Economy appears to be bottoming out
By Peter Diekmeyer • Bankrate.com

Rarely has the economy been harder to gauge; mixed messages abound. After navigating the fallout from last September and October's global financial crisis, Canada was hit by plummeting industrial activity and large job losses. In recent months, there have been numerous signs the deterioration has slowed. Yet at the same time, things do not look so good elsewhere.

The trouble facing forecasters is that global economies are now so closely linked that to assess how Canada will progress, they need to figure out whether positive developments here outweigh continued gloomy signs elsewhere, particularly in the United States, our largest trading partner.

Existing home sales, housing starts firming up
The good news is that economists at several Canadian banks have made decidedly upbeat statements recently. "After the worst downturn in more than 60 years, central banks and governments around the world have pulled out all the stops to get credit markets working again," said Stefane Marion, chief economist at National Bank Financial, in the group's summer economic forecast released earlier this month. "The resulting relief fuelled revival of financial markets and has resuscitated business and consumer confidence. Conditions are now in place for a return to global growth."

Marion's view was echoed by economists at CIBC, Laurentian Bank Securities, Desjardins and several others.

One of the most tangible signs of strength has been the housing sector. Existing home sales rose for the third consecutive month in April and are now close to last year's record levels. Prices have firmed up considerably as well. According to the Canadian Real Estate Association, the average price of homes sold during the month was $306,366, just 3.2 per cent below the same time last year. That's a far cry from the valuation drops that have hit real estate in the U.S.

Strong prices in the resale home market caused builders to stick some more shovels in the ground. According to the Canada Mortgage Housing Corporation, or CMHC, housing starts increased to a seasonally adjusted pace of 128,400 units in May compared to 117,600 units in April.

From green shoots to harvest
That said, not all of the news is good. Retail sales in Canada fell during April by 0.6 per cent in volume terms and by 0.8 per cent in nominal terms. In addition, earlier this week, the World Bank warned the downturn in the global economy would be worse than it had previously predicted. The Washington, D.C.-based international lender said it expects that world GDP would shrink by 2.9 per cent this year, which is far more pessimistic than its previous forecast of a 1.7 per cent contraction. 

Part of the reason for the World Bank's pessimism relates to the fact that many of the globe's largest lenders continue to struggle to get their balance sheets in shape, a process that has forced many to cut back on their lending. That concern is shared by Bank of Canada governor Mark Carney, who, in a speech this week, warned that much work needs to be done before all of those "green shoots" take hold. "It is a long, anxious time between the appearance of seedlings and the harvest," Carney said.

Carney identified liquidity levels at Canadian banks, the adequacy of their capital and the financial health of the country's households as three risks to the stability of Canada's financial system that could impact economic growth.

A double-dip recession?
As Yannick Desnoyers, assistant chief economist of National Bank Financial, points out, the question no one wants to ask right now, but is impossible to ignore, is whether the U.S. economy has bottomed out and whether it has done so permanently.

For example, when Japan's economy went into a tailspin following the implosion of its equity and real estate markets during the late 1980s, there were several occasions when activity bounced back for a couple of months, and on occasion for a couple of quarters, before slipping back into recession. This process of an economy climbing out of recession and then slipping back in is known as a double dip.

Forecasters are fully aware of the Japanese experience and thus couch much of their optimism in nuanced language. For example, Carlos Leitao, chief economist at Laurentian Bank Securities, titled his latest report "Recent U.S. Indicators Suggest the Great Recession Will End -- Eventually!"

Peter Diekmeyer (www.peterdiekmeyer.com) is Bankrate.ca's economics columnist.