your website when you are ready. You should only invest in a company website when you are ready to spend time and money on the project. Only develop a website when you are ready to hire professionals to design it for you and you are ready to promote and update your website regularly.

2) By entrusting your website to professionals. You may know someone who understands basic HTML or WYSIWYG programs, but you need professionals with a discerning eye to develop your professional website for you. You need a professional team – like the one at Ciplex – to get professional results. While amateur results may be OK for a personal webpage, any minor glitches or design errors on a company website make you look less credible. Unfortunately, with so many scams online today, customers may see any lack of credibility on your part as a red flag sign. Don’t give customers an excuse to not do business with you. If you cannot afford professionals, wait until you can or work out a financing plan.

3) By making your website part of an overall business plan. Your website is not stand-alone. It should work with your overall business plan, marketing strategy, and branding plan. If you are not sure what you want your website to accomplish, you should determine this before setting a site up. Nothing is worse than the business website with no discernable goal.

4) By ensuring that your website looks its best. Your website should be professional, clean, and attractive. It should err on the side of simplicity and work well with no delays or glitches. It should work well on different computers and with different browsers, so that all your potential customers can read your marketing message. Check and re-check your website to ensure that it looks as good as it possibly can.

About Ilya Pozin Ilya is the founder of Ciplex and leads marketing strategies for the company and its clients.

Is now the time to go to a Fixed Rate?

A recent Bank of Montreal study says that variable-rate mortgages have worked out to be better than fixed-rate mortgages 83 per cent of the time since 1975.

I believe we are now in the 17-per-cent zone.

Here are three key reasons:

Protect yourself from interest rates you can’t afford
Today, Canada’s debt-to-income ratio has reached 150 per cent – an all-time high. To me, this is rational. If you can borrow money at 2 per cent or 3 per cent, it can make financial sense to borrow a lot.

The big issue is whether these same borrowers would have borrowed as much if interest rates were 5 per cent or 6 per cent. Based on the history of five-year mortgage rates since 1950, it is rare to get a 5-year fixed mortgage for under 6 per cent.

We don’t know where interest rates will be over the next five to 10 years, but what percentage of borrowers today will have financial difficulty paying their debt at 6 per cent? For those that will be in rough shape in that scenario, a variable-rate mortgage today is a real risk.

The only way someone can eliminate that risk is to lock in their mortgage rate. Today, you can get a five-year fixed mortgage for as low as 3.2 per cent. While you still need to worry about where interest rates will be in five years, you will be protected from any interest rate increases until late 2016.

For those who are truly risk averse, you can get a 10-year mortgage today for 4.69 per cent. While a 10-year mortgage is not the right solution for many people, for some stable and risk-averse people, this could be an ideal solution to avoid any interest rate risks for a decade. Keep in mind that for most of the last half century, a mortgage rate of 4.69 per cent would have been a blessing.

The premium on fixed mortgage is very small
For most of the past year, Canadians have leaned very heavily to variable-rate mortgages. Earlier this year, five-year variable mortgages were being offered at rates as low as prime minus 0.95 per cent (2.05 per cent at current prime rates). With the latest financial worries, lenders have raised variable rates. It is now difficult to find better than prime minus 0.5 per cent on a five-year variable mortgage. At today’s prime rate, this translates into 2.50 per cent.

Traditionally, a five-year fixed-rate mortgage would be 1 per cent to 2 per cent higher than the five-year variable rate, depending on the prevailing yield curve. The yield curve shows the difference between short-term rates and longer term rates.

Today, if you can get a variable rate mortgage for 2.50 per cent, and a five-year fixed at 3.2 per cent that is just a 0.7-per-cent premium. That is a steal on a historical basis.

Now factor in the fact that today’s prime rate is among the lowest in history and there are very few people who believe that interest rates will be the same or lower three years from now. If ever there was a time to take a hit of 0.7 per cent (on the front end) for the benefit of having a locked in rate for five years, today might be the day.

