Economic Recovery Will Remain Slow and Volatile in 2011 : Reports

Two economic reports released in the first half of January 2011 paint a confusing, somewhat contradictory picture of Canada’s prospects for economic recovery this year. But both of them agree that any recovery will be subdued, a far cry from the solid recovery many were hoping to see.

The more optimistic of the two reports was issued by the Bank of Canada, as part of the announcement of its decision to not raise interest rates in January. The Bank of Canada’s outlook for the global and Canadian economies remains positive, but risks remain. The two main risks that the Bank of Canada sees are higher commodity prices and possibly higher than anticipated momentum in the Canadian household sector (fueled – ironically – by Bank of Canada’s decision to keep interest rates at a historic low). If commodity prices continue to climb and/or house prices continue to climb, this could lead to inflation, and will force the Bank of Canada to start raising interest rates early. Higher interest rates, however, could potentially kill the economic recovery, especially given the high indebtedness of Canadians (another risk that Bank of Canada’s governor Mark Carney has been talking about often lately)

The second report was issued by the Conference Board of Canada – a well-known and respected think-tank.   It focuses on the fact that economic growth in Canada has slowed recently as a result of increasing government and household debt. The debt problem will not go away this year (if anything, it may worsen), so the Conference Board’ expectation that the economic growth will remain slow in 2011 makes sense. When it comes to the actual growth levels, however, the Bank of Canada and the Conference Board of Canada don’t really see eye-to-eye. The Bank of Canada foresees a 2.4 percent growth in the GDP for 2011 and – somewhat surprisingly – expects a return to full economic capacity by the end of 2012. The Conference Board only forecasts a 2 percent growth for the same period and mentions nothing about the economy reaching full capacity. One is clear: Whether growth is at 2% or 2.4% in 2011, neither of these two levels would count as a “solid” recovery.

The conference Board of Canada also expects that Job creation will remain modest in 2011, so real after-tax income will not grow by more than 1 per cent in 2011. On top of that, the public sector is expected to contribute very little to economic growth over the foreseeable future.

The Risks

There are still significant the risks that may erase that 2% to 2.4% growth. From a global standpoint, the European economies slow recovery pace is creating an uncertainty for the global financial situation. This may have a negative impact on Canada’s recovery. In addition, both the Bank of Canada and the Conference Board agree that the strong Canadian dollar and – according to the Conference Board of Canada – lagging productivity present significant risks. On the bright sight, the strong Canadian dollar and high business confidence have already brought an increase of 14 percent in capital investment in 2010. The Conference Board of Canada expects double digit increases in capital investment for 2011 as well.   But the strength of the Canadian dollar will slow the recovery of Canadian exports to the US. This will most likely have a negative impact on Canadian exports and will contribute to Canada’s widening current deficit (that is, the difference between the value of imports to Canada the value of exports from Canada). The Bank of Canada points out that the deficit has reached a 20 year high.

If one thing is clear out of these two reports, it is that there are more bumps ahead. Those expecting to see a solid recovery pace this year are likely to be disappointed. But as of now, it seems likely that the economy will improve this year – although at a slow pace.

The fullBank of Canada statement can be found here:

http://www.bankofcanada.ca/en/speeches/2011/state190111.html

A summary of the Conference Board of Canada report can be found here:

http://www.conferenceboard.ca/press/newsrelease/11-01-18/Canada_s_Economic_Recovery_To_Slow_In_2011.aspx