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Folks, is this Bad news ? Hope everything will be OK.
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OTTAWA - Canada's economy has hit a wall and is unlikely to recover until the second half of this year due to a global slowdown and a crashing U.S. economy, the Bank of Canada said Thursday. 0 T7 C( J: \$ z0 V9 K7 j! s/ G! x
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But bank governor David Dodge noted that Canada is likely to avoid a recession, even though the U.S. may actually dip into a mild slump. "We will live through 2008 fine," he said in his last scheduled press conference before retiring at the end of January.
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"It may not necessarily feel fine, but we will get through fine." 5 o8 m4 ^7 t; {
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1 O. n5 @' Y! a' d& LCanada's gross domestic product is forecast to advance about 1.8 per cent in 2008, well below the modest 2.3 per cent gain the bank had previously predicted. 9 I g0 U% ^' [9 E8 F
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The central bank cut interest rates on Tuesday by a quarter-point for the second time in two months. In its first explanation of factors behind the move, it said Canada's economy slowed sharply at the end of last year and will all but stall in the first part of this year.
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"The major change is much weaker net exports," the bank said in its monetary policy update. "The outlook for Canadian exports has been marked down, reflecting the weaker U.S. economic outlook." % W: w/ j F% A: L( L1 I6 y5 V* @9 K
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It projects that exports, mostly to the U.S., will actually shrink in 2008 by 0.1 per cent after advancing 0.6 per cent last year.
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2 Q9 l+ V: I+ @* ?$ ^Only a few months ago, the bank had predicted the Canadian economy would go through some bumps and slow to about two per cent in the first quarter of 2008.
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8 s- e6 `# j4 g& E( |) I; c/ I. r; FBut it has dramatically downgraded that forecast and now says growth will only reach 0.6 per cent in the January-to-March period - almost flat - and average only 1.3 per cent for the first six months before picking up steam in the second half.
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: v. X% n( ?' V1 f4 A. XWhile somewhat bleak in Canada, the situation is far worse in the United States, the update says, because the country is still digging out of its subprime mortgage mess, which has devastated housing activity, spiked borrowing costs, reduced household wealth and shaken the confidence of consumers. * q* `6 V; i5 X# I
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4 N0 t" e6 B" V! _3 ^ a: {The global economy, which has sustained high resource prices that have helped drive activity in Western Canada, will also take a step back in 2008 to 4.6 per cent growth from 5.3 per cent last year.
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The bank said it expects the U.S. economy will largely be flat in the first half of this year, gaining only about 0.5 per cent and will only advance about 1.5 per cent for the entire 2008.
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Dodge stressed it is impossible to be precise about such levels of growth and that the U.S. could experience low levels of negative growth in the first two quarters, which would officially constitute a recession.
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. {$ Y% N7 ~6 L& JA deeper and more prolonged housing slump, or tighter than expected credit conditions, could easily throw the U.S. into a recession, he said. / r; X* T5 D! y6 Z* U
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And despite Tuesday's massive interest rate cut of three-fourths of a percentage point by the Federal Reserve - with another expected next week - Dodge declined to say whether a half-point cut in Canadian rates is in the cards. + V1 a& G; g3 m# B
9 G/ O g1 H! X( O0 W0 m"What we try to do, and have tried to do over this whole decade, is to move always in a measured fashion related to our medium-term goal of keeping inflation on target," Dodge said.
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$ _" l. ~+ a! b9 U, v% ~"And that's why we've tended to move over a period of time in relatively small increments, because it gives us a chance then to adjust or adapt to changes which we don't foresee, which come along." " \3 t7 n& S3 D0 q. f
3 D0 i' B- M% X2 t- E- ]Given the Bank of Canada's revised outlook, Dodge said, "we would move, going forward, to reduce rates but, obviously, we will have to wait and see what actually transpires." $ Z3 T. e4 H* L0 z) o1 n1 I
% f8 O! @& ^1 u) D8 FBMO economist Douglas Porter said the bank's tone suggests it feels "no real urgency" to keep up with the Federal Reserve in the race to the interest rate bottom. 8 ]9 J: @: J9 \$ R, ^
# S! }4 O% y$ w- X) D"Given their view that the economy will be perking back up by quarter two, the rate cut program could be done within the first half," he said.
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8 P' V% `& j7 b- |! j" MDodge hinted he had not been given advance notice of the Fed's surprise cut Tuesday, but suggested that it would not have made a difference to his decision to reduce rates more slowly.
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Credit conditions are much worse in the U.S., he said, Canada entered the year with an economy operating above capacity and employment is stronger. # |) V4 P2 v" b7 f8 N: X
) n/ v: b! b; C% p$ N/ r* e"Our situation is very different. Our conditions warrant what we've done," he said. 2 g' H$ w9 r, i; d7 X3 v
7 @8 x( g4 J2 r, jThe bank said Canadian households are paying about one-quarter of a percentage point more to borrow from banks since October than might otherwise have been the case, given the key overnight rate. And business borrowing costs have increased by since October, with loans less available and harder to negotiate. ' P! d% H2 ^3 r' z$ z
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"Given the increase in bond markets and a tightening in the terms and conditions for bank loans and market debt, there has been a significant tightening in credit conditions faced by firms," it said.
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: t+ l: K! X6 ^7 ZIf there is good news to the bank's update, it's that both countries are forecast to enjoy better economic prospects next year, with Canada's GDP growth rate rising to an average of 2.8 per cent in 2009. $ W& _" X; y, a+ Y, Y+ ]
, Y Q2 m; b+ w: d GTo lift the economy, the Bank of Canada reiterated its statement from earlier this week that it plans to further cut interest rates on March 4, noting that inflation has disappeared from the landscape of risks to easing monetary policy.
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"It appears that the Canadian dollar's rise to close to parity with the U.S. dollar raised consumers' awareness of the considerable differences between Canadian and U.S. prices," the bank said, "and led to greater-than-projected downward adjustment of the prices of some goods, particularly automobiles." % Y& A, A+ t' W) |; N' v W
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The bank said both total and core inflation will fall below 1.5 per cent - the lowest it's been in years - by mid-year, in part also because of the impact of the reduced GST tax to five per cent that went into effect Jan. 1. 1 \7 V& E, k. T
As for the Canadian dollar, the bank said the loonie's current level at about 98 cents US is about right. |
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