August 22, 2008 / 6:03 PM / 9 years ago

Fed cuts growth forecast due to global woes

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<p>Bank of Canada Governor Mark Carney leaves his office for a news conference upon the release of the Monetary Policy Report in Ottawa July 17, 2008.Chris Wattie</p>

OTTAWA/TORONTO (Reuters) - Canada's government has slashed its forecast for economic growth in 2008 to 1.1 percent from 1.7 percent, citing global economic woes it said were beyond its control.

"We are feeling the impacts of global economic factors beyond the control of any one individual or government," Finance Minister Jim Flaherty said in his department's fiscal update on Friday, which also noted that Ottawa returned to a budget surplus in June.

The Department of Finance's downgrade of its 2008 economic growth forecast was a widely anticipated move that brought its view more in line with private sector economists and the Bank of Canada's 1 percent growth estimate.

However, it maintained the estimate of nominal gross domestic product growth at 3.5 percent, citing higher commodity prices.

Speaking to reporters in Toronto, Flaherty refused to comment on whether the economy might shrink again in the second quarter after a surprise 0.3 percent decline in the first quarter.

"We are continuing to watch things closely, of course, because there is continuing weakness in the U.S. economy, which has a slow-growth effect on the Canadian economy, particularly (on) manufacturers, exporters and the auto sector."

The popular definition of a recession is two back-to-back quarters of economic contraction. Gross domestic product figures for June are due on August 29.

"We were slightly negative in the first quarter, but only slightly negative, so we'll see the numbers when they come out at the end of next week," Flaherty said.

However, Flaherty said the country was on track to post its 11th straight budget surplus in the 2008-09 fiscal year after returning to surplus in June from a deficit in the first two months of the fiscal year.

"We are on track budget-wise," he said in Toronto.

The government's June budget surplus totaled C$1.74 billion, bringing the year-to-date surplus to C$1.22 billion and reversing a deficit in the first two months of the fiscal year, the Department of Finance said in a report.

The June surplus was well below the June 2007 surplus of C$2.82 billion, and the three-month surplus trailed the April-June 2007 surplus of C$5.60 billion.

Nonetheless, Flaherty said the performance in the first three months of the fiscal year was "consistent" with his forecast last February of a surplus in 2008-09 of C$2.3 billion.

That is sharply lower than the estimated C$10.2 billion last year but still in keeping with a long string of surpluses that is without rival in the Group of Seven industrialized countries.

With the prospect of a national election on the horizon, the minority Conservative government has been quick to allay speculation that the economic slowdown might drag the government into a deficit -- a political taboo.

In June, budgetary revenues climbed 2.4 percent from the same month last year while expenditures grew 11.1 percent. In April to June, revenues rose 1.8 percent and expenditures jumped 8.4 percent.

However, Ottawa expects the percentage increase in spending in coming months to slow to 3.4 percent over the year before. The large year-on-year spike in spending reflects lower spending in the early part of the 2007 fiscal year, before implementation of budget measures, the finance department said.

Inflation in Canada has been relatively benign compared with that in other countries because of the strong currency, Flaherty said.

He declined to comment on whether inflation peaked in July at 3.4 percent, saying that was the domain of the Bank of Canada as it prepares for its next interest rate decision on September 3.

"You'll have to wait for the governor to take what ever action he chooses to take, or not to take, when he sets rates," he said.

Reporting by Louise Egan and John McCrank; Editing by Peter Galloway

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