GDP shrinks 1st time in 11 months; signals halt to rate hikes

Date: Thursday, September 30th, 2010

CBC News

Bank of Canada governor Mark Carney signalled Thursday a slowing of the bank’s recent effort to tighten monetary policy.

In a speech in Windsor, Ont., Carney said that given the risks of a renewed U.S. slowdown and amid slow consumption and housing activity in Canada, “any further reduction in monetary policy stimulus would need to be carefully considered.

“The unusual uncertainty surrounding the outlook warrants caution.”

Carney’s remarks came the same day new data showed Canada’s gross domestic product shrank by 0.1 per cent in July, the first time it has contracted in 11 months.

The Bank of Canada has raised interest rates — described as tightening monetary policy — three times in the past four months, most recently on Sept. 8. The bank’s key overnight lending rate is currently 1.0 per cent.

Carney pointed out that during the same time in the United States, the Federal Reserve has held the policy rate at almost zero.

“While Canada’s circumstances and the discipline of the inflation target dictate a different stance than in the United States, there are limits to this divergence,” he said.

The recession may be over, he warned, but it’ll still a long road back to a strong economy.

Domestically, Canada’s relatively strong bounce-back from recession has been supported by housing expansion and personal consumption, two factors that can’t continue, Carney said.

Externally, he said, the world is facing a restructuring that could take 10 years and subdue growth in the advanced economies.

Even Canada’s supposedly strong jobs recovery is not as shining as it looks, he said.

The unemployment rate remains high at 8.1 per cent and many of the jobs created since July have come in the public service and what he called involuntary part-time work.

GDP decline predicted

The decline in the gross domestic product, which was announced Thursday, was in line with what economists were expecting, as the economy has been showing signs of a slowdown since the early stages of the government stimulus-led recovery in late 2009.

“The Canadian economy has lost much of its forward momentum, reflecting sluggish U.S. demand for the stuff we make and the payback for having home renovation activity and home sales pulled forward earlier in the year,” BMO economist Michael Gregory noted.

The Bank of Canada is expecting two per cent growth for the July-to-September period as a whole, but the central bank is set to update those forecasts at its next policy meeting on Oct. 21.

Speaking at an event in Ottawa, Finance Minister Jim Flaherty said he was neither surprised nor overly concerned by the negative showing.

“The month of July had a very small negative showing,” he said. “From time to time, there will be ups and downs in any economic recovery.”

He blamed the decline, in part, on the impact of the HST in Ontario, B.C. and to a lesser extent Nova Scotia. He also said Ottawa is confident the third quarter will show growth overall.

“We’ve always said the recovery is fragile,” Carney said.

Manufacturing, retail and wholesale trade, construction and forestry all posted decreases.

“Consistent with faltering domestic demand and weak U.S. demand, manufacturing shipments fell the hardest in the month,” TD Bank economist Diana Petramala wrote in a note to clients.

Increases were recorded in the mining sector and, to a lesser extent, in some financial industries and the public sector.

“Although the GDP result comes as no surprise, that doesn’t make it feel any better,” Gregory noted.

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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