Future of Canada's economy comes into question as TSX ends week of panic

TORONTO — Questions about the future of the North American economy and mixed emotions by investors following the passage of a U.S. bailout package for Wall Street banks dragged the Canadian stock market to its biggest weekly loss in years.

The Toronto Stock Exchange tumbled 11 per cent over the trading week - a loss of more than $150 billion in value - a shocking drop that reflected economic worries about how deep the U.S. recession will bite in Canada, Europe and elsewhere.

A dismal report from the U.S. Labour Department only seemed to add to fears, reporting that American employers slashed payrolls by 159,000 in September, the highest in more than five years and well above expectations.

"It's not just about the consumer, it's now more broadly based in terms of weakness in the U.S. economy. That has significant implications for Canada," said Patricia Croft, chief economist and vice-president of Canadian money manager Phillips, Hager and North.

"We are seeing some signs of fraying around the edges for the Canadian economy."

The Toronto market, which was swamped by huge daily losses followed by moderate bouncebacks all week, continued to be volatile Friday as investors kept a wary eye on the situation south of the border.

The TSX recovered about 400 points lost until shortly before the U.S. House of Representatives voted again on a bailout package for the American financial industry. Then it began a gradual descent into negative territory and ended the day with a 97-point loss.

On Wall Street, the Dow Jones average was up about 290 points until shortly after the bill passed, when the early gains all but vanished. The Dow closed the session down about 157 points.

"It's not like we're going to turn a switch on, come to work Monday morning and the financial system is going to be all well and healthy once again," said Croft.

"It's going to take some time to go through this process, and in the interim there could be some more mergers or bank failures in the U.S. and Europe."

Chyanne Fyckes, chief investment manager with Stone Asset Management in Toronto, called the earlier TSX rally a "dead cat bounce" - a short-lived uptick that follows a major drop.

"There's lots of cash on the sidelines, everyone knows that," said Fyckes. "You're going to get these rallies in here, but I still think you're going to see further downside."

On Monday, the Canadian market had its biggest point drop ever - 841 points. The next day, the S&P/TSX composite recovered about half that loss. Thursday's 814-point drop was triggered by a major Wall Street firm's warning that commodity stocks are overpriced.

The recent economic turmoil has reinforced worries that Canada's resources-based economy will suffer from a worldwide drop in demand for oil, metals, fertilizer and grains. Worries also persist that the global financial crisis is squeezing the availability of credit in Canada.

"I don't see what's going to make the Canadian economy very strong in the short term," said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc.

"It used to be the commodity story, but you can see what's happening to our commodity prices. Though the Canadian dollar has fallen a little bit, it's not enough to get the manufacturing sector revving up."

In trading Friday, oil prices lost nine cents to US$93.88 a barrel on commodities markets. The Canadian dollar fell marginally to $92.46, its lowest closing level in more than two years.

Next week, investors will be awaiting the latest Canadian employment which analyst expectations generally expect will show flat job growth.

In a move to loosen up Canadian credit markets, the Bank of Canada said Friday it is pumping another $12 billion or more into money markets to ensure Canadians have access to loans.

The central bank move expands total credit to $20 billion available to the markets by Nov. 6.

The economy has become the main issue in the campaign for the Oct. 14 Canadian federal election, with all the opposition parties attacking the federal Conservatives for what they say is a do-nothing approach to slowing economic growth.

Prime Minister Stephen Harper and Finance Minister Jim Flaherty continue to insist the economy is fundamentally sound and the financial crisis and housing slump that have battered the U.S. and spilled over into Europe isn't nearly so severe in Canada.

"The Canadian economy has continued to create jobs - it's slower than it was, but it continues to grow," Harper said during campaign event Friday in Saint John, N.B.

"In Canada, we had a fairly stable mortgage sector and obviously our banks are in a stable situation."

In London, Ont., Flaherty said the "tragic" consequences of Americans losing their homes in the U.S. housing market meltdown won't befall Canadian homeowners.

Speaking to students at the University of Western Ontario, the finance minister said Canadians can afford the mortgages they have and he added that the domestic housing market is stable.

"There are some very significant changes between our two economies and that makes day-to-day life in Canada rather different, where people in Canada don't have to worry about losing their homes, whereas many Americans are right now," Flaherty said.

"Our fiscal fundamentals are solid, our banks are well-capitalized, our insurance companies are well-capitalized. Households are well capitalized."

Despite criticism at the televised English-language election debate Thursday night that the Conservatives aren't doing enough to avert a financial crisis at home, Flaherty said there's no need for sudden changes and that stability and steadiness will take Canada through the financial crisis.

Both Harper and Flaherty have said that while growth is slowing, the government's corporate and personal tax cuts announced last fall have helped companies and consumers deal with economic uncertainty.

The worsening U.S. economy has also spilled over into Europe, where France has called an exceptional weekend summit to come up with a common European response to the spreading U.S. financial crisis.

On Friday, Jean-Claude Trichet, head of the European Central Bank, called for European unity in responding to the global financial crisis.

Trichet warned that European "growth is weak and there are risks of it being even more so."

He said this "exceptional period" of financial turbulence requires Europe to be "as united as possible."

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