Canada sees no world meltdown, but ready to act

Fri Aug 19, 2011 12:55pm 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 contract in the second quarter. Less than a month ago he had forecast 1.5 percent second quarter growth on an annualized basis.

"Our expectation is that growth is going to be lower," Carney said of the situation in Europe and the United States.

Canada weathered the global recession better than most major nations, helped by a robust financial sector and more than a decade of federal 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 slowed 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," he said.   Continued...