November 20, 2009 / 2:21 AM / 8 years ago

Bank of Canada sees "softer" third quarter

<p>Bank of Canada Governor Mark Carney prepares to testify before the Commons finance committee on Parliament Hill in Ottawa October 27, 2009. REUTERS/Chris Wattie</p>

NEW YORK (Reuters) - Canada’s economy performed worse than expected in the third quarter and while now recovering, it risks further setbacks due to the sharp rise of the Canadian dollar, Bank of Canada Governor Mark Carney said on Thursday.

Carney said the bank’s projection last month of 2 percent annualized growth in the third quarter did not likely materialize but the overall outlook, including the strongest domestic spending profile in the G7 next year, remained the same.

“Recent indicators suggest somewhat softer growth relative to that 2 percent projection but the expectation is that the overall profile of the growth in that projection -- so accelerating growth in the fourth quarter and into 2010 for Canada -- remains valid,” he said in a press conference following a speech in New York.

Finance Minister Jim Flaherty earlier on Thursday suggested he thought the economy could have stood still in the third quarter, saying he agreed with the Organisation for Economic Co-operation and Development’s forecast that the growth profile for that quarter was “flattish.”

Quarterly growth figures will be released on November 30 and analysts are mixed on whether the economy stopped shrinking.

“There continues to be a great debate over whether Canadian Q3 GDP will manage a positive figure, in keeping with most of its peers on the world stage. This is far from a foregone conclusion,” said Eric Lascelles, chief economics and rates strategist at TD Securities.

Growth has been slowed down by the appreciation of the currency against the U.S. dollar and its volatility, Carney said, a line the bank has taken repeatedly in recent weeks.

“The current strength in our dollar is expected, over time, to more than fully offset the favorable developments since July,” he said.

Carney shed no new light on the bank’s thinking on the exchange rate or whether it would have to take action to prevent the currency from derailing growth and inflation.

Nor did he show any concern that a sudden revival of the housing market could create a housing bubble, as some have suggested, saying it was partly the result of pent-up demand after a hiatus and partly the result of low rates.

Carney repeated the bank’s conditional pledge to hold benchmark interest rates at a record low until the end of June 2010.

RESERVE CURRENCY DEBATE A “DISTRACTION”

Turning to the global current account imbalances that contributed to the financial crisis, Carney dedicated his speech to exploring the options for an eventual move away from the U.S. dollar’s dominance as the global reserve currency, without endorsing any one proposal.

However, he said the discussion of diversifying reserves was “a distraction” from the primary problem which is that countries like China have not allowed their exchange rates to adjust more freely.

Canada and others, which have seen their currencies strengthen dramatically, are bearing an unfair burden as a result, he said.

“Canada is giving at the office, if you will, with the shift in our current account, with the shift in our currency, with the shift in policy.”

Canada’s current account -- the broadest measure of total trade with the rest of the world, covering goods, services and income transfers -- plunged into deficit for the first time since 1999 in the fourth quarter of last year.

Any rebalancing of the global economy requires all systemically important economies to adopt market-based exchange rates, he said. The U.S. dollar will prevail for the foreseeable future, if only for lack of an alternative.

“In general, alternatives to the (U.S.) dollar as the reserve currency would not materially improve the functioning of the system,” he said.

“The common lesson of the gold standard, the Bretton Woods system and the current hybrid system is that it is the adjustment mechanism, not the choice of reserve asset, that ultimately matters.”

Greater use of the International Monetary Fund’s unit of currency, called Special Drawing Rights (SDRs), could be one way of reforming the global monetary system, he said, adding there was no technical impediment to expanding the use of SDRs.

Writing by Louise Egan; Editing by Jeffrey Hodgson

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