Peace of mind
There are a lot of things to worry about in life. For those with a large variable-rate mortgage, I know from our clients, that every Bank of Canada interest-rate announcement brings some anxiety. Having a fixed-rate mortgage simply eliminates that extra worry for at least a few years.

On its own, peace of mind is not a strong enough reason for most people to go fixed versus variable, but in combination with interest-rate history and the exceptionally low premium for a five-year fixed-rate mortgage, I believe now is the right time to lock into a fixed-rate mortgage.

Even if you are currently in a variable rate mortgage that doesn’t come due for a while, now might be a good time to consider moving to a fixed-rate mortgage and locking in the lowest rates in history.

We may just look back at today’s fixed rates and wonder how we could have ever considered not locking in.

Flaherty urges eurozone countries to act

By Jason Fekete, Postmedia News

OTTAWA — Finance Minister Jim Flaherty is urging eurozone countries to finally swallow the tough fiscal medicine that’s necessary to avoid financial catastrophe and return some stability to the global economy.
Flaherty is in Paris for this weekend’s meetings of G20 finance ministers and central bank governors, and he has got a blunt message for them: it’s time for Europe to live up to its promises and act decisively on fiscal reforms before the world slips back into recession.
While he pleads for European countries to get their financial houses in order, Flaherty also said he sympathizes with protesters in the Occupy Wall Street movement who are searching for more equitable income distribution.
Flaherty and Prime Minister Stephen Harper have been on a months-long campaign urging European countries to resolve their sovereign debt and banking system issues, and to implement “clear and credible” debt- and deficit-reduction plans.
Speaking to reporters Thursday before jetting to Paris for the G20 talks, Flaherty said the immediate concern for finance ministers and central bank governors is the deteriorating financial situation in Europe — including Greece potentially defaulting on its debt — and the general economic slowdown across the globe.
Canada will be looking for G20 members to develop a plan for sustainable, balanced economic growth over the midterm, he said.
“We have heard a lot of promises from eurozone countries, but actions to date have fallen short of what is needed,” Flaherty said. “It is critical that Europe deliver on a comprehensive package of measures that will address their sovereign debt and banking issues.”
Flaherty said there’s likely a need to increase the flexibility of the European Financial Stability Facility, a fund created as part of the overall 750-billion euro ($1.1-trillion Cdn) European bailout package.
Markets continue to reflect investor uncertainty, Flaherty said, and there’s a need for European countries to adopt immediate and decisive actions to restore global confidence.
He acknowledged the decisions facing eurozone countries are not easy, but said he expects governments to make the difficult choices necessary.
“Extraordinary circumstances require extraordinary actions,” he added.
The Paris talks are a prelude to a European Union meeting later this month and the G20 summit in Cannes, France, in early November.
Leaders from EU countries delayed their emergency meeting until Oct. 23 so they can develop a strategy to deal with the eurozone’s debt crisis, including a possible final plan for a Greek bailout and recapitalizing the banking sector.
