Friday, July 18, 2008

Economy still 'robust,' Bank of Canada governor says

The Bank of Canada sees the economy rebounding from its first-quarter contraction to eke out slim growth in the second quarter of this year.

"The Canadian economy remains robust," governor Mark Carney told a news conference Thursday, after the bank released an update to its monetary policy report.

The central bank projects annualized second-quarter growth of 0.8 per cent, a turnaround from the -0.3 annualized contraction seen in the January-March period.

The bank's latest outlook for the April-June quarter was slightly better than the 0.3 per cent growth rate it projected in April.

The bank said it also sees full-year growth of 1.0 per cent for 2008, 2.3 per cent in 2009, and 3.3 per cent in 2010.

"Excess supply in the Canadian economy is projected to increase further through late 2008, but to gradually dissipate with the acceleration in aggregate demand," the central bank said. "The economy is thus projected to return to balance around mid- 2010."

The bank also said higher energy prices will push total Consumer Price Index inflation temporarily above its upper target range of three per cent peaking in the first quarter of 2009, but core inflation — which factors out the more volatile influences — will remain contained.

Assuming energy prices follow current futures prices, inflation is projected to rise temporarily above four per cent, before retreating to two per cent in the second half of next year as energy prices moderate.

The central bank's latest outlook comes two days after it left a key interest rate unchanged at three per cent.

The forecast also arrived on the same day that Export Development Canada said exporter confidence has tumbled.

EDC said its semi-annual trade confidence index has fallen to 66.1 from 67.4 in January 2008. The July reading was the worst since EDC began semi-annual reporting on trade confidence back in 2000.

"Canadian exporters are clearly hurting right now thanks to a major slowdown in the U.S., a slowing global economy and a persistently high Canadian dollar," said Peter Hall, EDC's vice-president of economics and chief economist.

According the survey of 1,014 businesses, 62 per cent of respondents expect the loonie to remain at current levels. The Canadian dollar has traded around parity with the U.S. dollar in recent days.

"The dollar's impact continues to hamper Canadian exports, but we're seeing more respondents simply acknowledge that a higher dollar is now part of the equation. And at the same time, exporters are backing away from strategies to cope with the eroding margins," said Hall.

With files from the Canadian Press

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