Strategy

Carney optimistic on GDP growth

Bank of Canada governor tells Commons Finance Committee GDP growth should top 3.8% in 2010.

With Canadian job losses mounting at a staggering pace, it’s hard to believe that by this time next year the country’s economic woes will seem like a bad dream. That’s at least what Mark Carney seems to believe. The Bank of Canada governor told the House of Commons Finance Committee this morning that he expects GDP growth to top 3.8% in 2010.

That’s a bit too rosy of a projection for one bank economist, who expects growth to hit 2.8%. “Relative to other economic forecasters, the Bank of Canada’s assessment is stronger than most,” says Craig Alexander, vice-president and deputy chief economist at TD Economics. “I’ve seen varying [projections], which means there’s still a lot of uncertainty at the moment.”

Carney is optimistic that the aggressiveness of interest rate cuts, a weakening Canadian dollar and a homegrown fiscal stimulus package that’s about to be approved will bolster the country’s economic fortunes.

While Alexander doesn’t argue that Carney’s reasons for his optimistic outlook are wrong, he points out that Canada’s economic growth has a lot to do with America’s recovery plans as well.

“One of the big pieces of the puzzle that is creating a lot of uncertainty is what improvement will we see in global financial system,” Alexander explains. “The root of the problem is the weak balance sheets of financial institutions in the U.S. The credit markets outside of Canada are not operating properly.

“So the question marks are around what will be the scope of the U.S. economic recovery and how will the global economy rebound?” he adds.

Alexander points out that because 40% of the Canadian economy is tied to trade — with 76% of that being American-related business — when the global system starts improving, our country’s fortunes will too.

“Fundamentally, the Canadian economy is sound,” says Alexander. “But… the external shock is pushing down on the economy. And then you have a drop in commodity prices, weaker export and tougher labour market conditions.”

What can be gleaned from Carney’s announcement? Alexander says that while the BoC’s announcement is important — it helps create Canada’s monetary policy after all — it’s best to look at the big picture and not to concentrate on only one viewpoint.

The general consensus is that the Canadian economy will grow in 2010, even though many economists aren’t sure how much. On the high end is Carney’s 3.8% projection; on the more pessimistic side is the International Monetary Fund, which expects our economy to grow by 1.6%.

So, while some economists think growth will be sluggish, at least the numbers are positive. “Isn’t it heartening to say that while we’re in recession in 2009, growth will return at some pace in 2010?” asks Alexander. “Everyone is going in the same direction.”