Recovery to pick up, Bank of Canada says

The Bank of Canada has slightly raised its projection for growth in 2011, saying the Canadian economy will benefit from a faster-than-expected recovery in the U.S. this year.

The central bank said Thursday it expects the Canadian economy to grow by 3.5 per cent next year, up from its previous projection of 3.3 per cent.

But in late 2011 and into 2012, Bank of Canada governor Carney said the country should get used to a lower growth rate.

"Once things settle down … growth is going to be more around two per cent as a run rate for the economy [rather] than the three per cent we have enjoyed earlier this decade or the last decade," Carney told the CBC's Amanda Lang. He cited disappointing productivity growth and demographic shifts as reasons for the lower growth.

The cental bank said GDP will grow by 3.5 per cent in the first quarter this year from Q4 of 2009. While that's down from the 3.8 per cent quarter-over-quarter growth it was forecasting three months ago, the central bank now expects the economy to expand by 4.3 per cent in the second quarter and 4.0 per cent in the third quarter and 3.8 per cent in the final quarter of the year.  

The Q2, Q3, and Q4 growth estimates are all increases from the central bank's projections made last October.

"Export growth is projected to be somewhat stronger than was expected last October, owing to a more favourable outlook for the U.S. economy, particularly in the sectors that figure most importantly for Canadian exporters," the bank said in its quarterly Monetary Policy Report.

The Bank of Canada substantially hiked its estimate for U.S. economic growth this year from 1.8 per cent to 2.5 per cent. 

It says overall growth in Canada this year will come in at 2.9 per cent — down a tenth of a percentage point from its estimate of three months ago.

Still, the overall tone of the new outlook was slightly more upbeat than three months ago.

"Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold."

Canada fared better than most in downturn

The central bank says the Canadian economy shrank by 2.5 per cent in 2009. That's larger than its previous estimate of 2.4 per cent.

But even though real GDP in Canada contracted for three consecutive quarters, "the magnitude of the downturn was more modest than in other major advanced economies." 

The central bank estimated that Canada's GDP through the recession fell 3.3 per cent — less than most other advanced economies, even though Canadian exports plunged 20 per cent.

"Canada’s relatively solid economic performance, in spite of this trade shock, reflects the resilience of Canadian household demand. Consumer spending barely declined in Canada," it said.

"Canada has suffered less than many other countries, partly because of its sound banking system and relatively strong household and corporate balance sheets, and also because of the speed and scale of monetary policy actions."

Employment levels likely bottomed last summer, according to the central bank.

"The deterioration in the labour market appears to have stopped," Bank of Canada governor Mark Carney told a news conference. But the bank noted that its recent surveys have found that "ongoing weakness in the labour market is nevertheless evident." 

The jobless rate is now hovering around 8.5 per cent. 

Inflationary pressures edge higher

Inflationary pressures in Canada are building slowly. The central bank now expects total CPI inflation in the first quarter will be 1.6 per cent, up two-tenths of a percentage point from its estimate in October. It projects inflation will jump to 1.9 per cent by the fourth quarter of this year, up three-tenths of a point from its last projection.  

Core inflation, which excludes the more volatile items in the consumer price index, has been "slightly higher" than expected recently, the bank said. "Nevertheless, considerable excess supply remains, and the bank judges that the economy was operating about 3.25 per cent below its production capacity in the fourth quarter of 2009," it said.

The outlook for global economic growth this year and next is "somewhat stronger" than it was in October, the bank added. But it warned that "the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems."

On Tuesday, the Bank of Canada left its key lending rate at a rock-bottom 0.25 per cent and reaffirmed its commitment to keep it at that level through June, assuming inflation does not become a concern.