Outlook for Canada reduced again; Economy to grow just 0.8% this year
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The outlook for growth for Canada’s economy this year has been cut again to less than one per cent and less than half that of the U.S. economy.
But Canadians probably will have to wait until after the federal election, expected in mid-October, for the Bank of Canada to ride to the economy’s rescue.
The Canadian dollar sank to a more than one-year low of 93.12 cents U.S. yesterday before closing at 93.58 cents U.S., down from 94.16 cents on Friday, while Bay St. stocks plunged more than 470 points in the wake of the post-Hurricane Gustav retreat in world oil prices and after a major international think tank cut its forecast for Canadian economic growth.
The Canadian economy will grow just 0.8 per cent this year, down from the 1.2 per cent projected last spring, the Organization for Economic Co-operation and Development forecast. That’s also less than the downwardly revised 1.1-per-cent growth projected only last month by the Finance Department.
The OECD forecast was released as oil prices fell more than $5 U.S. to the $110 U.S. a barrel level.
In contrast to the darkening outlook here, the Paris-based research arm of the world’s industrial nations boosted its projection for U.S. economic growth this year to 1.8 per cent from 1.2 per cent last spring, while leaving its forecast for the G7 major industrial countries as a whole stable at 1.4 per cent.
In fact, the only G7 country now projected to post weaker growth than Canada is Italy, at a mere 0.1 per cent.
In the G7 countries - Canada, the U.S., Japan, Britain, France, Germany and Italy - economic indicators “point to weak activity through the end of the year,” the OECD said.
“Sharp increases in energy and food prices have boosted headline inflation and sapped real incomes of consumers across the OECD area,” it said.
While the G7 countries face different challenges, the OECD said central banks should not change their policy stances at this time, but if there is a need to slow or stimulate their economies, that should come from changes to interest rates, not changes in government spending, it suggested.
However, the Bank of Canada probably will not cut interest rates until after the federal election, according to a separate analysis yesterday.
“Central banking is not all about economics,” said Carl Weinberg, chief economist at U.S.-based High Frequency Economics. “Politics intervenes on a whim.”
“The Bank of Canada may find it awkward to lower interest rates until the election is over, other than in the case of a dire emergency,” he said. “So, with politics clouding the air and with headline inflation still above target, we expect no change in the bank rate this week.”
The view is that the central bank would not want to be perceived to be influencing the election results.
While most analysts expected the central bank to keep rates steady tomorrow, even before election fever mounted over the Labour Day weekend, the downwardly revised projection for economic growth in Canada reinforces the view that the bank’s next move will be to cut interest rates further.
Filed by Ozlem Yucel under Global Financial Crises