Bank Of Canada: Economy still not ready to stand on own legs

Date: Tuesday, January 19th, 2010

OTTAWA – Julian Beltrame, The Canadian Press

It will be another year before the Canadian economy can stand on its own feet without government assistance, the Bank of Canada said Tuesday.

The slightly pessimistic assessment came as the central bank signalled in no uncertain terms that it was in no hurry to move off historically low interests rates, saying they are still needed to stimulate borrowing and business expansion.

And it revised downward – ever so slightly – its previous forecasts on growth for this year while raising it slightly for next year.

The key message governor Mark Carney sought to impart was that both the Canadian and global economies may be improving, but that they are still primarily being propped up by massive government spending, and historically low interest rates, along with other measures.

“While the outlook for global growth through 2010 and 2011 is somewhat stronger than the bank had projected (in October), the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems,” Carney and his policy-making council said.

As for the Canadian economy, the council noted that the economy is operating 3.5 per cent under capacity and that the private sector won’t likely become the “sole driver” of demand growth until 2011.

With that in mind, the bank kept its trendsetting overnight interest rate at 0.25 per cent, the lowest in history, and again pledged to keep it there for the next six months.

To reinforce the commitment, it extended its emergency lending instruments to April, allowing chartered banks to access funds at the historically low rate.

The discouraging language on interest rate hikes sent the Canadian dollar below 97 cents for most of the trading day, from its 97.42 cents US closing Monday. It finished down 0.40 of a cent Tuesday at 97.02 cents US.

In that regard, mission accomplished, said independent economist Dale Orr.

One of the key challenges facing Carney in the next several months, Orr said, is to discourage markets from thinking he will hike interests rates ahead of the U.S. Federal Reserve. That would strengthen the loonie and weaken the recovery by discouraging exports.

Overall, the bank’s view on the economy remains little changed since October, when it last issued an outlook, and is falling in line with many other forecasters.

On Tuesday, the Conference Board of Canada issued its latest projection, pegging growth at 2.8 per cent this year.

The Bank of Canada’s estimate of growth is a tick higher at 2.9 per cent, which is still above the consensus estimate of 2.6 per cent. It expects the economy will expand by 3.5 per cent in 2011, also above many other forecasts.

Tuesday brought an indication that the economy is starting to revive after almost a year of contraction and job losses.

Statistics Canada said its leading index for December rose by 1.5 per cent, the biggest one-month advance since 1958, with none of the 10 major components registering losses.

Despite what several commentators called the “dovish” nature of the central bank’s remarks, some analysts saw elements of optimism in the statement.

Scotiabank economist Derek Holt noted that central bank removed from its text an earlier comment that “significant fragilities remain,” and forecast that global expansion would be somewhat stronger in 2010 and 2011 than it thought three months ago.

Economists are now projecting that Canada’s gross domestic product grew by between three and four per cent in the last three months of 2009, and will likely advance at a similar pace this winter.

“The justification for giving away free money is a lot tougher now,” Holt said, even if growth is muted.

However, Carney reiterated his concern about the low demand for Canadian exports – particularly in the U.S. – and the high price manufacturers are paying for the continuing strong loonie.

“The persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economy activity in Canada,” the bank statement said.

The bank was given some backing on the point by a TD Bank report, also released Tuesday.

The assessment called for manufacturing output to outperform most other sectors over the next few years. But output still won’t get it back to where it was a decade ago because of how far it has fallen in the recession.

Especially noticeable will be the drop-off in auto sales and production, said economist Dina Cover.

In another aspect of the Bank of Canada statement, the central bank said inflation has been rising faster than anticipated but it did not appear to be overly concerned at this point.

The bank said it still doesn’t believe inflation will return to the two per cent target until the third quarter of 2011, another indication it is not in a hurry to raise interest rates.

Lawrence Kobescak

Lawrence Kobescak

Lawrence Kobescak, the creator behind OntarioMortgageSuperstore.com is a real estate sales representative, mortgage agent and real estate investor. OntarioMortgageSuperstore.com has reached over 240,000 Canadians since 2009. Lawrence has been quoted in the Globe & Mail and MortgageBrokerNews.ca.

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