Bank of Canada says recession over, growth returning to economy

Julian Beltrame, THE CANADIAN PRESS
July 23, 2009

OTTAWA - The Bank of Canada is declaring the recession essentially over in Canada and projecting the economy will bounce back at least twice as strongly as in the United States.

The bank said Thursday it estimates the Canadian economy will advance by 1.3 per cent during the current July-September period, and three per cent in the fourth quarter, both at annualized rates.

The bank's quarterly monetary policy report contains many cautions about how the world and Canada is coming out of the deepest and most painful downturn since the Second World War.

The bank remains concerned that the fragile financial systems in the United States and Europe may contain more unpleasant surprises that will sideswipe the global economy once more, and it believes the strengthening loonie is not helpful given the Canada's dependence on exports. Mark Carney, Governor of the Bank of Canada, speaks during a press conference at the National Press Theatre  in Ottawa on Thursday July 23, 2009. The Bank of Canada is sounding optimistic, saying the worst of the recession is essentially over. THE CANADIAN PRESS/Sean Kilpatrick
As well, it warns the recovery is at best nascent and dependent on massive government stimulus and historic low interest rates to support domestic activity and consumer spending.

But overall, the new outlook represents a clearly more optimistic view of the Canadian economy than governor Mark Carney presented in April, when he saw the contraction that began last October lasting at least until the fourth quarter of 2009, and the dip in the first month of this year breaking all records.

The more optimistic view of the economy had an immediate effect on the Canadian dollar, which surged 0.97 cent to 92 cents US.

The Bank of Canada first indicated it was about to brighten its outlook on the economy on Tuesday in a statement accompanying the decision to keep short-term interest rates unchanged.

At that time, it said the economy would shrink by 2.3 per cent this year - implying growth had already begun - and expand by three per cent in 2010.

On Thursday it said that economic growth "is now projected to turn positive in the third quarter (of 2009)."

Carney told reporters at a news conference after the release of the bank's monetary report that recovery it will be a "gradual" process.

"Global economic activity appears to be nearing its trough, and there are increasing signs that activity has begun to expand in many countries in response to monetary and fiscal policy stimulus and measures to stabilize the global financial system," Carney said Thursday.

"However, this recovery is nascent, and to sustain global growth effective and resolute policy implementation remains critical."

That effectively means that the downturn that cost Canadians close to 400,000 jobs since October has ended, although the recovery will be modest by historic standards.

The bigger bounce the bank is projecting starting this quarter does not change its overall view that it will take until mid-2011 for Canada's economy to return to full capacity.

What is happening, say the economists in the bank's governing council, is that Canadians are responding to low interest rates and growing confidence by pulling the trigger now on such big-ticket items as houses, cars, furniture and appliances they were planning to purchase later.

Still, Canada will do better than many other industrialized countries, the bank predicts.

The U.S. has stopped shrinking, but is still likely not growing. And Europe may still be in recession, along with Japan.

Next year, the U.S. will only rebound by 1.4 per cent, less than half Canada's rate, and the European area by a mere 0.7 per cent.

The strongest engine of growth globally is China, expected to rebound to 8.3 per cent growth next year, almost two points higher than predicted three months ago.

The bank credits Canada's ability to grow out of recession earlier than it thought in April to a sooner bounce-back in commodity prices and underlying strengths in the economy, including a relatively stable financial sector and households that were less indebted than in the United States.

As well, wage increases have remained relatively healthy at about three per cent annually than might have been expected given massive layoffs, falling inflation, and production cutbacks.

Some conditions have already returned to normal, the bank said, including overall financial conditions and household credit, which has been boosted by demand for new mortgages. This has helped shore up Canada's domestic economy.

But the bank also sees future improvements for Canada's export sector, which it says will disproportionately benefit from the U.S. recovery starting next year.

Just as Canadian exports of autos and wood products were hardest hit during the downturn, they will be boosted more than other industries once demand returns in the U.S.

In the past, economies have bounced back significantly stronger than even the bank's new rosier forecast. But the bank said the recession has triggered such fundamental restructuring in many industries that going forward, Canada will just not have the means to produce it had in the past, limiting output capacity growth to 1.5 per cent next year and 1.9 per cent in 2011.

Currently, the bank estimates the Canadian economy is operating 3.5 per cent below capacity.

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