Bank of Canada slashes growth outlook

Thu Jan 24, 2008 2:31pm EST
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By Louise Egan

OTTAWA (Reuters) - Canada's central bank chief entertained the possibility of a U.S. recession and warned on Thursday that global policymakers have some "very hard work" ahead of them to resolve financial market troubles.

David Dodge, who steps down as Bank of Canada governor at the end of this month, also said Canada's economy would slow sharply as U.S. demand for its exports wavers, justifying the need for further "measured" interest rate cuts in Canada.

But he said Canada also has unique advantages that would keep it out of recession. The bank sees Canadian growth slipping to 0.6 percent in the first quarter, down from a previous estimate of 2 percent, but then picking up speed later in the year.

In its quarterly monetary policy report, the bank slashed its U.S. growth outlook for the first half of this year to an annualized 0.5 percent and to 1.5 percent for the full year, down from 2.1 percent previously.

But Dodge said repeatedly said that best guess could easily be proven optimistic as events unfold.

"Could U.S. growth be lower than half-a-percent? Could it be negative-half, or negative-1 percent in the first half? Sure," Dodge told reporters.

Two quarters of economic contraction would constitute a recession but Dodge stressed that the bank's forecast was not necessarily "cooked up with a huge degree of precision."

"This is a very weak U.S. economy and if you look at U.S. final domestic demand, which is really important for us here in Canada, because that's what's determining how many imports they are going to take in, U.S. final demand is actually weaker than that 0.5 percent."   Continued...

<p>Outgoing Bank of Canada Governor David Dodge leaves his office for a news conference upon the release of the Monetary Policy Report in Ottawa January 24, 2008. REUTERS/Chris Wattie</p>