Banks see better prospects for economy

OTTAWA — The Canadian economy may not be as weak as expected next year, although forecast growth still places the country in the slow lane of recovery from recession.

OTTAWA — The Canadian economy may not be as weak as expected next year, although forecast growth still places the country in the slow lane of recovery from recession.

Two private sector forecasters have revised their projections from the Canadian growth next year, with one — the Royal Bank — now calling for a relatively healthy 3.2 per cent advance following this year’s 3.1 gain.

As well, the TD Bank, which had been on the low end of the forecasting spectrum, sees the economy growing about half-a-point higher than previously thought to 2.6 per cent.

The key take-away from both forecasts was that they are considerably higher than the Bank of Canada’s 2.3 per cent outlook.

Both banks say the mid-year pullback in Canada, where growth slowed to crawling speed of one per cent in the third quarter, will turn out to be the flat stretch of the recovery, and that more positive results are expected going forward.

“The mid-year economic slowdown reflected a pullback in housing investment, which fell after five consecutive quarterly increases, and a mild downturn in exports,” said Craig Wright, senior vice-president and chief economist at RBC.

“However, financial conditions remain supportive of domestic growth which will be the main engine of the expansion going forward.”

Both forecasts say a stronger than anticipated bounce-back in the U.S. economy is the key reason why Canada will do better next year.

Despite the massive consumer debt overhang in the U.S., the TD Bank still sees Canada’s main trading partner recover to a 3.1 per cent increase in gross domestic product next year, while RBC is rosier at 3.3 per cent.

“The extension of Bush-era tax cuts for all earners, in combination with additional cuts of the payroll tax … is likely to lift real GDP growth in 2011 by slightly over half a percentage point,” TD economists argue.

Furthermore, they say, the US$600-billion second instalment of quantitative easing will add another 0.3 per cent.

Canadian exporters will benefit from the U.S. bounce, the banks said.

Despite, the improved prospects, the economists agree with Bank of Canada governor Mark Carney that risks remain, particularly from the European sovereign debt crisis.

But the improved prospects in the U.S. removes the biggest risk to Canada, they say.

Higher growth will translate into more jobs in Canada, the banks say, although the pick-up will be modest. Both see the unemployment rate around 7.5 per cent next year, slightly lower than the 2010 average of about eight per cent.

RBC sees unemployment reaching seven per cent by the end of 2012, while GDP growth remains at about 3.1 per cent in that year.

Next year, Saskatchewan is expected to take over from Newfoundland & Labrador as the fastest growing province. Alberta will also move ahead of that province.

Nova Scotia, New Brunswick and Prince Edward Island are projected to remain at the lower end of the scale through to 2011.

Wright says there is good reason for his optimism, and that is that governments have been swift to act at the first signs of trouble.

He pointed to authorities moving decisively in Europe, the quantitative easing decision and tax measures in the U.S., and notes that even Canada extended the infrastructure program for six months.