Canada sees risks, but no world economic meltdown

Fri Aug 19, 2011 4:13pm EDT
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By David Ljunggren and Randall Palmer

OTTAWA (Reuters) - Top Canadian economic policymakers see a raft of potential problems for a global economy they described as fragile yet still growing, but said they are ready to intervene to protect Canada from turmoil.

In testimony to a parliamentary committee on Friday, Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty both highlighted the risks posed by Europe's stubborn debt crisis and the slow U.S. recovery from recession.

But neither forecast a recession in either area, although Carney acknowledged Canada's economy might have contracted in the second quarter. Less than a month ago he had forecast 1.5 percent second quarter growth on an annualized basis.

"The considerable external headwinds that the bank has long identified are now blowing harder," said Carney, backing off previous language that suggested interest rates would be heading up in the short term.

Increasingly seen as a safe haven, Canada weathered the recession better than most nations. It was helped by a robust bank sector and more than a decade of budget surpluses, as well as by tax cuts introduced before world economies began to slow, and then by a package of government stimulus spending.

That package is now coming to an end, and Flaherty dismissed the idea that a revival of large-scale government spending would be a panacea.

"More spending now, in the current environment, that actually is the problem in Europe," he said. "Too much spending, accumulated deficits, it's exactly what we should not do if we want to maintain (our) fundamental fiscal health."

But if the world economy deteriorated dramatically, Canada would "do what was needed" to protect jobs and to shelter its own economy. "We would act in a pragmatic way as we have done successfully previously and recently," Flaherty said.   Continued...

<p>Canada's Finance Minister Jim Flaherty (L) shakes hands with Bank of Canada Governor Mark Carney during a break in testimony at the House of Commons finance committee on Parliament Hill in Ottawa August 19, 2011. REUTERS/Chris Wattie</p>