Bank of Canada slashes growth prediction

Canada's economic growth will decelerate sharply in the second quarter of the year, according to a new report by the Bank of Canada.

The country's central bank said it now expects Canada's gross domestic product (GDP) to expand in the April-to-June period — but by less than half of the 4.2 per cent it projects for the first three months of 2011.

The new predictions were contained in the Bank of Canada's monetary policy report, released on Wednesday.

The Bank now anticipates that Canada's GDP will expand by two per cent in the second quarter, down from the 2.8 per cent which the organization had forecast back in January.

In its latest prognostication on economic growth, however, the Bank of Canada really hiked the expected expansion rate in the first quarter of 2011, to the four per cent level, up from an initial projection of 2.5 per cent back in January.

Altered view

Effectively, the Bank now expects Canada's economy to slow between the first and second quarters of 2011 as compared with a projected acceleration in GDP growth in its January forecast.

Despite the anticipated slippage, the Bank of Canada still believes the economy of Canada and the rest of the world are recovering relatively nicely.

"The global economic recovery is becoming more firmly entrenched and is expected to continue at a steady pace," said the Bank.

Overall, Canada's economy will grow at a 2.9 per cent clip for all of the year, a half-a-percentage-point increase compared with the 2.4 per cent the central bank forecast at the beginning of 2011.

But, the bank now expects GDP to expand by 2.6 per cent in 2012, down slightly from January's prediction of 2.8 per cent.

Steady as she goes

So far, the central bank is keeping its powder dry in terms of hiking interest rates.

Earlier in the week, the Bank of Canada kept interest rates steady at one per cent, arguing that the Canadian recovery has not yet ignited any inflationary fires.

Still, many economists believe the central monetary authority will begin increasing borrowing costs gradually towards the end of 2011.

"Despite the upgrade to Canada’s economic performance, today’s even-handed statement suggests that the Bank of Canada does not appear to be feeling enormous pressure to resume interest-rate hikes at this point in time … We still believe that a July rate hike is the best bet," said Francis Fong, an economist with TD Economics.

Carney's clouding outlook

Bank of Canada Governor Mark Carney, however, indicated that a strong Canadian dollar — the result of U.S. economic weakness and higher world oil prices — could hammer the country's foreign exports.

"What we're seeing on the trade side is still quite a challenging situation for our exports and it could be more difficult, which is why we're highlighting the risk of the dollar," Carney said at an Ottawa press conference on the monetary report.

The Canadian dollar has risen 12 per cent from a low of 92.78 cents US on May 25, 2010 to the current level of $1.039 US. Generally, a more valuable currency hurts the ability of that country to sell its goods and services abroad.

Despite Carney's gloomy comments, some economists stuck to their predictions that the Bank of Canada probably will be looking at interest rate hikes later in the year.

"Economic conditions will require the Bank to reduce the amount of policy stimulus in order to contain upside risks to the inflation outlook," said Dawn Desjardins, assistant chief economist at RBC Economics in a note published after Carney's press conference.