Europe debt drama costly

Canada is paying a heavy price for Europe’s unresolved debt crisis, the Bank of Canada said Wednesday, estimating the loss to economic output this year at 0.6 per cent, or about $10 billion.

OTTAWA — Canada is paying a heavy price for Europe’s unresolved debt crisis, the Bank of Canada said Wednesday, estimating the loss to economic output this year at 0.6 per cent, or about $10 billion.

The costs to the global and American economies are even greater, at more than one per cent of gross domestic product and 0.8 per cent respectively.

The calculation marks the first time the Bank of Canada has attempted to put a hard number on the spillover effects of the ongoing European sovereign debt drama, and it shows the Canadian and global realities would be materially different, but for Europe.

The bank estimates that Canada’s economy would be worth about $10 billion more at the end of the year, with the subsequent beneficial impact on everything from more jobs, higher incomes and corporate profits and better government fiscal positions.

“Thus far, the impact on global financial conditions from the strains in Europe has consisted mostly of a general retrenchment from risk taking,” the Bank of Canada policy council, headed by governor Mark Carney, states in its latest quarterly outlook.

“Over the projection period, the impact is expected to become more widespread, however, and to take the form of increased funding pressures, adverse confidence effects and reduced availability of credit. In particular, deteriorating funding conditions are projected to push banks to restrict access to credit for households and businesses in Europe and the United States, adding to the drag on economic growth.”

The impact on Canada is less than on the U.S. and the world generally, because of the limited banking exposure to both European banks and sovereign debt and because Canada’s financial institutions remain sound and in a position to lend.

But the central bank notes that Canada will still be hit through indirect channels in terms of general financial conditions, consumer and business confidence and lower global commodity prices — a main component of trading on Canada’s financial markets.

Europe is, of course, paying the biggest cost. The bank said it now expects the eurozone countries to be in recession for the next four months.

Global growth is also slowing down to a likely 2.9 per cent pace this year, the bank said, although its view is rosier than the World Bank’s 2.5 per cent expectation.

On Tuesday, Finance Minister Jim Flaherty again expressed frustration that European leaders have so far failed to put in place the policy measures that would ensure the debt contagion does not spread to global credit markets. Analysts say if that happens, the aftermath would be similar to the Lehman Brothers collapse in the fall of 2008 — a freeze in credit in many advanced countries, possibly triggering a second global recession.

“We’ve been watching this European situation and participating in the discussions for a full two years now and there’s still not resolution. This poses a danger for the U.S. economy, the U.S. banking system, and our economy as well,” Flaherty said.

The Bank of Canada makes clear in its latest Monetary Policy Review that it considers the risks of European financial flu spreading to be increasing rather than diminishing.

It is the main reason the bank has downgraded growth rates slightly for the next four quarters — starting this month — from its previous projection in October.

For the year as a whole, the bank reported on Tuesday that growth would average two per cent.

Although the 2012 average growth is one notch higher than previously anticipated, that is only because the last half of 2011 turned out significantly stronger than previously expected, meaning the economy is beginning the year from a higher vantage point.

“The bank continues to expect these (external) headwinds will limit economic growth in Canada in 2012 to a modest pace, after which growth is projected to pick up as the global environment improves,” it said.

Overall, the economy is unlikely to return to full capacity until the third quarter of 2013.

But the bank also cautions that its assumptions are based on Europe being able to keep the crisis from escalating, a hope for which it admits its confidence is being tested.

On Tuesday, the bank conceded its low interest rate policy is encouraging more Canadians to take on greater debt, particularly to purchase homes.

But the policy review document points out that there is an upside to the sky-high household debt levels it fears. As weak as the economy is, it is because of the strong household market and consumers continuing to purchase everything from clothes to cars and homes that the economy is not doing even worse. Housing and consumption account for 70 per cent of this year’s growth.

“Residential investment is … now expected to remain strong, owing to its greater-than-anticipated momentum in the second half of last year and favourable mortgage financing conditions,” the bank said.

