The Bank of Canada said the economy will grow faster than expected from the second quarter through early next year and raised its forecast for the United States, while warning a durable global recovery depends on debt-cutting measures in advanced nations and on countries such as China continuing to stoke spending on goods from abroad.
Much of the improved forecast for Canada is due to the better outlook for the critical U.S. market, the central bank said Thursday in its quarterly Monetary Policy Report. At the same time, the central bank said the U.S. and global gains - on which Canada's fortunes rest to a large extent - may not be sustainable without more narrowing of the "large imbalances" that helped fuel the crisis, namely too much spending in the U.S. and too much saving in Asia.
"Sustained improvement over the medium term will require fiscal consolidation in the United States and several other advanced countries, together with policy-induced domestic demand growth and real exchange rate adjustment for surplus countries," Governor Mark Carney and his colleagues said. Without more progress in these areas, the bank said, "large imbalances" that narrowed during the crisis "may re-emerge." The central bank kept its estimate of 3.3-per-cent annual growth for the Canadian economy in the final three months of 2009 and said gross domestic product will expand at a 3.5 per cent annual rate from January to March, cutting its previous forecast of 3.8 per cent. But the economy will then grow by 4.3 per cent in the second quarter, 4 per cent from July to October, and 3.8 per cent in the fourth quarter and in the first three months of 2011 before slowing down.
That compares with policy makers' October projections, in which they said the economy would grow 3.8 per cent in each of the first and second quarters, followed by 3.7 per cent in the third quarter, 3.5 per cent in the fourth and 3.3 per cent in the first three months of next year.
At a press conference after releasing his report, Mr. Carney said the pickup in growth will help reduce unemployment and that he sees "gradual improvement" in the labour market now that the "deterioration has stopped." Canada's economy lost about 400,000 jobs over the course of the recession, he said.
Still, growth will retreat to 2.2 per cent by the fourth quarter of 2011, lower than the bank's October forecast of 2.5 per cent for that three-month period. Mr. Carney said at his press conference that the "new normal" for economic expansion after 2011 won't be "much north of 2 per cent," as the population ages and because of subpar worker productivity.
The central bank projected that the savings rate among U.S. households will rise to more than 6 per cent over the next two years from a low of 1.2 per cent in early 2008, before the financial crisis traumatized U.S. consumers. At the same time, policy makers said a weaker U.S. dollar and stimulus-driven demand in Asia will boost U.S. exports, while government programs and improved household balance sheets support spending on imports.
As a result, the U.S. economy will grow by 2.5 per cent this year and 3.9 per cent in 2011, compared with the bank's previous predictions of 1.8 per cent in 2010 and 3.8 per cent next year.
That brighter forecast bodes well for Canadian companies, particularly in the automotive and housing industries.
"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.
The central bank's forecasts assume that the strong Canadian dollar, which has crimped exports to the U.S. and elsewhere, will trade at an average of 96 cents (U.S.), the same as the bank's October projection.
Policy makers two days ago left borrowing costs at a record-low level and repeated language from their December interest rate announcement about the strong Canadian dollar, saying the loonie's "persistent strength" is curbing the country's exports.
The central bank also warned Thursday that the improved prospects for the global economy remain "heavily dependent" on monetary and fiscal stimulus and measures that have helped nurse financial markets back to health.
"Self-sustaining growth in private demand, which will be required for a solid recovery, may take longer than expected to materialize," central bank said Thursday.
In Canada, meanwhile, the central bank believes the private sector will be able to become the main engine of growth some time next year, picking up from the government spending and low interest rates that have allowed domestic demand to carry the economy while exports have languished.
"Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold," policy makers said. "As the recovery in the Canadian economy continues, excess supply will gradually be absorbed." The contribution of government spending to domestic demand growth peaked in the final three months of last year and will "gradually decline" over this year before becoming a drag in 2011, policy makers said. Earlier this week, the central bank said Canada's economy operated about 3.25 per cent below its production potential from October to December because of excess supply, repeating that it won't return to full tilt in the third quarter of 2011.
The central bank also appeared to express confidence that the country's hot housing market will even out before a bubble forms, as some economists have warned would happen if rock-bottom borrowing costs continue to help monthly sales smash records. In October, Mr. Carney attributed much of the buying spree in the resale market to people who had put off purchases during the recession, largely echoing that view Thursday.
"Following a period of vigorous growth, housing investment is projected to slow through 2010 as pent-up demand subsides and affordability declines," the central bank said.
The bank repeated that policy makers see inflation returning to their 2 per cent target in the second half of 2011 and said risks to that projection "are tilted slightly to the downside," yet another reminder to markets that unless this changes policy makers are unlikely to speed up a return to higher rates. Mr. Carney has left his benchmark rate at 0.25 per cent since April, when he first voiced a pledge to keep it at that level through the middle of this year or longer depending on the outlook for inflation.
At the press conference Thursday, Mr. Carney said he doesn't feel "compelled" to provide any more "guidance" at this point on when he may start tightening.