Swift action by policy-makers to ease restrictive financing conditions has been positive for Canada, but the economy is still on track for a significant, unavoidable downturn, according to a new report by Standard & Poor’s Rating Services.

The report, entitled ‘Canada’s Response to the Credit Turmoil,’ says consumer confidence in Canada is dependent on policy makers’ response to the upheaval in financial markets.

It applauds such moves as a series of cuts to interest rates, the use of term purchase and resale agreements to address liquidity problems, the federal government’s purchase of up to $75 billion in insured residential mortgage pools from financial institutions and the provision of insurance on term borrowing by federally regulated deposit-taking financial institutions.

“We find it encouraging that Canadian policy makers are acting swiftly in implementing various measures aimed at easing restrictive financing conditions,” writes Standard & Poor’s fixed income analyst Robert Palombi in the report.

The report says these measures will help restore a more normal flow of funds in the financial system, and as a result, Canada has a good chance of avoiding a deep recession.

But other factors will continue to hamper the economy in spite of policy action in the financial sector, Palombi says.

For instance, spending is set to become more conservative as equity and house prices continue to fall. This will have negative spillover effects on business spending as companies adjust to slower earnings growth. Lower commodity prices will also cut into earnings in Canada’s resource sector — “the one bright spot in Canada’s economy until now,” the report says.

These factors will slow employment and income growth, and exports will suffer since Canada’s major trading partners are close to, or in recession.

“With all major economies experiencing weak economic conditions at the same time, the period of disruption likely will be lengthy,” the report says.

As a result, S&P does not expect a meaningful pick-up in GDP growth until the latter part of 2009.

“It won’t be until 2010 that we anticipate starting to see GDP growth rates more in line with the average of 3% experienced in the past four years,” says the report.

IE