The Danger of the US Going into a Recession

The following is an excerpt by The Globe and Mail on the move by the Bank of Canada cutting interest rate by one-quarter point.    

The U.S. Federal Reserve announced its surprise massive interest rate cut of three-quarters of a percentage point about an hour before the Bank of Canada officially issued its own announcement on Tuesday morning. (A Canadian official said the Fed did not give the Canadian central bank any advance notice of its surprise cut.)

"Financial market conditions have deteriorated since October, leading to a tightening of credit conditions in industrial countries," the Bank of Canada said in a one-page statement accompanying its rate announcement.

Canada's economy will be hit hard, the central bank said, especially in the export sector. The Bank of Canada will publish full details of its projections and analysis on Thursday.

In October, the central bank projected that the Canadian economy would expand by 2.3 per cent in 2008, and 2.5 per cent in 2009. The central bank's last official projection for inflation in Canada was that it would fall below its 2 per cent target this year but return to target by the second half of 2008.

As for the United States, the Bank of Canada's old growth expectations in October were for 2.1 per cent in 2008 and 3.0 per cent in 2009. With the Fed's 75-basis-point cut on Tuesday morning, there is now an appreciable gap between the American's key interest rate of 3.5 per cent and the Canadian key interest rate of 4.0 per cent.

The possibility of a US recession has affected market sentiments in the world financial markets. There is a real danger that downturn in market confidence may spill over to affect the housing market in Canada.

Do you think the Canadian housing market will take a dive if the US goes into a recession?