Mortgage Watch

"I expect that the numbers are going to continue to deteriorate for the time being," he said yesterday when asked about the latest grim economic news – a 5.4 per cent drop (the worst in 15 years) in retail sales in December.

"The situation is very serious, economically," Flaherty told reporters.

Earlier, in an appearance before the Commons finance committee, he said: "We are experiencing a very difficult year, a year in which there will be a contraction in our national and global economies."

As Flaherty was sounding a note of caution in Ottawa, Prime Minister Stephen Harper was in New York – the heart of America's economic meltdown – to tout the stability of Canada's banking system while warning the U.S. financial system remains on shaky ground.

Harper said he remains "hugely worried" about the financial system in the United States as well as several other unnamed countries.

"Until that problem gets fixed, it's hard for me to see how we're going to turn the corner on this recession that we're in now," he told Fox Business News.

Yesterday's retail sales numbers reinforced a litany of gloomy statistics from December, including a record loss of 129,000 jobs, a 47 per cent spike in bankruptcies and a trade deficit of $458 million, the first since 1976.

Flaherty said one of the major problems with the economy is the trouble businesses and consumers have trying to borrow money.

"Even in Canada, we have some credit restrictions now" because some foreign banks and some leasing companies are no longer providing credit, he told reporters. "The banks have continued to lend, but they're being cautious ..."

Flaherty said banks need to do more to ease credit conditions.

He also said Ottawa's stimulus package, outlined in the Jan. 27 budget, will help beat back the recession by pumping $35 billion in fresh spending and tax cuts into the economy over two years.

"I'm looking forward to getting the stimulus into the economy, I think that will help," Flaherty said. He said he hopes the budget can be passed by Parliament by the end of March so the pro-growth measures can begin to be felt in the economy.

Harper hit the Big Apple yesterday for a round of interviews with U.S. television networks to capitalize on the media attention sparked by U.S. President Barack Obama's high-profile visit to Ottawa last Thursday.

"Because we're not a squeaky wheel, we often don't get the grease and we're forgotten. So it was great to have that kind of attention from our great friends in the United States," Harper said during a morning interview with Alexis Glick of Fox Business News.

The Prime Minister sang the praises of Canada's prudent banking and financial system, which he said can be attributed to "activist" regulation by Ottawa.

"We're helped by the fact we have six major banks, three major insurance companies, so it's easier for the government to exercise moral suasion on the sector," Harper said.

He said Canada, while hit by the economic downturn, hasn't suffered the kind of meltdown of the financial sector or the mortgage foreclosures that have hit the U.S. economy so hard.

"We haven't had to bail out any of our financial institutions," Harper said. "There will be no government bailout of mortgages in Canada."

He also sounded a caution against trade protectionism by U.S. politicians, calling it the "biggest risk" to the already unsteady world economy, a theme he's hit often recently.

"Protectionism is the one thing that could turn a very deep recession into a very deep depression if we are not careful," Harper said.

The Prime Minister was asked about Alberta's oil, which has come under fire because of the high environmental price to extract it. But Harper fired back that "Americans should be under no illusion.

"When I look at the energy needs of the United States, there's going to be lots of demand for all kinds of oil, particularly Canadian oil, which is a secure, safe supply from a reliable ally," he said.

The Prime Minister was due to make several other appearances on Fox News, CNN and CNBC. He also held a round table with business leaders in the city.

Construction began on 153,500 units in January, on a seasonally adjusted annual rate, down from 172,200 the previous month, CMHC said.

Urban housing starts dropped 15.6% to 126,700 units last month, with single units falling 20.2% to 50,000 and multiple dwellings declining 12.1% to 76,700.

"To a certain extent, the decline in housing starts coincides with recent developments in the existing home market," said Bob Dugan, CMHC's chief economist.

"Reduced sales and increased listings in the existing home market have led to reduced spillover demand in the new home market."

All regions of Canada saw declines in housing starts in January, CMHC said.

Urban construction fell 8.6% in Atlantic Canada, while Quebec experienced a 1.4% drop, Ontario at 14.6% decline, the Prairies 30.3% and British Columbia 29.1%.

Meanwhile, there were 26,800 units stared in rural areas.

Charmaine Buskas, economics strategist at TD Securities, said Canada's housing market "is under a great deal of pressure."

"The combination of an increasingly weak labour market and lingering concern about the state of the economy has left consumers unwilling to take the plunge into the housing market," she said.

"The correction in Canada's housing market continues to unfold and it appears the pace is a bit quicker than we had originally anticipated. In the face of continued economic weakness, housing may not see a rebound until early 2010."