Bankers see bright future

OTTAWA — Canadian and American central bankers suggested Tuesday that an end to the recession may be in sight.

OTTAWA — Canadian and American central bankers suggested Tuesday that an end to the recession may be in sight.

In separate events Tuesday, the Bank of Canada and U.S. Federal Reserve chairman Ben Bernanke expressed confidence that the economies of their respective countries were showing signs of improvement.

The optimism was more pronounced in the case of the Bank of Canada, which all but declared the recession over by brightening its outlook for the Canadian economy both for the remainder of this year and next.

“There are increasing signs that economic activity has begun to expand in many countries,” the Bank of Canada said in a statement accompanying its decision to keep the policy interest rate unchanged.

“(In Canada,) stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are spurring domestic demand,” the bank added.

The bank’s unsigned statements are widely considered to reflect the views of Bank of Canada governor Mark Carney, who will hold a news conference Thursday to discuss the central bank’s latest monetary outlook.

In testimony before Congress, his American counterpart was more measured, declaring that the pace of the economic decline in the United States had slowed and repeating the Fed’s forecast that the U.S. economy should start growing again in the second half of this year.

But he said the economy remains vulnerable.

“Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending,” Bernanke said. “The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook.”

The Bank of Canada’s more optimistic view of the economy — particularly after several cautious statements in early July — came as a mild surprise to economists.

While the central bank cautioned that the global recovery was “nascent,” and that Canada’s economy will be cramped by the strong dollar and ongoing industrial retrenchment, its overall tenor was one of a brighter future that is starting soon, if it hasn’t already begun.

The bank did not even mention the centre-piece of Carney’s April economic review, the introduction of the quantitative easing option to increase the money supply as a kind of ace in the hole should the economy turn for the worse.

And the bank is now projecting this year’s economic retreat will be limited to 2.3 per cent, instead of the three per cent predicted in April, while growth next year will hit three per cent, a half-point higher than previously projected.

Bank of Montreal economist Douglas Porter said given the steep drop in gross domestic product that already occurred in the first half of 2009, the bank’s new numbers makes it all but certain that the governing board believes growth will return during this current third quarter, the July-September period.

“They didn’t quite say ‘Ding Dong, the Recession’s Dead,’ but I think they really wanted to,” Porter said.

“They danced all around the topic.”

CIBC chief economist Avery Shenfeld said the Bank of Canada’s three per cent forecast for 2010 is about double his own, but since Carney is counting on low interest rates to support growth going forward, the difference is not critical.

“The good news is that if the bank has been too optimistic on 2010, it won’t really matter much for what the bank actually does,” he said. “It will have plenty of time to observe actual growth and inflation conditions before making a decision to begin a tightening cycle.”

Despite the Bank of Canada’s generally positive statement, it continued to warn about the negative impact of a high Canadian dollar.

“The Canadian dollar, as well as ongoing restructuring in key industrial sectors, is significantly moderating the pace of overall growth.”

After falling back in June, the loonie is now back into the territory that caused the bank governor to warn the currency’s rapid rise threatened to “fully offset positive factors” in the economy.

But the latest warning represents an easing of the previous concern, said Royal Bank economist Paul Ferley.

Economists with Scotiabank noted that a strong loonie is not all bad news for Canada since it decreases the cost of imports, helping reduce costs for businesses and keeping inflation in check.

The Canadian economy got another piece of good news Tuesday with a report from New York-based Global Insight forecasting that the global recovery is under way and being led by Asia’s emerging economies, particularly China, India and South Korea.

Growth in Asia increases demand for Canadian commodities, such as oil, minerals and fertilizers, sectors that have been undercut by the collapse in world demand.

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