Expect recovery in 2010: BoC

The head of the Bank of Canada has defended his assessment of the Canadian economy but cautioned that domestic growth would be heavily reliant on government stimulus south of the border.

“In our base-case projection, real GDP is expected to rebound in 2010, growing by 3.8%,” Bank governor Mark Carney told the House of Commons Standing Committee on Finance. “Though seemingly impressive when viewed from the depths of a recession, such a recovery is actually more muted than usual.”

In its January Monetary Policy Report Update, the Bank projected that global economic growth would amount to just 1.1% for 2009 but would rebound slightly to 3.7% in 2010.

“The reality is that the financial crisis and subsequent recession originated beyond our borders, and the necessary triggers for a sustainable recovery must be found there as well,” he told the committee. “Canada has much to offer to these efforts, which is why the Bank is working closely and tirelessly with our international colleagues.”

That recovery would depend on a number of factors, some within the Bank’s powers, but most beyond. Carney acknowledged that the Bank’s monetary policy needs to be timely and of the right scale, and that the past depreciation of the dollar would also aid in recovery.

But more important would be domestic fiscal stimulus and the return of demand for Canada’s exports, particularly from emerging economies. This would prop up employment in resource extraction industries, strengthening household and corporate balance sheets.

“The outlook for the global economy has deteriorated significantly in recent months,” Carney said. “What began last autumn as a relatively controlled slowdown has become a sudden, synchronized and deep global recession.”

He pointed out while many initially thought the global financial system faced a liquidity crisis, it is now more widely acknowledged as a solvency crisis.

The unwinding of massive current account deficits in the U.S. and Britain, for example, will dampen growth in countries that have been running account surpluses, such as China and Germany. The U.S. is expected to cut its 2006 current account deficit in half, to 3% of GDP for 2009.

“The global downturn and declining demand for our exports will make this a very difficult year for Canada’s economy,” Carney said. “We are now in recession, with GDP projected to fall by 1.2% this year. The first half of the year will be particularly challenging, with sharp falls in activity and increases in unemployment.”

Last week StatsCan reported 129,000 jobs were lost in January alone, but Carney said this was, “unfortunately,” in line with the Bank’s projection.

Carney forecasted CPI inflation will dip below zero for two quarters of 2009, due to year-over-year price declines in the energy component, but he opined that the risk of deflation was “remote.” He expects total inflation to return to the Bank’s 2% target by the first half of 2011.

“Decisions taken in the coming weeks in the United States and in other major economies to isolate toxic assets in order to create a core of ‘good’ banks will be critical,” he said. “In addition, G-20 countries need to act in concert to improve domestic and international regulatory frameworks. In this regard, measures to improve transparency and integrity, to implement a macro-prudential approach to regulation, and to adequately resource the IMF are vital.”

(02/10/09)