Analysis: Canada's star fades as economy faces tough 2012

Thu Jan 19, 2012 3:55pm EST
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By Louise Egan

OTTAWA (Reuters) - Canada's moment in the sun as the fastest-growing economy in the G7 club of rich countries is set to end this year, when it will likely underperform the United States for the first time in seven years and struggle with a mounting household debt problem.

A potential housing market downturn has emerged as the top threat to the economy from within, along with the grim realization that a bad ending to the European debt crisis could set back growth in Canada, the world's 10th largest economy.

Even some perennially optimistic Canadians say the economy has lost its shine, pointing to late 2011 as the turning point.

In an opinion piece in the Financial Post newspaper this month, the usually upbeat economist Finn Poschmann explained how he had crossed over "growling and snarling, into the bearish camp."

"People spend a lot of time making fun of me and offer rose-colored glasses," chuckled Poschmann, vice president of research at the C.D. Howe Institute, a think tank, in an interview with Reuters.

"It was over the course of the fall as the housing prices just continued to march upwards and debt was growing ... It's not sustainable. It won't be sustained. Let's take a breath here," he said.

In the best case scenario, the housing situation will dampen growth as house prices grow faster than people's incomes and demand slows. In the worst case scenario, a crash could force many Canadians to default on their mortgages and really hurt the economy, although nobody expects a downturn as dramatic as the U.S. housing price collapse.

Canada had a remarkably swift recovery from the 2008-09 economic recession and leapt ahead of the U.S. in job growth, recovering the jobs lost in the recession by January 2011.   Continued...

<p>The Canadian flag is seen on top of a flagpole in the midst of high-rise buildings in the financial district of Toronto April 3, 2009. REUTERS/Mark Blinch</p>