Canadian economy expanding quickly, but will soon trail G7

OTTAWA — Canada is leading the other G7 countries out of recession with the fastest growth in a decade, but it will be trailing those countries in a few years, the Bank of Canada said Thursday.

OTTAWA — Canada is leading the other G7 countries out of recession with the fastest growth in a decade, but it will be trailing those countries in a few years, the Bank of Canada said Thursday.

The central bank’s latest economic outlook released Thursday makes several bold predictions, including that Canada’s fast start out of last year’s slump is already slowing, that the housing boom is fizzling out, and that the country’s long-term growth prospects are discouraging.

And governor Mark Carney is cautioning markets not to be so sure Canada’s central bank will raise its key interest rates in a matter of weeks.

On Tuesday, the Canadian dollar shot up more than 1.5 cents to above parity with the U.S. currency after the Bank of Canada said it was dropping its promise not to raise rates before July at the earliest.

But Carney told a news conference Thursday that there is still considerable risk in the global economy, or to anticipating his next move.

“There is nothing pre-ordained from this day forward,” Carney said to a question on interest rates.

Most economists interpreted Tuesday’s statement as an alert to plan for higher rates in June, but some argued Carney had left himself plenty of wiggle room.

“The Bank of Canada has limited scope to raise interest rates in the next several months,” said Brian Bethune, chief economist with IHS Global Insight.

“While we may see one or two token moves to raise the overnight rate by a quarter of a point in the June to October window, action to raise rates will be very limited” by the fact doing so would further boost an already strong dollar.

In Thursday’s report, the bank said it is planning for the dollar to hover around parity for the next three years and listed it as a major impediment to strong growth because it will make exports less competitive in global markets.

The dollar hovered just above and below parity throughout the Thursday trading day.

The report says Canada’s economy expanded by 5.8 per cent in the just past quarter, the largest advance since 1999, but growth will likely slow to 3.8 per cent in the April-June period, and to 3.5 per cent the rest of the year.

It gets worse. Economic growth will average 3.1 per cent in 2011 and 1.9 per cent in 2012, about half what it will be in the United States and lower than both Europe and Japan.

“There is some good news here, our economy has returned to growth,” said Carney, noting that more Canadians will find jobs and those who have had their hours reduced are more likely to be called in to work longer.

But as he has in the past, Carney warned that the longer-term prospects for the Canadian economy is modest unless the corporate sector starts investing heavily in new machinery and equipment to become more productive.

Canada is also facing a bigger issue of an aging workforce than the United States, exacerbating the divergent trend line between the two economies.

“This is in the hands of the private sector,” Carney said. “If we want to grow faster, we’re going to have to work smarter, invest better, (and) build new markets.”

The bank said it fully expects businesses to step up investment this year, but it could hardly get worse — business investment actually declined in the fourth quarter when the rest of the economy was rebounding.

A big reason the economy has shot out of recession is that Canadian consumers, particularly home-buyers, have “front-loaded” their purchases because of record low interest rates.

But Canadians that bought homes in the past six months, or took advantage of the now defunct home renovation tax credit, won’t be doing so in the future, hence bringing an end to the housing sector boom.

Housing, which is contributing about 0.6 per cent to economic growth this year, will actually be a slight drag next year, the bank forecasts. That doesn’t necessary translate to an outright decline, but it does foresee prices and sales levelling out.

For the bank, that is a good thing because it regards the housing market as too hot for home-buyers’ own good. It has warned repeatedly that households should make sure when they purchase a home that they will be able to afford the monthly payments once interest rates rise.

In the main, the bank’s view of the Canadian economy and the world is actually brighter than the previous published analysis issued in January, while noting the high level of uncertainty.

The world economy will grow at around four per cent for the next three years, the bank says, led by China and other emerging countries. This should help Canada’s export sector, the bank said.

The advanced countries, which borrowed heavily to soften the blow from the 2008-09 recession, will end up with lower activity going forward. Europe will be the weakest major economic region, with growth rates of 1.2 and 1.6 per cent over the next two years.

The bank also issued a more detailed explanation of its fears about inflation that provides more ammunition to analysts who expect Carney to raise the policy rate from 0.25 per cent to 0.5 per cent at the next opportunity, June 1.

The report says underlying inflation is higher than it had expected it to be at this point in the recovery because wages unexpectedly held up during last year’s recession. Shelter costs have also increased faster than expected, it said.

The bank also warns that Canadians can expect prices to receive a 0.6-per-cent boost after July 1, when Ontario and British Columbia move to a harmonized sales tax.

The new tax will cut costs to businesses, however, and the bank says cost savings will likely be transmitted into prices in the second half of they year and trim inflation by 0.3 percentage points.

Total inflation, the amount Canadians actually see when they go to the store, will be higher than two per cent for the rest of this year before returning to target in the second half of 2011, it said.

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