OTTAWA – The global recovery is under way but expansion of the Canadian economy remains dependent on government support and historically low interest rates, the Bank of Canada said today.
As expected, the central bank again pledged to keep its trendsetting policy rate at the lowest practical level of 0.25 per cent until mid-2010, saying the economy at the moment is performing slightly worse than it projected three months ago.
To reinforce the commitment, the bank said it was extending its emergency lending instruments to April, with maturity dates beyond June, at the low policy rate.
The announcement contained few surprises for markets, but the tweaking of growth rates — although at the margins — was somewhat unexpected.
“Economic growth in Canada resumed in the third quarter of 2009 and is expected to have picked up further in the fourth quarter,” bank governor Mark Carney and his policy-making council said in an accompanying note.
“Nevertheless, considerable excess supply remains, and the bank judges that the economy was operating about 3.25 per cent below its production capacity in the fourth quarter of 2009.”
Carney had been among the most bullish of forecasters for the economy this year, although by historic standards, even Carney was not anticipating a robust recovery.
Now the bank says the economy likely contracted by 2.5 per cent last year, a little worse than the 2.4 per cent it had predicted in October.
As well, it says growth this year will be 2.9 per cent, one-tenth of a point less than it had previously forecast and more in line with the private sector consensus of 2.6 per cent.
The good news is that the economy will make the up ground in 2011, says the bank, with a growth rate of 3.5 per cent. It had earlier pegged next year’s growth at 3.3 per cent.
The bank’s message to Canadians is that although conditions are improving, strengthened by a global economy that is expanding faster than expected, the recovery still is dependent on “exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.”
In Canada, the bank says the private sector won’t become the sole driver of domestic demand until 2011.
As has been the case throughout the recession, Canada’s recovery continues to be hampered by the slow pick-up in U.S. demand for Canadian products and the high Canadian dollar, which makes those exports less competitive.
That means Canada’s internal domestic economy, largely reflected in consumer spending and the hot housing market, will be the main engine of the recovery.
The bank noted that inflation has been rising faster than it anticipated, but appeared not to be overly concerned, especially with the large amount of slack in the economy.
Although economists forecast inflation likely hit 1.6 per cent in December, after being below zero through much of the summer and part of the fall, the bank said it still doesn’t believe inflation will return to the two-per-cent target until the third quarter of 2011, when it expects the economy to be firing on all cylinders.