Real estate agent Sheila Power stands at the door as she holds an open house in Silver Spring, Md. Sales of previously owned U.S. homes rose more than expected in April to a five month high.JONATHAN ERNST/Reuters
Europe's ever-mounting strife is sparking new fears that the region's fiscal troubles will wash up on North America's shores and swamp the economic recovery.
Persistent worries that Greece, Spain and other European countries may default on their debts has sent investors scurrying to safety, pushing the U.S. dollar up, yields on U.S. Treasury bills down and stocks to their lowest levels in months.
That shouldn't matter in Canada and the United States, except that in a globally connected financial system, Europe's woes can quickly become everyone's problem.
"This is all becoming horribly reminiscent of the summer of 2007," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
"Fear and loathing" has returned to the global financial system, he said. Investors overestimated the strength of the U.S. economy, and for too long have been in denial, Mr. Shepherdson added.
And yet a spate of recent reports suggest economic conditions are improving, at least in the United States. Consumers are feeling more confident. Americans are buying and building more homes. Interest rates are low. And employers are hiring again in significant numbers.
So why then are investors in such a funk?
"Everyone I talk to in our business is depressed," said economist Ed Yardeni, chief investment strategist at Yardeni Research Inc. in New York. "That's not surprising, given all the ... chatter suggesting the end is near."
The U.S. and Canadian economies don't operate in a vacuum. Just as the U.S. mortgage meltdown reverberated through Europe and Asia, Europe's debt problems are now hitting North American financial markets.
The transmission route for those problems is straightforward. Defaults in Europe would weaken the capital and profits of North American banks that lend them money. In turn, banks here would pull back on their lending, just as they did after the 2008 collapse of investment bank Lehman Brothers.
Trouble in Europe could also depress global trade if the debt crisis stalls the major economies of Europe, such as Germany, France and Britain. Europe buys a quarter of U.S. exports. For Canada, it's less than 10 per cent. But Europe's woes have depressed prices for many commodities, including oil, which affects a much larger chunk of Canada's export economy.
Some economists see a more insidious threat from what's happening in Europe.
"What is happening today in Greece is just the tip of the iceberg of rising sovereign debt problems in the euro zone, in the U.K., in Japan and in the U.S.," New York University economist Nouriel Roubini told Britain's Telegraph newspaper. "This is going to be the next issue in the global financial crisis."
Some analysts fear a double-dip recession. For that to happen, the labour market would have to stall completely. And so far there's no hint of that in the U.S. or Canada.
The U.S. is continuing to dig itself out of the worst recession since the Second World War, according to the latest economic reports.
U.S. consumers are more confident than they have been in more than two years, according to the U.S. Conference Board's monthly confidence index, released Tuesday. The index rose to 63.3 this month from 57.7 in April. It marked the fourth successive month that confidence is up.
The catch is that the survey was conducted just as Europe's problems were starting to infect markets here.
There was mixed news from the housing market Tuesday. Prices rose 2.3 per cent in March from a year ago, according to the Standard & Poor's/Case-Shiller index of home prices in the 20 largest U.S. metropolitan markets.
However, prices fell 0.5 per cent between February and March, marking a sixth consecutive monthly decline.
Over all, prices remain more than 30 per cent below where they were in mid-2006, when the market peaked.
On Monday, the U.S. National Association of Realtors reported that sales of existing homes sales shot up 7.6 per cent in April to an annual rate of 5.8 million - the fastest pace since November of last year.