OECD sees no Canadian recession, but deficit risk

Wed Jun 4, 2008 4:46pm EDT
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OTTAWA (Reuters) - Canada's economy will avoid a recession, despite a contraction in the first quarter, but small budget deficits are likely in 2008 and 2009, a report by the OECD said on Wednesday.

"The general government is projected to show small deficits for both years (2008 and 2009), and governments will have to stick to their spending plans closely to avoid dipping into the red on a more sustained basis than projected," the Organization for Economic Co-operation and Development said in its semi-annual outlook on Canada's economy.

Federal Finance Minister Jim Flaherty said the comments by the OECD reflected both federal and provincial spending plans, and he insisted that Ottawa would remain in surplus.

"What the report said is that, overall, governments in Canada might run deficits this year and next. Certainly the federal government will not," he told reporters.

Canada is the only member of the Group of Seven industrialized countries to consistently post budget surpluses, and it could be politically risky for the minority Conservative government to slide into deficit.

The OECD also said that the Bank of Canada needs to continue lowering interest rates. The bank has slashed its overnight rate by 150 basis points since December to help the economy recover next year from the effects of the U.S. slowdown.

"Further easing of monetary policy will be required to give a needed boost to the economy in 2009 and at the same time avoid putting additional upward pressure on the currency," the report said.

The outlook, usually conducted in co-ordination with official policy-makers in Ottawa, supports market expectations for at least one more rate cut by the central bank on June 10.

The Paris-based OECD said Canada's strong domestic demand and employment meant it was headed for a "relatively mild" slowdown. But it sharply cut its forecast for 2008 economic growth to 1.2 percent from a December estimate of 1.7 percent.   Continued...