Source: The Canadian Press
Canada is leading the other G7 countries out of recession with the fastest growth in a decade, but it will be trailing those countries in a few years, the Bank of Canada said Thursday.
The central bank’s latest economic outlook released Thursday makes several bold predictions, including that Canada’s fast start out of last year’s slump is already slowing, that the housing boom is fizzling out, and that the country’s long-term growth prospects are discouraging.
And governor Mark Carney is cautioning markets not to be so sure Canada’s central bank will raise its key interest rates in a matter of weeks.
On Tuesday, the Canadian dollar shot up more than 1.5 cents to above parity with the U.S. currency after the Bank of Canada said it was dropping its promise not to raise rates before July at the earliest.
But Carney told a news conference Thursday that there is still considerable risk in the global economy, or to anticipating his next move.
“There is nothing pre-ordained from this day forward,” Carney said to a question on interest rates.
Most economists interpreted Tuesday’s statement as an alert to plan for higher rates in June, but some argued Carney had left himself plenty of wiggle room.
“The Bank of Canada has limited scope to raise interest rates in the next several months,” said Brian Bethune, chief economist with IHS Global Insight.
“While we may see one or two token moves to raise the overnight rate by a quarter of a point in the June to October window, action to raise rates will be very limited” by the fact doing so would further boost an already strong dollar.
In Thursday’s report, the bank said it is planning for the dollar to hover around parity for the next three years and listed it as a major impediment to strong growth because it will make exports less competitive in global markets.
The dollar hovered just above and below parity throughout the Thursday trading day.
The report says Canada’s economy expanded by 5.8% in the just past quarter, the largest advance since 1999, but growth will likely slow to 3.8% in the April-June period, and to 3.5% the rest of the year.
It gets worse. Economic growth will average 3.1% in 2011 and 1.9% in 2012, about half what it will be in the United States and lower than both Europe and Japan.
“There is some good news here, our economy has returned to growth,” said Carney, noting that more Canadians will find jobs and those who have had their hours reduced are more likely to be called in to work longer.
But as he has in the past, Carney warned that the longer-term prospects for the Canadian economy is modest unless the corporate sector starts investing heavily in new machinery and equipment to become more productive.
Canada is also facing a bigger issue of an aging workforce than the United States, exacerbating the divergent trend line between the two economies.
“This is in the hands of the private sector,” Carney said. “If we want to grow faster, we’re going to have to work smarter, invest better, (and) build new markets.”
The bank said it fully expects businesses to step up investment this year, but it could hardly get worse _ business investment actually declined in the fourth quarter when the rest of the economy was rebounding.
A big reason the economy has shot out of recession is that Canadian consumers, particularly home-buyers, have “front-loaded” their purchases because of record low interest rates.
But Canadians that bought homes in the past six months, or took advantage of the now defunct home renovation tax credit, won’t be doing so in the future, hence bringing an end to the housing sector boom.
Housing, which is contributing about 0.6% to economic growth this year, will actually be a slight drag next year, the bank forecasts. That doesn’t necessary translate to an outright decline, but it does foresee prices and sales levelling out.
For the bank, that is a good thing because it regards the housing market as too hot for home-buyers’ own good. It has warned repeatedly that households should make sure when they purchase a home that they will be able to afford the monthly payments once interest rates rise.
In the main, the bank’s view of the Canadian economy and the world is actually brighter than the previous published analysis issued in January, while noting the high level of uncertainty.
Economic growth, housing slowing after fast start to recovery, BoC says
Canadian economy will grow by 3.7% this year, 3.1% next
- By: Julian Beltrame
- April 22, 2010 April 22, 2010
- 13:30