Dodge says credit conditions could get worse

"These difficulties are expected to persist for a longer period of time than previously thought," he said, adding that the weakness in the U.S. has increased the risk that exports will decline further.

"All of these factors considered the bank judges there's been a shift to the downside in the balance of risks ... ," he said.

Dodge said the bank expects weaker economic growth in the fourth quarter of this year and the first half of 2008.

REM: Except in BC where it is the land of milk and honey.

However, the Canadian economy is still operating above its non-inflationary capacity, said Dodge, who is retiring as governor at the end of January.
"Given the strength of domestic demand and weak productivity growth there continue to be upside risks to the bank's inflation projections," he said "However, ... other developments ... suggest the downside risks to the inflation projections ... have increased."

REM: It would be nice if he could pick a side.

Dodge's semi-annual testimony to the Senate banking trade and commerce committee came as the central bank released a report saying that the Canadian economy - including the business sector - was in good shape to weather the global financial turmoil resulting from the U.S. housing market meltdown and the fall in the greenback against most currencies, including the loonie.

"There will be some impact on the Canadian economy directly through credit spreads and availability, and indirectly through the effects on the U.S. economy," it said bank said in a Finance System Risk Assessment in its latest Financial System Review.
"The effects on the Canadian financial system, however, should be mitigated by the strong balance sheets of financial and non-financial corporations built up through years of strong growth and substantial profits."

Yet, it also warned that there is a "low" risk that the U.S. and global financial and economic situation could deteriorate more than expected.

REM: I think they are down-playing this “low” risk. There has been much talk about certain rescission and the credit conditions deteriorating well into 2008 over the past couple months in the US. There are also those that disagree with this. The one thing I have learned is that when the sheep believe in a boom or bust the psychology and not the fundamentals behind it seem to prevail.

If that occurred, the greater-than-expected slowing in the economy of the U.S., and possibly globally, together with a rise in the loonie would "increase stress on Canadian businesses, households and financial institutions.

"This might threaten the viability of some firms," it warned.

Meanwhile, in a separate report appearing in the Financial System Review, the central bank said heavily indebted households are becoming more vulnerable to financial or economic shocks, including a rise in interest rates.

REM: Heavily indebted household do not become vulnerable, they are vulnerable, one hiccup and the party’s over.

Full Storey Here