With few growth engines, Bank of Canada sees 4 straight weak quarters

OTTAWA – Canada’s economy is struggling amid mounting difficulties from abroad that have weakened commodity prices and from some home-grown problems, the Bank of Canada said Wednesday.

The central bank’s latest monetary policy overview of global and domestic conditions makes clear Canada is a victim of global problems, but adds some of the country’s internal strengths are running out of steam.

In raw numbers, the bank expects economic growth will slow to 2.1 per cent this year from 2.4 per cent in 2011, and only advance by a still moderate 2.3 per cent and 2.5 per cent in 2013 and 2014.

A continuing source of weakness is still increasing household debt, which will temper consumption, and soft export performance, which is being hurt by slowing growth in the U.S., emerging markets and Europe.

As well, world oil prices are off by about 15 per cent since April, making Canadians a little poorer, the bank said.

Cheaper oil has given car owners a break at the gas pump, bank governor Mark Carney conceded at a news conference following release of the policy document, but the overall impact on the economy is negative.

“It’s one of the reasons why we’ve taken down our forecast for Canada,” he said. “It impacts investment, it impacts government revenues, it impacts incomes, it impacts linkages across the economy.

“I wouldn’t overplay that,” he added. “(Commodity prices are) still elevated relative to historic levels, (and) there are still major projects that are going to continue and we still have an economy that is growing around its potential, so let’s not get all doom and gloom here.”

Carney’s new take on the economy is more pessimistic than his earlier rosy outlook of April, when he foresaw 2.4 per cent growth for this year and next.

Starting with the first three months of this year — which are now known — the central bank has had to lower the projection on growth for five consecutive quarters, ending in the spring of 2013.

The first quarter of this year came in six-tenths below the bank’s previous call at 1.9, and the yet to be reported second, which ended in June, is now expected to be slightly weaker at 1.8, seven-tenths of a point slower than it thought. The subsequent three quarters will also produce modest results of 2.0, 2.3 and 2.3, the bank says.

That’s still too rosy for many private sector analysts, who responded to the report with unusual contrariness, quibbling with the bank over the strength of growth, domestic spending and the housing sector. All will be weaker than the bank assumes, said several analysts.

“It’s entirely possible that the (bank’s) pushed-out optimistic bias comes true after having been disappointed with this forecast approach over (the first half of) 2012… but I’m skeptical,” said Derek Holt, Scotia’s vice president of economics, in a note.

David Madani of Capital Economics also called the bank’s assumptions overly optimistic, noting he sees a dampening housing sector as recent indicators suggest. Both prices and sales have dropped, in some cases sharply in recent weeks, including in hot markets like Vancouver and Toronto.

“We expect the bank to drop its interest rate tightening bias and move completely to the sidelines before year-end,” Madani said.

Also on Wednesday, the Conference Board of Canada lowered its expectations for Canadian economic growth to 2.2 per cent in 2012 and 2.4 per cent in 2013. It had previously projected GDP growth of 2.3 per cent this year and 2.8 per cent next year.

Responding to a question about continuing to lean toward hiking interest rates, while around the world central banks are easing further, Carney said he makes decisions based on Canadian conditions, not those in other economies.

“We’re in a situation where there’s a very small amount of excess capacity in this economy,” he said. “Rates are at one per cent, they’re very low.”

Deputy Liberal leader Ralph Goodale said the bank report should be a wake-up call to the Harper government. He called for more incentives for hiring students and youth, better access to post-secondary education and skills-training, a stronger commitment to support basic research and simplification of Canada’s tax code.

“If Mr. Harper does not pull his head out of the sand, Canada’s mediocre economic performance, a nationwide skills and training shortage, and rising household debt could spell serious trouble for hard-pressed middle-class families,” he said.

Carney sees the performance of the export sector, which accounts for about one third of gross domestic product, as a major disappointment holding back the recovery.

Canada’s global market share of goods exports has actually declined in recent years, from a peak of 4.5 per cent in 2000 to 2.7 per cent in 2010, the bank noted, and exports overall have yet to recover to the pre-recession level.

The sector is facing pressures from the strong dollar, which hurts manufacturers in central Canada most, and low productivity. But the biggest drawback is that exporters continue to focus on the United States and other slow-growing nations, and not enough on fast-growing emerging markets like China.

“So it’s the structure of where our export markets are,” he explained. “One of the messages the bank is trying to get across is one can expect those economies to be relatively low-growth for some time.”

Carney said government stimulus and household consumption backed by low interest rates had sustained the recovery so far, but there are limits to that approach.

“We’re seeing the limits on the household debt side which is why various measures are being taken,” he said, referring to tighter mortgage and lending rules.

The bank does not forecast employment, but the macro growth numbers suggest that job creation will be modest the rest of 2012.

Looking at the economy by sectors, the bank says business investment and consumer spending, supported by super-low interest rates, remain the chief support systems for the recovery.

Even so, both will contribute less to growth than previously projected. Consumer credit continues to slow, but remains above income growth. Business investment will also be less robust than expected due to concerns about the global economy.

Meanwhile, housing activity is a complicated picture.

“Housing investment has strengthened further, with both the construction of new multiple-family dwellings and renovation activity expanding robustly,” the bank says, but adds that it is expected to slow in wake of the new mortgage rules that went into effect July 9.

As laboured as Canada’s recovery is, the global outlook is far worse, the bank says, with Europe likely to remain in recession throughout 2012, U.S. growth moderating to below Canada’s pace, and even the fast growing emerging economies hitting a few speed bumps. China, the world’s second largest economy, is expected to see growth of 7.8 per cent this year, strong by most standards, but significantly weaker than last year’s 9.3.

Overall, the bank predicts the global economy will expand by 3.1 per cent this year and next, seven-tenths of a point below last year’s pace.

While a sombre report overall, the bank points out that the assumptions are based on a rather optimistic assumption.

“In particular, the bank’s projection assumes that authorities in Europe are able to contain the ongoing crisis, although the assumption is clearly subject to downside risks,” it cautions.