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Canadian economic recovery loses steam

Ottawa, ON -- The over-exuberance of domestic spending early this year is wearing off, and Canada's economic g...


Ottawa, ON — The over-exuberance of domestic spending early this year is wearing off, and Canada’s economic growth in the second half of 2010 and 2011 is weakening with it, according to the Conference Board of Canada’s Canadian Outlook – Autumn 2010.

“Canada’s recovery is further along than many other developed economies, especially when considering the rapid rebound in employment. But the strong rebound in late 2009 and early this year, driven by growth in the domestic economy, is losing steam,” said Pedro Antunes, director, National and Provincial Forecast.

“To continue on its path of recovery, Canada will need to rely on the US economy to improve trade and a steady rise in private capital investment — components that are very dependent on the state of the US and global economy.”

The strong start to 2010 suggests that Canada’s real gross domestic product (GDP) is likely to post growth of 3% this year, while a softer domestic economy and still frail US recovery will restrain real GDP growth to only 2.5%in 2011 — down 0.4 percentage points from the summer Canadian Outlook.

Furthermore, the risks to the global recovery are on the downside, due to the fragile US economy, mounting trade and exchange rate tensions, and continued fallout from the European debt crisis. While the US and Europe are underperforming, the near-term outlook for many developing economies — such as China and India — is promising.

A weak dollar is no longer in the cards, so Canadian businesses will not see any slackening in global competitive pressures. The loonie averaged about US$0.97 over the first half of 2010, and is flirting with parity with the US dollar.

LOONIE TO AVERAGE US$0.99 IN 2011

Supported by increasing prices for oil and other raw materials, as well as a growing interest rate differential between Canada and the United States, the loonie is forecast to average US$0.99 in 2011. Total capital investment by businesses is rebounding slowly, after plummeting during the recession, but private investment will not return to 2008 levels until 2013.

The weak inflation outlook, softening domestic demand, strong loonie and unstable global outlook may cause the Bank of Canada to pause from its schedule of raising interest rates. But the pause is likely only temporarily as the Bank unwinds monetary stimulus implemented during the recession.