Flaherty says recovery remains fragile

OTTAWA — The Canadian economy remains fragile almost three years removed from the recession and must avoid “shocks” that can derail the recovery, Finance Minister Jim Flaherty said Monday.

OTTAWA — The Canadian economy remains fragile almost three years removed from the recession and must avoid “shocks” that can derail the recovery, Finance Minister Jim Flaherty said Monday.

The relatively sober assessment followed more worrying news coming out of Europe and Ottawa’s tabling of legislation to bring a quick end to the Canadian Pacific (TSX:CP) rail strike.

With Statistics Canada releasing gross domestic product results for the first quarter of 2012 on Friday, analysts say the Bank of Canada’s prediction of a 2.5 per cent advance will be difficult to reach.

The economy has slowed appreciably since the third quarter of 2011 and will likely come in at sub-two per cent annualized rate for the first three months of 2012. Even that requires a fairly healthy bounce-back in March from a 0.2 per cent setback in February, analysts say.

“We still anticipate modest growth here this year and next year,” Flaherty told reporters at an event in Toronto.

“(But) this is worrisome, this business in Europe, that it festers, that it continues. The exposure of the Canadian banks to European banks is modest, but we’re in the real world and we’re in a trading economy and if there are shocks emanating from the European banks to the global situation, to the American banks, of course there would be a consequence to Canada.”

Flaherty said there is little Canada can do other than what it has been doing, ensuring its banks are financially sound and well regulated and that governments keep slicing away at their deficits.

On Monday, the government cited the fragile economy for tabling back-to-work legislation to restart CP freight rail service.

But on the broader economic front, most of the recent developments have tended to point to a slowing of already tepid growth, if not to outright declines.

Europe in particular has continued to deteriorate with some calling for Greece to default and exit from the euro. But, the European tragedy goes well beyond relatively tiny Greece.

Spanish Prime Minister Mariano Rajoy insisted Monday the country’s banking sector would require an international bailout although his government would have to rescue Bankia, the country’s fourth-largest bank, from crippling losses. Bankia is estimated to have C32 billion in toxic assets.

And most economies in the continent are in recession or registering weakening conditions, including Germany.

Flaherty said the government has prepared “contingencies” if the European problems are exported, noting that policy-makers have learned some lessons from the recent global recession.

In Canada, one of the few large advanced countries that did not experience a financial crisis, Ottawa still had to step in to provide liquidity to the system by purchasing billions of dollars in bank-held mortgage assets. As well, the Bank of Canada slashed interest rates to historic lows while also adding liquidity to ensure financial institutions continued to lend.

“(The) Bank of Canada and my department have the tools to act expeditiously if we need to act,” Flaherty said.

Not all of the softness in Canada’s economy can be placed at the door of external factors, however.

High household debt has tempered consumers in the first quarter, say Scotiabank economists Derek Holt and Don Zigler in an analysis of domestic and global conditions, which will weigh on growth.

“Retail sales data indicate that the contribution to growth from retail trade will be just about zero on the quarter,” the write. “Canadian consumers have already binged … the question now is whether the slow-down will be gradual or abrupt.”

Given the weakness in exports and cooling on the housing front, there is little to sustain growth going forward with the possible exception of business investment.

The only recent significant positive has come on the jobs front — where 140,000 new jobs were added in the past two months — but few economists expect the trend to continue.