Mark Carney sees more than year of soft growth
Jeremy Torobin, The Globe and Mail
11:00 AM, E.T. | October 26, 2011Economy
The deteriorating global picture is turning what had been a soft patch for Canada’s export-heavy economy into more than a year of sluggish growth, the Bank of Canada said Wednesday in a new quarterly forecast.
A day after leaving their benchmark interest rate at 1 percent for a ninth consecutive meeting, Bank of Canada Governor Mark Carney and his officials fleshed out why they believe the economy will perform below its potential until 2013, and why they are unfazed by hotter-than-expected inflation in recent months.
Plus, although the central bank sees things improving within two years, policy makers again stressed that a failure to contain the European debt crisis could mean an even bleaker few months ahead.
“The economic outlook in Canada has weakened, reflecting the substantially downgraded outlook for the global economy,” Carney and his policy team said Wednesday in their Monetary Policy Report.
“The Bank now projects slow growth in real GDP in Canada through mid-2012. Economic growth is expected to improve thereafter, in line with an improved global environment as uncertainty dissipates and confidence recovers.”
Demand has slowed everywhere and, further hampering exporters, the dollar is back around parity with its U.S. counterpart and could stay around 99 cents (US) until the end of 2013, the bank said.
Plus, the hit to global confidence that started in August and has accelerated in the past few weeks is affecting the private spending by Canadian businesses and consumers that has been counted on to drive the recovery. This, plus lower commodity prices, will put a big brake on prices.
Policy makers are not forecasting a recession in Canada but cut their domestic growth forecasts for every quarter from the recent July-through-September period until the middle of next year.
The economy likely grew at an annual pace of 2 percent in the third quarter, instead of the bank’s July prediction of 2.8 percent, and 0.8 percent in the current three-month period, way down from the bank’s earlier call for 2.9 percent -- reflecting “an environment of lower confidence and heightened uncertainty.” Growth will pick up a bit in the first quarter of 2012, but at a 1.9-percent pace instead of the much healthier 2.9-percent clip anticipated in July.
In a summary of the risks that could throw off its projections, the central bank noted that high household debt levels could mean a sharper-than-expected drop in consumer spending, as the external backdrop weighs on Canadians’ sense of their financial well-being. More ominous, the central bank reminded that a “sudden” weakening in the housing market could have “sizable spillover effects” elsewhere in the Canadian economy.
The gloomier outlook arrives as European leaders gather in a crucial attempt to agree on a solution to the euro-zone debt mess, and before a Group of 20 summit next week in France which may represent the last chance to put a floor under the crisis before it engulfs the continent’s banking system and tips the world economy back into recession.
The related global slowdown is already affecting European, American and Canadian financial conditions, consumer and business confidence, and trade, and the central bank has stressed that while its forecast assumes the European crisis will be contained, this notion is “clearly subject to downside risks.”
As policy makers first mentioned on Tuesday in their rate decision, the central bank predicts that the euro zone -- which accounts for 15 percent of global gross domestic product -- will have a “mild recession” starting late this year, due to a deadly mix of market strains, deleveraging by banks, brutal belt-tightening measures and falling confidence.
The region will grow 1.5 percent for all of 2011, down from the bank’s July forecast of 2 percent, and a mere 0.2 percent in 2012, reflecting an almost total downgrade of its previous call for 1.6-percent growth.
In 2013, the euro area’s recovery will pick up some steam but at a slower pace than the rest of world’s major economies, growing 1.5 percent. Much like the bank’s overall forecast assumes that the euro-area debt crisis will be stemmed, the anticipated gain in momentum hinges on the notion that reforms to address the crisis would be starting to take effect, helping to gradually revive confidence.
The United States, meanwhile, will grow at an average annual pace of just 1.25 percent -- or, around levels that increase the chance of a recession, the bank said -- through mid-2012.
Still, U.S. growth will then start to gather a bit of steam, because of moves by the U.S. Federal Reserve and as the situation in Europe improves, while remaining “quite modest,” reflecting the extreme difficulty of recovering from downturns caused by financial crises. The world’s biggest economy and Canada’s chief export market will grow 1.7 percent in both 2011 and 2012, instead of 2.4 percent and 3.2 percent. While U.S. growth would then rebound to 3.3 percent in 2013, the bank noted that the level of real gross domestic product at the end of that year would still be “well below” where policy makers anticipated it would be in July.
“Growth in U.S. domestic demand -- and, hence, growth in demand for Canadian exports -- will remain modest for the foreseeable future,” the central bank said.
Efforts to reduce Washington’s bloated budget deficits and total debt are projected to chop 1 percentage point off of U.S. GDP in 2012 and 2 percentage points in 2013. The bank added that if all of the tax cuts and stimulus measures in President Barack Obama’s jobs bill are implemented, they could add 1.3 percentage points to growth in 2012, though much of that would be subtracted the following year as they expire.
As a result of the global slowdown, which has affected developed economies the most but is also spreading to emerging-market powerhouses like China, commodity prices are projected to stay about 10 per cent below levels predicted in July.
Nonetheless, the bank said, demand from the developing world should help keep prices “relatively high by historical standards.” Most relevant to Canada’s economy, oil prices are now expected to trade between $85 (US) to $89 per barrel until the end of 2013, down from the $100-plus-per barrel range this summer.
Carney, whose next decision is scheduled for Dec. 6, holds a press conference later this morning in Ottawa with Senior Deputy Governor Tiff Macklem.