Bank of Canada deputy governor says economy not growing as quickly as thought

OTTAWA – The Bank of Canada signalled Tuesday that it’s lowering the forecasts for economic growth in the second half of 2012 and possibly for next year, citing a more prudent consumer and an export sector that has yet to fully recover.

The central bank said Tuesday, through a speech by senior deputy governor Tiff Macklem, that it no longer expects the July-September period to grow at a rate of 3.8 per cent as previously forecast.

Instead, the bank says the third quarter will likely show an economy that advanced at a more moderate pace of 2.0 per cent to 2.5 per cent, the same speed it now expects will continue in the fourth quarter. Previously, it had penciled in a solid 2.5 per cent expansion for the last three months of the year.

The new projections were unveiled in an advance copy of a speech to be delivered by Macklem to a business audience in Toronto.

It’s an unusual occurrence for the central bank, which normally issues new forecasts during its quarterly monetary policy reports. The next report will be issued on Oct. 23.

It was unclear why the bank decided to jump the gun, other than that early indicators have pointed to a more subdued bounce-back for the third quarter.

Monday’s report on gross domestic product from Statistics Canada found the economy advanced by 0.6 per cent in July, a good monthly number but less than would be necessary to jump-start the quarter to a near four-per-cent surge.

In the speech, Macklem explained that Canadians had become more cautious about spending, a welcome development giving that debt levels are already at record highs in relation to income.

“This is good news,” Macklem said. “But this new-found and welcome household prudence is dampening growth. To replace this growth, we need a rotation in demand toward exports and business investment.

“Unfortunately, this rotation has proven elusive.”

Macklem said the central bank still believes a revival in the U.S. economy will eventually lead to an increase in demand for Canadian products, but due to competitive pressures and continuing weak demand, it is taking longer. The delay has also restrained businesses from stepping up needed investments that would make them uncompetitive, a vicious negative cycle that is keeping our economy from returning to potential..

Although he did not specifically refer to 2014, the analysis suggests that the bank may also be preparing to revise downward next year’s 2.7 growth estimate, which many economists already consider overly rosy.

It also suggests that the Bank of Canada may be prepared to keep interest rates at current super-low levels until possibly 2015.

Still, Macklem said the bank is holding out hope the reversal in the negative cycle could produce stronger results.

“Some recent surveys and other evidence, including the pick-up in firm creation, suggest that firms are becoming more optimistic,” he said. “And once the sequence of stronger exports, rising confidence, increased investment and stronger productivity is launched, it could well gain traction faster than expected.”

Macklem said for the economy to start reigning in the slack it needs to achieve a growth pace of at least 2.5 per cent.

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