BoC sees U.S., EU troubles sapping its strength

Wed Oct 26, 2011 12:33pm EDT
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By Louise Egan and David Ljunggren

OTTAWA (Reuters) - Bank of Canada painted a darker picture of the domestic economy on Wednesday, warning of risks from a likely recession in Europe and continuing weakness in the United States.

In its quarterly Monetary Policy Report, the central bank slashed its fourth-quarter growth forecast to an annualized 0.8 percent from 2.9 percent, down from a likely 2 percent in the third quarter.

"We are expecting that the situation in Europe, the weakness in the United States will have an impact on confidence in Canada," central bank Governor Mark Carney told a news conference. "What we're expecting is modest growth in Canada and then a pickup, which begins from the middle of next year."

The bank said the economies of the United States and Europe are weaker than they had been following previous recessions and were likely to stay that way, prompting big hits to a Canadian economy that has heavy trade and financial linkages to the United States.

Canada's export-dependent economy recovered more quickly than its partners from the financial crisis of 2008, helped by tax cuts, a government stimulus program and a strong and conservative financial sector that needed no government bailouts.

Already by January, the economy had recovered all the jobs lost during the downturn, although officials warned of high domestic debt levels and external risks ahead.

But consumer confidence fell for the fifth time in six months in October, according to figures released by the Conference Board of Canada on Wednesday, and a Royal Bank of Canada (RBC) survey found that fewer respondents expect the economy to improve over the next year.

"The drop in the RBC Canadian Consumer Outlook Index reflects ongoing global economic uncertainty, showing that strong Canadian economic fundamentals insulate us but do not make us immune to the turmoil around the globe," said Craig Wright, senior vice-president and chief economist at RBC.   Continued...

<p>Bank of Canada Governor Mark Carney speaks during a news conference upon the release of the Monetary Policy Report in Ottawa October 26, 2011. REUTERS/Chris Wattie</p>