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OECD highlights problems for next BoC head

The next governor of the Bank of Canada received a sharp reminder from the Organization for Economic Co-operation and Development (OECD) of the problems that lie ahead for the Canadian economy.

Unemployment in Canada will remain high, falling to just 6.9 percent – from its current level of 7.4 percent – by 2014, while the economy will grow just 2 percent this year, 1.8 percent in 2013 and 2.4 percent in 2014, the Paris-based think tank said today in its Global Economic Outlook.

These forecasts are well below those of the Bank of Canada. The bank is expecting the economy to grow 2.2 percent in 2012, 2.3 percent in 2013 and 2.4 percent in 2014, according to its recent Monetary Policy reports.

On Monday, the current Governor of the Bank of Canada, Mark Carney, announced – to the surprise of many investors -- that he will be leaving in May to take the top job at the Bank of England.

Carney will be leaving an economy that is showing signs of weakening, high household debt levels and once hot housing market showing signs of cooling.

The OECD reiterated on Tuesday that high consumer debt levels remain one of the biggest risks to the Canadian economy.

"The dominant domestic risk is that of renewed momentum in housing demand and house prices, aggravating existing imbalances," the report said. "Continuing high household debt levels could lead to a sharp deceleration in household spending, while a sudden weakening of the housing market could have sizable negative spillover effects."

The next governor of the Bank of Canada will also have to address the central bank's recent hawkish outlook on interest rates, which have been on hold at one percent for more than two years. While Carney and the Bank of Canada have repeatedly warned that the next move for interest rates will be higher, many economists have continually pushed out their forecast for when that hike will occur.

"Easy monetary policy has been maintained in a context of downside external risks, low inflation and restrictive fiscal policies. However, economic slack is not large, so that a shift toward a tightening stance by the latter half of 2013 may be needed," the OECD said in its report.

Capital Economics economist David Madani highlighted the added risk of Carney's departure.

"Mark Carney's surprise decision to accept the head job at the Bank of England, after explicitly telling everyone he was not interested, adds to an already uncertain outlook for Canada. Moreover, it could not come at a worse time for Canada's economy, which appears to be confronting the risk of a potentially severe and protracted housing market correction. Carney's departure has not materially altered, however, the near-term outlook for interest rates," he said in a note to clients.

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