Bank of Canada cuts third quarter growth forecast as exports sluggish

Mon Oct 7, 2013 4:26pm EDT
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By Leah Schnurr

TORONTO (Reuters) - The Bank of Canada cut its third-quarter economic growth forecast sharply on Tuesday and said the crucial export sector might recover more slowly than expected, making clear interest rates will remain low until the outlook improves.

Senior Deputy Governor Tiff Macklem said the central bank now expects annualized growth in the third and fourth quarters to be in the 2 to 2.5 percent range before strengthening next year. In its monetary policy report released in July, the bank said third-quarter growth would be 3.8 percent and fourth-quarter growth would be 2.5 percent.

"Near-term growth now looks a little less choppy than initially projected," Macklem said.

The bank's July projections overestimated the second-quarter impact on growth of severe flooding in Alberta and a construction strike in Quebec, both in June. The economy grew 1.7 percent in the second quarter, compared with the bank's estimate of 1 percent.

Macklem said the economy must grow by at least 2.5 percent to put a meaningful dent in excess slack. This suggests that process will not start until 2014.

Stating a goal for the growth rates gives markets extra guidance on the timing of the bank's next interest rate hike. The rare level of detail provided in Macklem's outlook marks a departure by the bank from its usual practice of refraining from making even broad-stroke forecasts in speeches, much less in statements by deputies.

"It is now clear that from a Bank of Canada point of view, excess slack is not expected to begin being absorbed before early 2014, and that is at the earliest," said Jimmy Jean, an economic strategist at Desjardins Capital Markets.

"Most likely, this implies a longer horizon for the output gap's closure," he said.   Continued...

Bank of Canada Governor Stephen Poloz speaks during a news conference upon the release of the Monetary Policy Report in Ottawa July 17, 2013. REUTERS/Chris Wattie