September 16, 2008 / 10:30 PM / in 9 years

Canada maintains growth outlook despite turmoil

OTTAWA (Reuters) - Canadian Finance Minister Jim Flaherty sees no need to lower his forecast for the country’s economic growth, despite a deepening global financial crisis and his expectation of a further slide in U.S. growth.

Flaherty said in an interview with Reuters he was open to the idea of concerted action among policy makers in the world’s most developed economies to manage the fallout from the failure of some of Wall Street’s biggest firms.

But there is no need to convene an emergency meeting of Group of Seven finance ministers, he said during a pause from campaigning for a federal election set for October 14.

The minister, who is seeking re-election for the Conservative Party, rejected any suggestion he might rethink his latest estimate of 1 percent economic growth in Canada as the outlook for the U.S. economy deteriorates.

At the same time, he considers the 3.3 percent real growth that the United States recorded in the second quarter will be higher than the overall figure for this year.

“The economic forecast that we’ve been using for the United States is not as positive as some others have been using,” he told Reuters in an interview.

“The growth in the second quarter in the United States is not in our view representative of what the growth is going to look like in the United States for the rest of the year. That (was) true before this most recent issue with Lehman Brothers and Merrill Lynch,” he said.

Central banks have been pumping funds into markets this week to prevent them from seizing up in response to the bankruptcy filing of Lehman Brothers Holding Inc, the sale of Merrill Lynch and major troubles in insurer American International Group.

Toronto stocks tumbled 4 percent on Monday and touched a two-year low early on Tuesday before recovering. The Bank of Canada stayed out of markets on Tuesday after pumping the largest amount of liquidity into the overnight market since 2000 on Monday.

Flaherty said the government had been braced for the worst.

“We expected over time that there would be further difficulties with some of the investment banks and that’s proven to be so,” Flaherty told Reuters. “There have been concerns about Lehman Brothers for a long time,” he said.

But he suggested the damage from the crisis would be contained to financial markets and not necessarily hit hard on the Canadian consumer.

“We have to get through this. This is a credit situation and an investment banking situation that has to be seen through,” he said.

Analysts have said that because Canada’s economy is so tightly intertwined with that of the United States, its top trade partner, the worsening U.S. credit crisis is likely to curtail economic growth in Canada.

Regarding the possibility of a special meeting of G7 finance ministers, Flaherty said: “Certainly we’re open to that. I don’t think it’s necessary at the moment because we are in daily communication.”

Flaherty also said that he, Bank of Canada Governor Mark Carney and the federal banking regulator are all “comfortable” with the level of capitalization at Canadian banks.

Upbeat too on the fiscal side, Flaherty promised to post a budget surplus in 2008-09 of over C$3 billion ($2.8 billion), saying government revenues have remained strong through July.

Even in a worst-case scenario of rapidly deteriorating growth posting a deficit would be completely out of the question for the federal government.

“I‘m comfortable with a relatively modest surplus ... We’re disciplined enough to do that and that’s how we plan,” he said.

Last February, Flaherty estimated a surplus this fiscal year of C$2.3 billion, Ottawa’s eleventh straight surplus by both the Conservative and Liberal governments. But that was down from an estimated C$10 billion in the previous year.

The July budget figures have not yet been made public but Flaherty said that, as of that month, Ottawa was slightly ahead of where it expected to be with the surplus.

“Corporate profits are up, they’re strong in Canada. The revenue numbers that I’ve seen through July are positive,” he said.

Reporting by Louise Egan; editing by Rob Wilson

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