The forecasted economic growth for the first quarter of 2006 in both U.S and Canada is strong. The forecast for U.S economic growth in the first quarter is 4.7% and for Canada is 3.3%. But it is increasingly clear that the housing market in U.S is slowing down and that would eventually affect the consumer spending. Consequently we believe the growth of U.S economy will slow down in the second half of 2006. This will in turn effect the growth of Canadian economy.
In U.S. although existing home sales rebounded in February to 6.91 million units, the gain was due to abnormally warm weather this winter and gave the home buyers an opportunity to start early. More importantly the supply of existing homes rose 5.2% in February. Sales of new homes decreased by 10.5% in February, the biggest drop in almost nine years.
Once the consumer who has made money by increased real estate prices is affected, the U.S. economy will slow down and that in turn will affect our economy.
For now, with both economies operating at full capacity we believe there will be one more rate hike in both U.S and Canada. But once the economy slows down by the second half on 2006 we believe both central banks will cut rates before the year end.