Canadian recession to be steep but short: BoC

Thu Jan 22, 2009 2:27pm EST
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By Louise Egan

OTTAWA (Reuters) - Canada's recession will be harsh but shorter than previous ones, Bank of Canada Governor Mark Carney said on Thursday, laying out a scenario for recovery that some economists considered overly optimistic.

Signaling the economy is now in the most dramatic phase of its downturn, the bank projected a sharp 4.8 percent contraction, annualized, in the first quarter. Just last October it forecast the economy would stay flat in the first quarter, neither growing nor contracting.

Gross domestic product likely shrank by 2.3 percent in the fourth quarter of last year, the bank said, and will decline by 1 percent in the second quarter of this year before returning to growth.

"The projected return to balance of the Canadian economy is faster than either of the recoveries following the 1981-82 and 1990-92 recessions," the bank said in its quarterly economic outlook.

It said the economy would not ramp up to its full potential again until mid-2011, but this would be about a year faster than in the past, partly because the central bank was able to slash interest rates early and aggressively without fear of inflation expectations becoming unhinged.

"Part of it is that monetary policy is very stimulative and it was stimulative early," Carney told reporters. "We've acted and we will continue to act, if necessary, so we provide a considerable stimulus."

On Tuesday, the bank dropped its overnight rate by one-half point to a 50-year low of 1 percent for a cumulative reduction of 350 basis points since December 2007.

The bank's view on the speed of the recovery is "open to debate," said Doug Porter, deputy chief economist at BMO Capital Markets.   Continued...

<p>A worker prepares to install a battery into a Ford Flex on the assembly line at the company's Oakville Plant in this June 3, 2008 file photo. REUTERS/Fred Thornhill</p>