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Europe's problems to weigh on Canada

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Central bank governor Mark Carney is predicting 2012 will be a bit stronger than first thought. After telling us last fall the Canadian economy would grow by 1.9 percent in 2012, Carney is now calling for a 2-percent rate for all of this year. What's expected to drive the stronger growth this year is the better-than-expected end to 2011. The world's most respected central banker, however, is trimming his forecast for next year's growth to 2.8 percent.

But what's expected to keep our economy from growing even more than the 2-percent rate predicted by the Bank of Canada is the ongoing uncertainty in the euro zone. The Bank of Canada says that will cut into spending, lending and confidence in Europe and the United States -- with a $10-billion knock-on effect for Canada's $1.6 trillion economy.

Carney is predicting the euro zone will be in a recession for a full year and that it will be deeper and longer than originally expected. And while it will hold us back by about 0.6 percent this year, our biggest export customer will be hit harder -- by 0.8 percent. As a result, the Americans won't need as much of what we make. Weaker trade and a slightly softer pace of business spending growth is the other part of the expected $10-billion hit to our economy this year.

The Bank of Canada revised higher its predictions for core inflation this year from 1.7 percent to 1.9 percent. We won't be back into the BoC's sweet spot of 1 to 3 percent until 2013 when the economy is expected to return to full potential.

That's led to predictions the Bank of Canada won't be raising rates any time soon.

TD economist Diana Petramala is telling clients today: "The January monetary policy report largely underscores our view that the Bank of Canada will remain on hold through 2012. Most importantly, the central bank is unlikely to want to raise rates in an environment where global financial conditions are worsening."

BMO's Michael Gregory agrees -- telling his clients that he's bracing for some degree of rate hikes starting by the middle of next year -- adding that the market is not quite there yet, but it's "only a matter of time." While that's good news for the slowing housing sector, Carney continues to beat the drum of higher household debt loads -- although he isn't being specific about what the bank might do about it.

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