Real GDP Expected To Rebound, Growing By 3.8% In 2010

Ottawa, ON — In the Bank of Canada’s January Monetary Policy Report Update, which discusses current economic and financial trends in the context of Canada’s inflation-control strategy, it noted that the outlook for the global economy has deteriorated, with the intensifying financial crisis spilling over into real economic activity. However, the bad news should end by next year, it predicts.

“Heightened uncertainty is undermining business and household confidence worldwide and further eroding domestic demand, the Bank says. “Major advanced economies, including Canada’s, are now in recession, and emerging-market economies are increasingly affected. Commodity prices — especially energy prices — have fallen as a result of substantially weaker global demand.

“Stabilization of the global financial system is a precondition for economic recovery. To that end, governments and central banks are taking bold and concerted policy actions. There are signs that these extraordinary measures are starting to gain traction, although it will take some time for financial conditions to normalize. In addition, considerable monetary and fiscal policy stimulus is being provided worldwide.”

The Bank notes that Canadian exports are down sharply, and domestic demand is shrinking as a result of declines in real income, household wealth and confidence. Canada’s economy is projected to contract through mid-2009, with real GDP dropping by 1.2% this year on an annual average basis.

However, as policy actions begin to take hold in Canada and globally, and with support from the past depreciation of the Canadian dollar, real GDP is expected to rebound, growing by 3.8% in 2010.

A wider output gap through 2009 and modest decreases in housing prices should cause core CPI inflation to ease, bottoming at 1.1% in the fourth quarter. Total CPI inflation is expected to dip below zero for two quarters in 2009, reflecting year-on-year drops in energy prices.

With inflation expectations well-anchored, total and core inflation should return to the 2% target in the first half of 2011 as the economy returns to potential.