MONTREAL/CAMBRIDGE, Ontario (Reuters) - Canada forecast a wide but manageable budget deficit on Thursday and offered help for the struggling economy in terms of rock-bottom interest rates and billions of dollars in government aid.
At separate events, the government and the central bank both admitted to concerns about Canada’s export-oriented economy, which may decline by almost 5 percent this year, and where a surging currency may offset the positive impact of higher commodity prices and better financial conditions.
But even as Bank of Canada Governor Mark Carney told markets not to overplay the “green shoots” of economic recovery that are starting to emerge, both he and Prime Minister Stephen Harper insisted that Canada remains in a healthy position compared to other industrialized nations.
“Our starting point is stronger than basically any other industrialized country,” Carney told a news conference in Montreal.
Canada went into the world economic recession with the only budget surplus in the Group of Seven big industrialized countries, along with a still growing economy and healthy, well-capitalized banks.
That surplus melted away last year, as tax revenues fell and the government began priming the economic pump with billions of dollars of financial aid.
The Bank of Canada slashed its benchmark interest rate to a record low 0.25 percent to help spur growth and, in an unprecedented move, promised to keep the rate at that level until mid 2010, unless inflation spirals higher unexpectedly.
In a quarterly update on the budget and the economy, Harper noted that private sector economists expected Canada’s recovery to start in the second half of 2009 and gain traction in 2010.
The update forecast a decline of 4.3 percent in nominal gross domestic product this year, compared with a decline of 2.7 percent forecast in the January federal budget. “The effects of the recession are beginning to ease,” Harper said.
He said Canada would run a C$50.2 billion ($45.6 billion) budget deficit this year as it pumps billions of dollars into the auto sector and helps fund infrastructure projects designed to restart growth.
That’s well above the C$33.7 billion deficit predicted in the January federal budget, but lower than some guesstimates that circulated after Finance Minister Jim Flaherty warned that the deficit would be “over C$50 billion”.
“I am slightly encouraged that it’s barely above C$50 billion,” said Doug Porter, deputy chief economist at BMO Capital Markets.
“They left it kind of open-ended before, saying it was ‘above C$50 billion’ and that could have been any number, so the closer it was to C$50 billion the better.”
Flaherty promised the budget would be back in surplus by 2013-2014, and said he was seeing encouraging signs about the economic recovery.
“We do not have a permanent lasting deficit,” he told reporters. “I‘m feeling relatively positive about Canada these days, better certainly than I’ve felt in many months, because of some of the encouraging signs we’re seeing in the bond markets, credit markets and the housing markets and so on.”
Carney reiterated his promise to keep interest rates rock-bottom until the middle of next year, but admitted he remained worried about a steep rise in the Canadian dollar
“The recent sharp increase in the value of the Canadian dollar, if it proves persistent, could fully offset recent positive developments in financial conditions, commodity prices, and confidence,” he said.
Carney declined to directly comment on the new budget deficit figure, but said Canada had a stronger fiscal position going into the crisis than any other industrialized nation and if the path to growth is well-managed, there should be no need to raise taxes in order to balance the books again.
“And if we do things right here, we have one of the best prospects of getting that path of growth back up,” he said.
(Additional reporting by Rita Devlin Marier, Jennifer Kwan, David Ljunggren, John McCrank, Randall Palmer, Frank Pingue)
Writing by Janet Guttsman; editing by Rob Wilson