Battered by European debt woes and a global slowdown, Canada’s economy is approaching stall speed as the year comes to a close but is likely to avoid an outright recession, predicts the Bank of Canada.
The central bank fleshed out its new outlook for the global and domestic economies Wednesday, saying Canada’s growth rate will dip as low as 0.8% in the last three months of the year, after rebounding somewhat to two per cent in the third quarter.
That’s a massive downgrade from what the bank had been expecting for the second half of this year, when in June it predicted growth rates approaching three per cent.
But bank governor Mark Carney told a news conference that the global picture had materially worsened in the past few months when global confidence has been shaken by the escalating European debt crisis, a weaker U.S. economy that puts the country at risk of a slump and even slowing growth in emerging nations, including China.
The new projection shows global growth braking to 3.1% in 2012 from a weak 3.8 this year, and the U.S. barely edging about above one per cent until the middle of 2012.
Amid this sea of trouble, Canada remains a relative safe harbour but not unaffected.
Carney said the fourth quarter, the October-December months, appears weaker than it is due to temporary factors and that growth will be on a stronger track starting next year, when the first three months will show a 1.9% advance.
“We are expecting the situation in Europe, the renewed weakness in the United States, will have an impact on confidence in Canada, on consumption, on the margin in investment, also it’s having an impact on exporters (because) there’s less demand out there,” he explained.
“But as those start to move away, what we are expecting is modest growth in Canada and then a pick-up which begins from the middle of next year.”
The bank’s latest forecast predicts that the economy will have advanced 2.1% this year, soften to 1.9% in 2012 and pick up speed to 2.9% in 2013.
Scotiabank economist Derek Holt, who is bearish on the near-term future prospects, praised Carney for becoming more “realistic” about the economy’s potential. But others thought the governor had swung too far after the summer’s optimistic report.
“We see the bank as now too pessimistic on global growth, leaving a bit more upside for Canada next year if the U.S., for example, extends tax cuts for another year,” said CIBC chief economist Avery Shenfeld. The central bank’s forecast is slightly below the economist consensus the federal government intends use for its fall update next month.
Given that the economy is expected to move forward, if hesitantly, Carney cautioned analysts who are projecting interest rates to remain unchanged years into the future.
He said at the near-historic low of one per cent “it’s a very low bar to say that there’s an expectation that some monetary policy stimulus would be removed over the course of the next 27 months.” The statement doesn’t contradict analysts who are now expecting the bank to keep them at one per cent until 2013, however.
Carney cautioned that his forecast is based on Europe containing its financial crisis so that it doesn’t spill over into the global financial system, which could have the effect of freezing up credit and possibly trigger a double-dip recession. If contagion happens, all bets are off, he suggested.
“It’s the biggest risk to the downsize,” he said. “Obviously that would effect Canada… We are in better position than virtually any other advanced economy with respect to the financial system, but we can’t totally isolate ourselves from a bad outcome in Europe.”
As well, failure in Europe would likely shake household and business confidence in Canada, as well as much of the world.
As he spoke, European leaders were preparing for a critical meeting later in the day to work out plans to backstop sovereign debt in Greece, as well as other weak zone economies, while ensuring banks that hold sovereign bonds are not placed at risk.
Carney said the Wednesday meeting was important but “not make or break,” noting there will be other opportunities for policy-makers to hammer out measures to address the multi-faceted problem.
On Tuesday, Finance Minister Jim Flaherty warned a recession is still possible in Canada should the European crisis cause global credit markets to seize up — much as happened in 2008 with the failure of the U.S. banking system — depriving businesses and consumers access to affordable credit they need to keep investing and spending.
But Carney would not speculate about a Canadian recession despite several direct questions.
The bank’s quarterly policy review, released prior to Carney’s news conference, pointed to several strengths in the Canadian domestic economy.
The bank noted household spending will continue to grow, if more moderately than previously thought given the hit to incomes, wealth and confidence from market turmoil and the flow-through affect of lower commodity prices. Business investment is also still expected to be robust, if more subdued.
While the review highlights the considerable risks facing Canada, the bank pointed out that not all of the uncertainties are negative. It noted that the Europeans could surprise and take decisive action to fix their debt and financial difficulties, emerging markets such as China could beat expectations and Canadian consumers could continue to take advantage of low interest rates and keep up their high levels of spending.
If those eventualities come about, Canadians would be enjoying a stronger economy, generating more jobs and higher salaries.