July 23, 2009 / 3:00 PM / 8 years ago

Bank of Canada, in shift, sees recession ending now

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

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.

The report devoted little attention to the idea of quantitative easing, essentially a last-resort way to stimulate the economy through printing money. The bank has not ruled it out as an option in the case of future shocks to the economy.

It repeated its pledge to keep its benchmark interest rate at an all-time low of 0.25 percent through the second quarter of next year unless inflation rises steeply.

“The bank retains considerable flexibility in the conduct of monetary policy at low interest rates,” it said.

The bank said financial conditions in Canada have improved sharply since April -- its financial conditions index, which shows the net impact of financial conditions on the economy, has risen to above the 10-year average and rock-bottom benchmark interest rates are offsetting higher-than-normal spreads on corporate bonds and tighter lending standards.

Canadian business investment is projected to contract sharply in 2009, reflecting lower profits, tighter credit, uncertainty and excess capacity. Business credit did not grow in the three months to May while household credit has picked up and has grown at near its 1992 pace.

The report said global financial markets were healing, albeit unevenly, and it said the markets for securitized instruments remained severely impaired.

Reporting by Louise Egan; Editing by Randall Palmer and Janet Guttsman

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