The failure and subsequent partial nationalization of Franco-Belgian bank Dexia may have been the jolt that European leaders needed to put their financial institutions on more stable footing, argue observers.
“They’ve finally woken up,” said Avery Shenfeld, chief economist with CIBC World Markets.
“They’re not in denial now. They have enough (European) domestic pressure to get on with the job.”
Finance ministers and central bankers will prepare an action plan for strong, sustainable growth that the leaders of G20 countries can debate when they meet in Cannes in a few weeks.
Canada also wants countries with fixed exchange rates to implement measures that allow their currencies to appreciate, Flaherty said, specifically noting China’s “limited flexibility” on the issue.
Economists believe the Harper government’s tough talk with Europe is about all Canada can do to spur the eurozone into action and prevent a deeper economic slump from spreading across the globe.
“Given that Canadians can really suffer from any type of crisis . . . it’s certainly a fair game from Canada to at least try to play that role, of suggesting gentle pressure and trying to get things improved,” said Jacques Marcil, a senior economist with TD Economics.
“We don’t have any other type of weight of modifying what’s going on out there.”
Marcil said Flaherty’s message might be directed to European leaders but could be meant just as much for Canadian consumption because instability on the other side of the Atlantic Ocean is eroding confidence for investors and families in Canada.
Opposition parties in Canada, however, say the Harper government is ignoring obvious economic signs at home.
The NDP and Liberals are calling on the Conservatives to introduce a jobs plan to get Canadians back to work, including spending potentially billions of dollars on a new infrastructure stimulus package.
Flaherty also offered his thoughts on the Occupy Wall Street movement and associated spinoffs springing up across Canada, saying he recognizes income distribution is important and that a very small number of people have very large incomes.
There’s mounting concern about a lack of opportunities for the younger generation — particularly in the United States — and it’s incumbent upon governments to ensure youth are able to capitalize on their education and find good jobs, he said.
“I can understand some legitimate frustration arising out of that,” Flaherty said, when queried on the matter.
The prime minister, meanwhile, is also speaking out on the need for Europe and the G20 to deliver “immediate and decisive” action to contain what he says is an economic crisis that’s threatening global growth.
In a column published in Thursday’s Globe and Mail newspaper, Harper takes European nations and the group representing the world’s major economies to task for not stemming a renewed threat to economic stability that he says began as a sovereign-debt crisis in small European countries.
“We cannot afford any more missed opportunities,” Harper writes. “To be clear, the crisis could have been contained. Instead, it grew.
“The good news is that this crisis can still be contained and reversed.”
Setting his sights next on the G20, Harper says the world body has an important role to play in righting the world’s teetering financial ship.
He urges members to follow through with the concrete debt- and deficit-reduction plans they committed to at last year’s summit in Toronto.
“The choices that must be made in Europe and elsewhere are not easy,” Harper writes.
“Yet, if not made, we will do a great disservice to all nations. A slow response to the recent crisis has allowed it to spread, but political will, decisiveness and a clear plan can resolve it, if we act now.”

