Canada's economy seen shrugging off market malaise

By Frank Pingue

TORONTO, Aug 16 (Reuters) - Canada's economic fundamentals are strong and unlikely to be threatened by the recent market turmoil, analysts said on Thursday, but a sustained credit crunch could eventually crimp consumer spending.

Toronto's main stock market has fallen nearly 15 percent from the its July peak due mostly to concerns over fallout from a global credit crunch.

Some experts feel the slide would have to reach 20 percent to threaten economic fundamentals and make the Bank of Canada consider an interest rate cut.

"This doesn't mean anything for the economy, although the longer it goes on the more that you've got to begin to wonder about at what point it might start to affect the consumer," said Jeff Rubin, chief economist at CIBC World Markets.

"This isn't about economic fundamentals, this is about vibes. The only market that really has seen an increase in default rates is the subprime mortgage market, everything else has been contaminated by contagion effect."

Canada's Finance Minister Jim Flaherty said on Thursday the country's economy and financial sector are strong. The economy is the "strongest it has been in a generation," he said.

Rubin said the market will either correct itself as reduced prices lure investors back to the market, or the central bank will step in with a rate cut and restore liquidity.

The Bank of Canada has already pumped money into financial markets almost every day for the past week given the troubles in the U.S. subprime mortgage market.

Financial markets remain stressed despite help from the Bank of Canada and other central banks that injected liquidity. Further injections are viewed as a necessity.

"I think it's important that central banks keep on injecting liquidity," said Stefane Marion, assistant chief economist at National Bank Financial in Montreal.

"Because the problem that we have right now is that even though the economic fundamentals are relatively good, for the economy the risk is that the longer this crisis lasts the more probability you have that you could impact the economy."

The Bank of Canada had been widely expected to hike its key overnight rate by 25 basis points to 4.75 percent on Sept. 5, but the market turmoil in the past week has clouded forecasts.

"At this point I think all bets are off for a Canadian rate hike at the September meeting," Marion said.

"Injecting liquidity for a few weeks and then proceeding with a rate hike given the fragility of financial markets I don't think would be a good script at this point."