Mark Carney is counting on Canada's private sector to carry the economic rebound when the government turns off the stimulus taps next year, but it's not clear if business is ready to take the reins.
The private sector "should become the sole driver" of growth some time next year, the Bank of Canada Governor said Tuesday, after keeping its benchmark lending rate at a record low 0.25 per cent.
Mr. Carney reiterated a plan to keep rates at the current ultralow level through the middle of this year, depending on the outlook for inflation. For now, there remains plenty of slack in the economy, which continues to rely on government stimulus spending and low rates.
"The bank is expecting that the fiscal side of the equation, in other words the government stimulus, either will not be adding to growth or might even be subtracting" by next year, said Douglas Porter, deputy chief economist at BMO Nesbitt Burns. "That's a very compelling reason to believe that the recovery looking beyond this year will be subpar."
The bank's comments serve as a reminder that when the $62-billion of federal and provincial stimulus plans fade out by the end of next year, consumer demand offers the best hope for filling the vacuum.
In October, the Bank of Canada estimated that the end of fiscal stimulus programs would subtract 0.3 percentage points from average annual GDP growth in 2011, after stimulus spending added 1.3 points this year. Policy makers may update that in a quarterly economic forecast that they'll release this Thursday.
Mr. Porter noted that the expiry or withdrawal of fiscal stimulus measures throughout the Group of 20 - and the belt-tightening that will result as finance ministers scramble to trim their nations' bloated debt loads - provide more reason to believe the global recovery will be a struggle.
"Canada probably faces this issue a little less intensely than places like the U.S., Japan, England, and a good chunk of Europe. If anything, they face even more retrenchment."
For Benjamin Tal, a senior economist at Canadian Imperial Bank of Commerce, the central bank appears ``too optimistic'' about when the so-called output gap - overcapacity in economic production - will be closed and, consequently, about the private sector's ability to replace the economic boost from federal spending and superlow rates.
The central bank's commitment to hold borrowing costs until July will likely remain intact, economists said, particularly because policy makers repeated that they don't see inflation returning to their 2-per-cent target until the second half of 2011, a reminder that unless this changes, the bank is unlikely to speed up a return to higher rates.
The bank tweaked its Canadian growth forecast slightly, saying the economy will expand by 2.9 per cent this year and 3.5 per cent in 2011 after shrinking by 2.5 per cent last year. In October the bank said the economy would grow 3 per cent this year and 3.3 per cent in 2011, after contracting 2.4 per cent in 2009.
While the central bank said the outlook for global growth through the next two years is "somewhat stronger" than policy makers projected in an October forecast that they'll update on Thursday, the global recovery that's under way "continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems."
Policy makers also said Canada's economy operated about 3.25 per cent below its production potential between October and December as "considerable excess supply remains," and repeated that it won't return to full tilt until the third quarter of 2011.
Mr. Carney and his deputies largely echoed language from their December statement on the strong Canadian dollar's effect on exporters, saying the loonie's "persistent strength" combined with "the low absolute level of U.S. demand" continue to act as "significant drags on economic activity in Canada." As a result, policy makers continue to look to domestic demand to drive the recovery, the bank said.
The central bank said nothing Tuesday about the hot housing market, where some observers continue to warn that low interest rates might be fuelling a new bubble.
On Thursday, the bank will release a full quarterly update of its growth and inflation forecasts, which will include a more detailed discussion of the economy and how policy makers see the recovery unfolding. The next rate decision is scheduled for March 2.