Central bank forecasts 3% GDP growth in 2010

The Canadian economy is projected to grow by three per cent in 2010 and 3.3 per cent in 2011, the Bank of Canada said in its latest economic forecast Thursday.

The projections are slightly different from those the bank put out in its last update in July. Growth in the second half of this year looks strong, the bank said, with gains in economic output of two per cent and 3.3 per cent in the third and fourth quarters.

That's up from the July estimates of 1.3 per cent and three per cent respectively.

Overall, the Canadian economy is expected to shrink by 2.4 per cent in 2009. That's slightly worse than the 2.3 per cent forecast in July.

The projections for the medium term were downgraded slightly. The three per cent expectation for 2010 in unchanged, but the 3.3 per cent growth the bank now expects in 2011 is 0.2 percentage points off what was expected in July.

"Global economic and financial developments have been somewhat more favourable than expected at the time of the July Report, although significant fragilities remain," the bank said in its latest Monetary Policy Report.

The economy will not reach capacity, when supply and demand are in balance, until 2011, the bank now forecasts.

Despite the generally positive overall tone, the document notes the bank is deeply concerned by the effects of a soaring loonie. "Heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures," the bank said.

"The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July."

The Canadian dollar remained relatively stable from July to early October, trading in a range of 90 to 94 cents US. More recently, however, it has appreciated sharply, averaging about 96 cents US over the past 10 days, much higher than the 87 cents US the bank had assumed at the time of its July report.

In the immediate aftermath of the news, the Canadian dollar fell, slipping a third of a cent to 95.24 cents US at midday.

"The Canadian dollar is finished in my mind," currency trader Ian Cochrane at Calgary-based BNH Strategies told CBC News. "Forget about raising rates, they're going the other way. The Bank of Canada governor basically told us this in no uncertain terms."

On Tuesday, the bank maintained its policy rate at 0.25 per cent and reaffirmed its conditional commitment to hold its current policy rate steady until the end of the second quarter of 2010.

"People should manage their affairs prudently in anticipation that at some point rates will return to a more normal level," Bank of Canada governor Mark Carney said at a press conference following the release of the report on Thursday.

"Clearly there are going to need to be adjustments in exchange rate policies in many G20 countries."

Carney also expressed some concerns over consumer debt levels, saying it is something the bank keeps a close eye on.

"Consumer borrowing cannot grow faster than the economy forever, to state the obvious," he cautioned. "But Canadian consumer balance sheets are starting from a much firmer starting point than U.S. ones," he noted.