Get local stories you won't find anywhere else right to your inbox.
Sign up here

Just Posted

Red Deer Public Schools says that in the absence of additional funds from the provincial government, there was no consideration of using alternate classroom sites in the district. (AP Photo/Gregory Bull)
Red Deer Public Schools launches online engagement process

Red Deer Public schools is seeking community input to help ensure a… Continue reading

Students walk into Hunting Hills High School, which is one of the Red Deer Public Schools with solar panels on its roof. (Photo by SEAN MCINTOSH/Advocate staff)
Red Deer high school was placed in lockdown following potential threat

Hunting Hills High School was placed in a lockdown Friday after Red… Continue reading

Red Deer Mayor Tara Veer says some details of the provincial government’s 2021-22 budget need to be ‘sorted out’ when it comes to the hospital expansion funding. (File photo by Advocate staff)
More detail needed regarding hospital funding, says Red Deer mayor

Red Deer Mayor Tara Veer says some information is unclear regarding the… Continue reading

Alberta Health reported two new COVID-19 deaths in Red Deer Friday. (Image courtesy CDC)
Two more deaths linked to Olymel outbreak in Red Deer

Province reported 356 additional COVID-19 cases Friday

Nicole Buchanan, chair of Red Deer Public Schools board, says it’s too soon to say how the provincial government’s 2021-22 will impact the district. (Contributed file photo)
Red Deer school boards react to provincial budget

It’s still too soon to say how the latest provincial budget will… Continue reading

An arrest by Red Deer RCMP is facing online scrutiny. No charges have been laid and the incident is still under investigation. (Screenshot of YouTube video)
Red Deer RCMP investigating violent arrest caught on video

Police say officer ‘acted within the scope of his duties’

A worker carrying a disinfectant sprayer walks past a WestJet Airlines Boeing 737-800 aircraft, after cleaning another plane at Vancouver International Airport, in Richmond, B.C., on Thursday, January 21, 2021. THE CANADIAN PRESS/Darryl Dyck
WestJet to lay off undisclosed number of pilots amid labour negotiations

WestJet to lay off undisclosed number of pilots amid labour negotiations

The Site C Dam location is seen along the Peace River in Fort St. John, B.C., Tuesday, April 18, 2017. THE CANADIAN PRESS/Jonathan Hayward
British Columbia’s Site C dam to cost $16 billion, delayed until 2025

British Columbia’s Site C dam to cost $16 billion, delayed until 2025

Mark Machin, President and CEO of Canada Pension Plan Investment Board, speaks at a seminar on building a sustainable social security system in Beijing, China on Monday, Feb.20, 2017. Machin has resigned after admitting he was vaccinated for COVID-19 abroad. THE CANADIAN PRESS/HO-Canada Pension Plan Investment Board MANDATORY CREDIT
CPP Investments CEO Mark Machin resigns after travelling to UAE for COVID-19 vaccine

CPP Investments CEO Mark Machin resigns after travelling to UAE for COVID-19 vaccine

Selina Robinson listens to Premier John Horgan in Coquitlam, B.C., Friday, Nov. 17, 2017. Robinson, B.C's finance minister, says she's encouraged by predictions that British Columbia's economy will rebound this year and next. THE CANADIAN PRESS/Darryl Dyck
Economists predict slight rebound and moderate growth for B.C. economy in 2021

Economists predict slight rebound and moderate growth for B.C. economy in 2021

A street sign along Bay Street in Toronto's financial district is shown on Tuesday, January 12, 2021. THE CANADIAN PRESS/Nathan Denette
S&P/TSX composite falls as commodities, financials struggle

S&P/TSX composite falls as commodities, financials struggle

This image released by Briarcliff Entertainment shows Saudi Crown Prince Mohammed bin Salman, left, with journalist Jamal Khashoggi in a scene from the documentary "The Dissident." (Briarcliff Entertainment via AP)
US implicates Saudi crown prince in journalist’s killing

US implicates Saudi crown prince in journalist’s killing

This image released by Amazon Studios shows Maria Bakalova, left, and Sacha Baron Cohen in a scene from "Borat Subsequent Moviefilm." The film was nominated for a Golden Globe for best musical/comedy.(Amazon Studios via AP)
Breakout ‘Borat’ star Maria Bakalova conquers Hollywood

Breakout ‘Borat’ star Maria Bakalova conquers Hollywood

Doctors, caregivers push for in-home COVID-19 vaccinations for housebound seniors

Doctors, caregivers push for in-home COVID-19 vaccinations for housebound seniors

Most Read