And we’re not in a recession. And things are going just fine. Remember those messages from the Harper cabinet? Well now just let the Central Bank (run by Goldman-Sach alumnus Mark Carney) take care of everything and we’ll be all right. In other words, let them pump up a new, bigger bubble based on money at even one further remove from commodities.
Heather Scoffield, The Globe and Mail
January 22, 2009
OTTAWA – The world is in a deep, stubborn recession, but Canada should be able to dig itself out faster than in past slumps, and faster than many other countries, the Bank of Canada argues.
In its quarterly outlook, the central bank defended its renegade forecast for 3.8 per cent growth in Canada in 2010, crediting its own early cuts to interest rates for the speedy recovery.
Compared to Canadian recessions in the early 1980s and early 1990s, “monetary policy has been able to react in a timely and significant way to help offset the economic downturn and promote conditions to support recovery,” the bank’s Monetary Policy Report Update stated.
More fiscal flexibility than in the past, as well as strong corporate balance sheets, will also help, the bank said, adding that it was assuming “substantial” fiscal stimulus in Canada and around the world.
The bank’s expectations for a strong resumption of growth in 2010 contrast with many private-sector economists who believe Canada will continue to be held back by global weakness next year, and recover only slowly.
Indeed, that’s what the central bank expects for the rest of the world, as financial markets and consumer confidence remain broken.
The bank pointed out that global growth is expected to be about 1.1 per cent in 2009, “a rate consistent with a deep, global recession.”
The world economy should pick up some speed in 2010, but remain below its potential rate of growth for years, the bank said.
“Economic activity in all regions is expected to be much weaker over the next couple of years … because of a more protracted and widespread weakness in global financial markets and a stronger negative feedback to the real economy,” the update said. “Heightened uncertainty is also contributing to slower growth.”
Despite its expectations for a quick rebound in Canada, the bank expects a dismal 2009 for the national economy.
With the country’s real income set to drop a huge 3.6 per cent this year in the wake of plunging commodity prices, consumption will slow to a crawl, housing prices will decline, housing and business investment will contract, and trade will stagnate, the bank said.
The report did not specifically mention job prospects, but it warned that slack in the Canadian economy will build up sharply and persist until the middle of 2011 — implying sustained job losses.
All told, the bank expects a contraction of 1.2 per cent in 2009.
It sees three consecutive quarters of contraction for Canadian economic activity: -2.3 per cent in the fourth quarter of 2008, -4.8 per cent in the first quarter of 2009, and -1.0 per cent in the following quarter.
After that, as financial conditions normalize, stimulus from rate cuts and government spending kicks in, and the weak Canadian dollar attracts foreign demand, the Canadian economy should resume growth in the third quarter of this year, and quickly accelerate.
By the second half of 2010, the Canadian economy is forecast to be expanding at a blistering 4.9 per cent pace, the bank said.
Still, the bank warns that plenty of things could go wrong between now and then, and its forecast stands a high chance of not panning out as planned.
“The outlook is subject to a high degree of uncertainty,” the report said.
As for inflation, falling energy prices will mean total inflation will fall below zero, on a year-over-year basis, in the second and third quarters of this year, the bank said.
That’s not generally considered to be deflation, since the dips in inflation come from one sector of the economy. Core inflation, which excludes energy and the most volatile prices, will bottom out at 1.1 per cent in the fourth quarter of this year, the bank projected.
The report reiterated that it will continue to cut its key interest rate if necessary, in order to nudge inflation back to the bank’s two per cent target.
The bank cut its rate by half a percentage point earlier this week, leaving its key interest rate at 1.0, the lowest level ever. Since December 2007, the central bank has eased by a total of three and a half percentage points.
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