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TORONTO (Reuters) - Strong economic data and a central bank growth forecast suggested on Tuesday that Canada's recovery from recession is on track, though soft private sector demand and a buoyant currency were seen as risks.
Canada's composite leading indicator put up an unexpectedly strong performance in December, and stretched its streak of gains to seven months, in the latest sign that the worst of the recession is over.
The Bank of Canada trimmed its 2010 growth forecast slightly but it still predicted the economy would grow 2.9 percent this year, boosted by increased confidence, improved financial conditions, global growth and better export prices.
The central balanced that view by cautioning about the considerable slack in the economy, lack of private sector stimulus so far in the recovery, and the unfavorable impact of a strong currency on exporters.
Canada exited recession in the third quarter, but barely, though fourth-quarter data has shown more bounce. In addition to predicting growth this year, the Bank of Canada raised its growth forecast for 2011, when it expects private sector demand to drive the economy.
The bank will provide more details in Thursday's Monetary Policy Report (MPR), the bank's quarterly economic projection, and in an ensuing press conference by Governor Mark Carney.
"While some of the economic deck chairs get moved about in the post meeting statement, the general thrust of the Bank of Canada thesis remains consistent with what was seen in October's MPR," said Stewart Hall, an economist at HSBC Securities Canada.
The Bank of Canada's rate announcement and pledge to keep its conditional commitment to low interest rates until the end of the second quarter came on the heels of the strong leading indicator report.
The indicator soared 1.5 percent in December, the biggest month-on-month increase for almost 27 years, spurred by household spending and a surging stock market, Statistics Canada said.
It handily beat forecasts for a 1.0 percent increase in the index after November's 1.3 percent rise, and for the second consecutive month, none of the index's 10 components fell.
While the economy appears to be gaining traction with a brighter outlook than this time last year, the Conference Board of Canada said on Tuesday the recovery remains "muted".
It said government spending would play a major role in the country's economic growth this year, which it pegged at 2.8 percent after an estimated 2.5 percent contraction in 2009.
"Fiscal stimulus by government is expected to bolster the economy and will compensate for soft growth in private sector investment and exports," said Pedro Antunes, director of national and provincial forecasts at the Conference Board of Canada.
"Propped up by low borrowing rates and rising confidence, consumers will loosen their purse strings in 2010," he said.
The Conference Board of Canada agreed with the Bank of Canada's assessment that private investment spending is expected to be the weak point of the domestic recovery.
Last year, companies slashed investment in structures and machinery due to reduced cash flow, weak demand and tight credit conditions, the Conference Board said in its Winter Outlook report.
It said industry is still running at record low capacity despite improving business conditions. It predicted private investment will grow by 3.4 percent in 2010.
Editing by Jeffrey Hodgson and Peter Galloway