Bank of Canada, in shift, sees recession ending now

Thu Jul 23, 2009 11:25am EDT
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OTTAWA (Reuters) - Canada's economy will pull out of its worst recession since the early 1990s this quarter, the Bank of Canada said on Thursday, and the world economy has likely averted a worst-case scenario and is bottoming out.

"With the economy supported by better financial conditions and higher levels of business and consumer confidence than anticipated, the downturn in activity in the first half of the year has been less severe," the bank said in its Monetary Policy Report. "And growth is now projected to turn positive in the third quarter."

In April the bank had projected a turnaround in the fourth quarter. It now sees third-quarter growth of 1.3 percent on an annualized basis, rather than the 1 percent decline it forecast earlier, ending three straight quarters of decline.

It also projects stronger-than-expected quarterly growth through the first half of 2010, but weaker-than-expected growth through 2011, when its current forecasts end.

It said the recent rise in the Canadian dollar, which the bank attributed to higher commodity prices and a weak U.S. dollar, is moderating the overall pace of growth.

The bank projects the currency will average 87 U.S. cents, or C$1.1494 to the U.S. dollar and said its strength will help boost import volumes starting in the second half of this year.

The currency was at 91.74 U.S. cents, or 1.0900 to the U.S. dollar, soon after the report was released, above that projected rate, and up from levels around 1.0940 before the report.

Canadian bonds mostly weakened after the report, with the yield on the 10-year government bond rising to 3.513 percent from 3.484 percent before.

Expressing continued concern about the possibility of persistent strength in the Canadian dollar, the central bank said a strong dollar posed a risk of slower economic growth and could put downward pressure on inflation.   Continued...

<p>A Canadian one dollar coin, also know as a loonie, is shown in Montreal, April 28, 2006. REUTERS/Shaun Best/File</p>