Bank of Canada reports new anticipated growth!

OTTAWA — The Bank of Canada expects consumer spending to expand considerably, aided by improved financial conditions, and business investment to finally post growth in early 2010 after five consecutive quarters of declines, according to its updated economic outlook released Thursday.


In its quarterly monetary policy report, the central bank upgraded its growth projections for the second half of 2009, anticipating expansion of two per cent for the third quarter and 3.3 per cent in the current three-month period. That's compared to its previous expectation of 1.3 per cent and three per cent, respectively.


The Bank of Canada said its forecast "hinges" on the resumption of growth in the global economy and the firming of commodity prices. Yet, it acknowledged the global recovery could be "even more protracted," as there is "modest" evidence that private-sector demand is poised to return and the unwinding of global trade imbalances could create "disorderly adjustments."


Plus, the Canadian dollar — which it assumes will trade at an average rate of 96 cents U.S. over its forecast period — will be a "drag" on the trade-oriented sector of the economy, with net exports expected to fall one per cent next year. The bank attributed the loonie's recent climb to over 97 cents U.S. to have been "increasingly driven by a broader appreciation of the U.S. dollar."


Domestic demand in Canada is set to boost the domestic recovery, with growth of three per cent next year and 3.3 per cent in 2011. According to the bank's outlook, consumer spending is set to contribute half of the 3.4 per cent gain in final domestic demand in 2010. In 2011, that contribution increases to roughly 75 per cent as government spending is wound down.


"Consumer spending is expected to grow at a solid pace throughout the projection horizon," the central bank said. "Improvements in wealth and in consumer confidence, as well as the re-emergence of demand postponed from previous quarters, will help to fuel spending."


The existing home sale market, especially in big urban centres, has recorded remarkable gains in recent months, leading some analysts to worry that an asset bubble may be forming due to low borrowing costs.


The central bank said it expects growth in housing investment to remain brisk until early 2010, but then slow down as pent-up demand for real estate is met, affordability declines and the federal home-renovation tax credit expires.


However, in detailing the risks to its outlook, the bank suggested that domestic demand could be stronger than anticipated, as households "may" increase their spending on goods and real estate as a recovery takes hold. Some economists have expressed concern that by keeping rates too low, households would be tempted to take on more debt, which they have done at an increasing pace during the recession. The central bank is scheduled to provide more details about household debt in its biannual financial stability report later this year.


The Bank of Canada has conditionally pledged to keep its record low policy rate of 0.25 per cent, in an effort to push inflation to the two per cent level — which it doesn't expect to happen until the latter half of 2011 due to "substantial excess supply" in the domestic economy that needs to be absorbed.


Government spending, through stimulus programs led by Ottawa's two-year, $46.6-billion scheme, will be the second biggest contributor to final domestic demand.


Business investment on capital and equipment is expected to turn slightly positive early 2010, the bank projected. Growth in this area is expected to lag the recovery due to the large amounts of unused capacity, but then rebound strongly once a recovery takes hold and commodity prices — such as natural gas — move higher.


The central bank's outlook for Canadian economy, at least for next year, is rosier than its view on the U.S., which it expects to expand 1.8 per cent next year, and Europe, at a meagre 0.9 per cent.


The global economy, as a whole, is set to grow 3.1 per cent in 2010, an improvement from its previous expectation of 2.3 per cent, led by China's 8.9 per cent expansion.


It said the global recovery is expected to be more gradual than usual as underlying private demand will recovery "slowly" as "significant balance-sheet and structural adjustments (global trade imbalances) run their course."

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