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Ottawa maintains economic outlook despite headwinds

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Now is not the time to lower Ottawa's forecast for the Canadian economy, Finance Minister Jim Flaherty said at a press conference this week.

"Right now we are seeing moderate economic growth in Canada, which is what was anticipated in the budget this year," Flaherty told reporters.

In its 2012 budget tabled in March, Ottawa used a survey of private sector forecasts, which called for 2.1 percent growth for this year and 2.4-percent growth next year.

Now Ottawa's failure to lower its GDP forecast is increasingly putting it at odds with private sector economists who say the headwinds facing the Canadian economy -- ranging from a stagnant U.S. economy to high household debt levels -- will act as a drag on growth in the coming months.

Economists at Desjardins Capital Markets on Thursday were the latest to lower their GDP forecast for this year and next, saying negative forces on the Canadian economy "are far more numerous" than the positive.

They predict the Canadian economy will post 2-percent growth this year, down from their previous forecast of 2.1 percent. They have also cut their 2013 growth forecast to 2.2 percent from 2.4 percent.

"The recent results highlight the extent to which the underpinnings of Canada’s economy have weakened," Desjardins said in the report.

Ongoing budget cuts by Ottawa and the provinces, a slowdown in exports due to a weak U.S. economy and a high currency are all cited as drags on GDP growth.

Desjardins also says consumers have finally heeded warnings by numerous policymakers that they should get their fiscal houses in order, citing the slowdown in the year-over-year growth of consumer credit from 10 percent in the spring of 2012 to the current level of less than 3 percent.

"Clearly, they have heard the message and many households are now being more cautious. On the other hand, weaker demand for credit means weaker consumption, particularly of durable goods," they said. "That said, we cannot expect any real improvement to households’ balance sheets as long as mortgage credit growth remains elevated. To see an improvement, the housing market would have to slow down."

They add that the housing market has recently provided "substantial" support to the economy and defied repeated calls of a slowdown. But they believe that relying on growth in the housing market is no longer an option.

"Our scenario calls for the real estate market to gradually slow over the coming quarters, meaning that the Canadian economy will likely no longer be able to bank on residential investment to support its growth," Desjardins said.

TD also recently lowered its forecast for the Canadian economy, saying they expect the economy to post 1.8-percent growth this year, with 2-percent growth expected in 2013 and 2014.

And RBC economists earlier lowered their outlook for GDP growth to 2.1 percent in 2012 and 2.4 percent in 2013 -- below their previous forecast for 2.6-percent growth for both years.

Meanwhile, Scotiabank economists Derek Holt and Dov Zigler are calling for 1.9-percent growth this year and 1.8-percent growth in 2013.

Even the Bank of Canada cut its outlook for the Canadian economy. In its July Monetary Policy Report, the central bank trimmed its 2012 growth forecast to 2.1 percent from 2.4 percent, and 2.3 percent in 2013 from 2.4 percent.

"While global headwinds are restraining Canadian economic activity, domestic factors are expected to support moderate growth in Canada," the central bank said in July when it updated its forecast.

With files from Reuters

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