Double-dip fears give way to weak recovery European debt crisis, political gridlock still pose major obstacles

By Rich Miller and Vivien Lou Chen, Bloomberg News ….The U.S. has likely dodged a recession for now, even though it’s too early to sound the all-clear for the economy.
A string of stronger-than-projected statistics — capped by the news on Oct. 7 of a 103,000 rise in payrolls last month — has prompted economists at Goldman Sachs Group Inc. and Macroeconomic Advisers LLC to raise their growth forecasts for third quarter growth to 2.5 per cent from about two per cent. That’s nearly double the second quarter’s 1.3-per-cent rate and would be the fastest growth in a year.
“The U.S. economy doesn’t look like it’s double-dipping at all,” said Allen Sinai, president of Decision Economics Inc. in New York. “But it is a crummy recovery.”
That recovery still faces what economist Chris Rupkey in New York calls “a lot of headwinds.” These range from the sovereign-debt crisis in the eurozone — and increasing likelihood of a recession there — to political gridlock in the U.S. over the budget.
“We can skirt a recession,” said Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. “But if headlines worsen in Europe and cause a major stock-market rout, it could lead to a loss of confidence here on the part of businesses and consumers and make forecasts for a recession a reality.”
European stocks and the euro rose after German and French leaders pledged to devise a plan to stem the debt crisis in three weeks. U.S. stock futures also gained.
The unsettled outlook may push U.S. Treasury bond yields back down as investors seek safety in the debt of the world’s largest economy. The yield on the 30-year bond remains on course to fall to about 2.5 per cent, according to Christopher Hine, vice-president of technical analysis at Credit Suisse Securities in London.
“The bull trend is still there,” he said in an Oct. 7 conference call with clients.
The long bond ended trading at 3.017 per cent in New York on Oct. 7, after touching 2.69 per cent Oct. 4, the lowest since January 2009. Yields rose as concerns about a recession ebbed.
The 103,000 gain in September payrolls announced by the Labor Department was more than economists had forecast and followed an upwardly revised gain of 57,000 for August. Private employment climbed 137,000 and included the return of 45,000 striking workers at Verizon Communications Inc.
“The continued forward momentum in private job growth should ease concerns that the U.S. will slip into recession in the second half of this year,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York.
The latest numbers bring the jobs data in line with what other statistics are suggesting: Gross domestic product is growing “very slowly,” not contracting, he said.
Construction spending rebounded in August, propelled by the biggest jump in state and local government outlays in more than two years. Manufacturing accelerated in September, helped by gains in exports and production.
“For the first time in eight months, we revised upward our forecast of GDP growth over the second half, to just shy of 2.5 per cent,” economists at St. Louis-based Macroeconomic Advisers said in a report last week. In September, they were predicting second-half growth at less than two per cent.
The drags on the economy in the first half of the year — higher gasoline prices and supply-chain disruptions from the earthquake and tsunami in Japan — are dissipating, giving growth a lift, Feroli said.
The average price for unleaded gasoline fell almost 20 cents, or 5.4 per cent, in September to $3.43 a gallon, according to AAA, the nation’s largest motoring group.
The automobile industry has been an obvious beneficiary. Car and truck sales rose to a seasonally adjusted annualized rate of 13.1 million in September, according to Autodata Corp. That’s the highest since April’s 13.2 million, when lost output caused by the tsunami started restraining supply.
With vehicle production and inventories recovering for Toyota Motor Corp. and Honda Motor Co., the fourth quarter may be the year’s strongest, Al Castignetti, Nissan Motor Co.’s vice-president of U.S. sales, said in an Oct. 3 telephone interview.
“People who have been sitting on the fence are likely to get back in the market,” he said.
While the U.S. is “shaking off” the first-half drags, it faces risks from events at home and overseas, Feroli said.
The debt crisis in Europe will “likely slow the economy to the edge of recession by early 2012,” Andrew Tilton, senior economist at Goldman Sachs in New York, said in note last week to clients. He sees growth falling to a half per cent in the first quarter of 2012.
A mild recession in the eurozone could shave as much as a half percentage point off U.S. expansion, said Nariman Behravesh, chief economist in Lexington, Massachusetts, at IHS Inc. The direct effect on trade likely would be small, he said. U.S. exports to the euro area were equivalent to less than 2 per cent of GDP last year.
Greater consequences could come from the financial links between the two economies and the impact of the crisis on the U.S. stock market and general confidence.
“Europe is so large and so closely integrated with the U.S. and world economies that a severe crisis in Europe could cause significant damage by undermining confidence and weakening demand,” Treasury Secretary Timothy F. Geithner said Oct. 6 in testimony to the Senate Banking Committee. That would pose a “significant risk to global recovery.”
Policy-makers in Europe aren’t the only officials on the spot, according to Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago. Authorities in the U.S. also need to act, she said. If a Congressional supercommittee can’t come up with the more than $1 trillion in budget savings required by November, “that further undermines confidence in our own government,” she said.
The U.S. also faces a big fiscal squeeze in 2012 from the scheduled expiration in December of a payroll-tax cut, extended unemployment benefits and a business-tax credit.
“We have a very big tightening on track for next year,” Feroli said. He put the amounts involved at about $350 billion, or the equivalent of about 2 per cent of GDP.
President Barack Obama has offered a $447 billion jobs plan that includes an expansion of the payroll-tax cuts in 2012 and an extension of the unemployment benefits. It faces resistance in the House of Representatives, where Republicans hold the majority and oppose the tax increases Obama proposed to pay for the program.
“We’re still labouring under the fallout from the bursting of the housing and credit bubble,” Jan Hatzius, chief economist for Goldman Sachs in New York, told Bloomberg Television on Oct. 7. “In the aftermath of that, unfortunately, you’re often in a weak position for a long time.”

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