The Canadian economy will no doubt experience a downturn going forward, but signals indicate that the end of the financial turmoil is in sight, CIBC World Markets senior economist Benjamin Tal said on Tuesday.

The problem at the core of the U.S. financial crisis is house prices, Tal said in a keynote speech at CIBC World Markets’ annual income fund conference. He showed figures indicating that although house prices continue to fall, they are falling at a diminishing rate.

“We are starting to see the end of this game,” he said.

Since Canada has a much healthier housing market, prices in this country will not fall nearly as severely as the plunge experienced south of the border, according to Tal. He expects house prices in this country to fall between 5% and 10%, with markets in the west experiencing the biggest drops, since massive growth in those cities have pushed house prices artificially high in recent years.

The Canadian economy in general will witness a slowdown of its own in the months to come, though Tal said a healthier housing market will shield it from some of the turmoil facing the U.S. economy.

The U.S. housing market was a major factor supporting the U.S. economy, and it fueled what Tal calls the ‘housing wealth effect’– a phenomenon that drives homeowners to spend more in general when they feel their house is highly valued. The deterioration of this value has hurt consumer spending –and the economy — all around, Tal said.

“The consumer in the U.S. is really struggling,” he said.

But Canada’s energy-heavy economy won’t escape a downturn either, especially as commodity prices continue to fall. Tal pointed to figures showing that by the first quarter of this year, Canada’s GDP growth rate had already dropped below that in the United States, despite a seemingly better economic environment in this country.

“Clearly it’s about commodity prices,” Tal said. “They are falling big time.”

But it doesn’t necessarily mean this is the end of the commodity cycle, he added. The U.S. comprises just 12% of global GDP growth, whereas Brazil, Russia, India, China and Middle East oil producing countries together comprise almost 40% of global growth. He expects demand from such key emerging markets to fuel a rebound in commodity prices.

“We believe this is a correction within a bull market for the commodity market,” he said.

In fact, by 2010, supply restraints on food and energy will drive up demand and create another dramatic rise in commodity prices, fueling widespread new concerns about inflation, Tal said.

“By 2010 or late 2009, the story will not be subprime; the story will be inflation.”

IE