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Canadian growth slowing sharply, but central bank says second recession unlikely

Written by Julian Beltrame, The Canadian Press

OTTAWA – Canada’s economy is slowing much faster than previously thought amid widening global risk, but the prospects of a second recession remain slim, the Bank of Canada says in its new outlook.

The central bank’s newest comprehensive analysis of economies around the world highlights a series of potential risks that could derail the global and Canadian recoveries, led by Europe’s ongoing debt crisis and weakness in the United States.

But at an accompanying news conference Thursday, governor Mark Carney said the odds of the country sinking into a second recession remain remote.

That’s partly because the global recovery is becoming entrenched, if weak, and because governments have backstopped troubled European nations and put in place plans to rein in ballooning deficits.

“Those responses took out … the possibility of something very bad happening because of the debt burden,” he said.

The responses have, however, added another layer of drag to the recovery that will result in slower growth for the world in general and Canada in particular. That’s because weaker growth in Europe, the U.S. and elsewhere will reduce demand for Canada’s resources exports and other goods.

Canada’s economy likely grew only three per cent in the just completed second quarter, half the pace of the first quarter, and 0.8 percentage points lower than the bank had previously predicted in April.

And in the current third quarter, growth will be even tamer at 2.8 per cent, 0.7 points lower than it previously estimated.

Overall, growth will average 3.5 per cent this year and 2.9 per cent next.

“Given the profile of growth in the three per cent area both in Canada and the United States, the prospect of that (double-dip recession) is very low,” Carney said.

The Bank of Canada is confident enough of its base-line scenario for growth occurring that it has hiked short-term interest rates a quarter point twice in as many months — the last coming Tuesday — and signalled again Thursday that further gradual tightening is in the offing.

For ordinary Canadians, the bank’s latest analysis suggests the recovery from the 2008-2009 recession will take longer and income and job growth will be moderate.

The national jobless rate, now 7.9 per cent, has been slowly falling since last summer, but may take years to drop to pre-recession levels in the low six-per-cent range.

Carney’s prognosis, if it proves correct, will also mean that it will cost more for Canadians to borrow going forward, although interest rate increases will come in small increments and likely spread out.

Bank of Montreal economist Michael Gregory said the bank’s statement suggests Canadians will have plenty of time to adjust to higher borrowing costs down the line.

The bigger worry, he said, is that the central bank has basically agreed with U.S. Fed chairman Ben Bernanke’s assessment issued Wednesday that the economic future is “unusually uncertain.”

“I saw continued worry about Europe and a growing worry about the U.S.,” Gregory said of the bank’s new outlook.

“The tone of the report was definitely: ”We have some challenges ahead.’ “

The 28-page document makes clear that the Bank of Canada’s governing council sees conditions in Canada and around the world deteriorating since its last assessment in April, and risk factors intensifying.

While employment has sharply picked up — more than 400,000 new jobs since last July — the bank points out that hours worked remain down and income gains will be tepid going forward.

This will moderate consumer appetite for spending, further weakening the recovery.

The bank’s expectations of the Canadian dollar are also more modest, in the 96-cent range, due to dampened global demand and softer prices for commodities that Canada exports.

And it scaled down expectations for the world as a whole to below four per cent in 2011 and 2012, and particularly for the United States, to 2.9 per cent this year and three per cent next, both below what the Fed sees for its economy.

While the bank says the projections could be equally optimistic or pessimistic, the downside risks get the most ink in the report.

It highlights risks stemming from the European crisis, lower growth in China, high unemployment, loss of confidence, weak consumer demand and businesses too fearful to invest in the future.

Carney said the uncertainty for the U.S. revolves around whether the economy is strong enough to withstand the pullback of government stimulus spending, not an easy question to answer at this point.

For Europe, the immediate danger has passed, but the bank points out that the “downside risk of a more pervasive crisis persists.”

It adds: “If realized, the impact could be sizable. First, a severe disruption to bank funding markets could increase borrowing costs for firms and households. Second, the negative effects on Canadian exports could be substantial.”

Also, the bank flags a concern that “private demand around the world may be insufficient to sustain the recovery.”

The bank takes pains to note that is not its base-line, or most likely, forecast. Still, it thinks the European mess is knocking one-tenth of a point off Canadian growth this year, and will shave three-tenths of a point next year, and another two-tenths in 2012.

Originally appeared on PROFITguide.com