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The economy will grow slowly until well into next year as consumers and businesses spend less and the country’s trading partners struggle, the Bank of Canada said Thursday, while playing down the possibility of a “double-dip” recession and reminding borrowers that interest rates will continue to rise.
Growth from April to June slowed to almost half the pace of the previous quarter, the central bank said in its July Monetary Policy Report, kicking off four consecutive quarters in which economic expansion is expected be weaker than policy makers first predicted.
While the fading impact of government stimulus and a cooler housing market were expected to restrain the economy after it rocketed out of the recession, global uncertainties will also suppress private-sector demand in Canada, the central bank said.
The European debt crisis and the era of belt-tightening it spawned will shave 0.1 of a percentage point off Canada’s gross domestic product this year, 0.3 of a percentage point in 2011 and 0.2 of a percentage point in 2012, the bank forecast.
In the United States, the bank said, it will take longer for consumers and businesses to fill the gap left as stimulus measures stop propping up the world’s biggest and most important economy.
Still, the central bank took the unusual step of saying explicitly that its forecasts assume “a gradual reduction in monetary stimulus” in Canada in order to keep inflation close to its 2-per-cent target. Economists interpreted that as a reminder that the central bank’s interest rates are still likely to trend higher.
Already, Governor Mark Carney has raised rates twice in the past two months, to 0.75 per cent, the only Group of Seven central banker to have moved since the worldwide slump ended.
“The external environment is still pretty sluggish and that’s going to limit just how fast the Canadian economy rebounds. So there’s that headwind that the economy is confronting and, to me, reason why you [Mr. Carney] might want to be a bit cautious” even if rates are “clearly” on an upward path, Paul Ferley, assistant chief economist at the Royal Bank of Canada, said in an interview. “They’re tightening more quickly than the other Group of Seven central banks.”
“The accelerated global fiscal consolidation and the weaker and more uncertain global outlook imply a slightly more pronounced deceleration in economic growth in Canada than previously expected,” the central bank said in its report.
Although efforts across advanced economies to reduce household, business and government debt could boost confidence around the world, the bank said they could also result in demand “insufficient to sustain the recovery.”
At a news conference after the Bank of Canada released its report, however, Mr. Carney sounded a somewhat more optimistic tone.
It’s possible households may trim their spending more than anticipated or that business investment could take longer to return to pre-crisis levels, he said, but there’s also a chance that private demand could be stronger than forecast.
And though the next few months represent a “crucial time” for the U.S. economy, Canada’s main trading partner, Mr. Carney said he sees a “very low” probability of a double-dip back into recession.
At the same time, inflation in Canada will stay near the central bank’s target throughout the projection period without overshooting it, according to forecasts in the report. The economy won’t return to full capacity until the end of 2011 – six months later than policy makers had forecast in April.
But that doesn’t preclude further rate hikes this year, economists said.
“As long as you don’t get the U.S. consumer turning south, it’s reasonable to suggest you’ll get a series of rate hikes through to the end of 2010, but in the current environment, they’re not going to come right out and say that,” said Stewart Hall of HSBC Securities. “We’re looking at a central bank that’s largely a product of the environment it’s operating in, which is one of heightened uncertainty.”
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BANK OF CANADA GROWTH OUTLOOK
Canada
Second quarter: 3 per cent, down from April estimate of 3.8 per cent, and sharply below the 6.1-per-cent growth rate of the first quarter.
Third quarter: 2.8 per cent, down from previous forecast of 3.5 per cent.
Fourth quarter: 3.2 per cent, down from 3.5 per cent.
United States
2010: 2.9 per cent, down from previous forecast of 3.1 per cent
2011: 3 per cent, down from 3.5 per cent
Source: Bank of Canada
Jeremy Torobin
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