Ottawa -- The Bank of Canada has significantly upgraded its growth forecast for the United States in its latest economic forecast released Thursday, arguing the U.S. export sector is set to "grow substantially" as it capitalizes on a weaker dollar, and a productive and price-competitive labour force.
Mark Carney, the Bank of Canada governor, said the emergence of a U.S. exporting powerhouse likely spells tougher times ahead for Canadian producers that are already coping with a strong dollar. Among the things Canadian companies will have to do is improve productivity, which he noted has been "relatively disappointing" in recent years.
"The competitive environment for exporters has intensified without question," he told reporters at a media conference in Ottawa. "It is more competitive and it is not just U.S. competition," citing the gains made by emerging economies.
Nevertheless, the central bank has pencilled-in rising Canadian exports and business investment levels this year and next, partly on improved global prospects. Quarterly growth is set to peak in mid-2010 at 4.3%, but tail off in every quarter to the end of 2011.
Beyond that period, Mr. Carney warned it would be difficult to record growth "north of 2%" unless productivity, or output per hour work, is improved.
Still, the central bank's quarterly monetary policy report provided a more upbeat outlook compared with the interest-rate statement released Tuesday, in which it maintained its benchmark rate at a record low 0.25%, but offered notes of caution about the economic outlook. It tinkered with the Canadian growth forecast slightly, indicating growth of 2.9% in 2010 -- down from 3% in its previous monetary report -- followed by 3.5% expansion in 2011, which was an upgrade.
As in the rate statement, the Bank of Canada reinforced its conditional commitment to keep its policy rate unchanged until July. And it repeated the same caveats that pose a threat to its outlook – that the persistent strength of the Canadian dollar could act as a "significant" drag on growth; the recovery remains "heavily" dependent on monetary and fiscal stimulus; and private-sector-led growth may take longer to realize.
The latest outlook attempted to illustrate how Canada's growth profile will transform over the next two years.
One of the biggest changes in the central bank's forecast revolves around growth prospects for Canada's biggest trading partner, the United States.
The Bank of Canada boosted its U.S. forecast, envisaging now 2.5% growth in 2010, as opposed to its 1.8% forecast from last October, and 3.9% expansion in 2011, which is just a tick above the 3.8% it previously anticipated.
The central bank said the recovery in domestic U.S. demand is expected to be weak, and warned of the low absolute level of consumption. Yet, it indicated gradually improving credit conditions and an export sector poised for take off would drive better growth than anticipated.
"U.S. exports are expected to grow substantially, supported by a weak U.S. dollar and a faster-than-anticipated recovery in overseas economies," the Bank of Canada said. "Higher productivity growth and lower unit labour costs have also made U.S. goods more competitive."
In contrast, Mr. Carney noted Canada's productivity "has been relatively disappointing in recent years." In fact, recent Statistics Canada data indicated productivity, which is a measure output per hour worked, dropped during a recession – the first time that happened in eight downturns. Generally, productivity should improve during a recession, as firms cut payrolls and hours worked and the remaining workers are expected to do more.
A shift to more export-oriented growth for the U.S. economy is one of the elements required to unwind the massive global trade imbalances that helped spark the financial crisis.
The latest monetary policy report highlighted the continued need for the Group of 20 nations to work on policies designed to narrow the imbalances. For progress to continue, the central bank said that, among other things, the industrialized world, led by the United States, had to address bulging budget deficits, while China and other Asian emerging nations need to liberalize exchange-rate policies.
Meanwhile, in Canada, the central bank said it expects business investment and the pace of export growth to gradually ramp up in 2010 on improved global conditions.
"Export growth is projected to be somewhat stronger than was expected last October, owing to a more favourable outlook for the U.S. economy, particularly in the sectors that figure most importantly for Canadian exporters," it said, in likely reference to the auto and forest products sectors.
As that transpires, the gangbusters-like activity in Canadian real estate will lose steam once pent-up demand subsides and affordability declines, it indicated.
Last week, a senior Bank of Canada official said it was "premature" to talk about a housing bubble in the country, even though the existing housing market is witnesses record sales levels and prices that have returned to pre-recession levels.
Further, the economic impact from increased government spending is likely to hit a peak in the fourth quarter of last year, and is destined to gradually decline in 2010 and then emerge as a drag on growth in 2011.
The outlook for inflation was adjusted slightly higher for this year, with both the headline and core rate nearing the 2% mark in the fourth quarter as excess slack is absorbed. Yet, it maintains that it won't reach its preferred 2% target until the third quarter of 2011.
That view comes amid consumer price data released Wednesday that indicated inflationary pressure was subdued, prompting currency traders to sell some of their Canadian dollar holdings on the belief the Bank of Canada could take its time in tightening its highly accommodative monetary policy.
The central bank also confirmed what many private-sector economists had reckoned – that the Canadian recession was more modest than in other industrialized countries. It calculated the peak-to-trough drop of 3.3% in GDP, from late 2007.
