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The statement issued by the Bank of Canada following Tuesday’s policy meeting, when the overnight rate was cut by 25 basis points to 2.25%, indicated significant revisions to the economic outlook for both Canada and the United States. The Bank indicated that it was projecting that the U.S. economy was already in recession. The statement also indicated that in the face of weaker U.S. and global growth, lower commodity prices and tighter credit conditions, the outlook for Canada’s growth rate was also being cut. The reduction was most marked with respect to 2009 — the expected increase in GDP was slashed to 0.6% from a 2.3% gain projected in July, although it did not suggest the Canadian economy was expected to fall into recession. This morning’s Monetary Policy Report (MPR) provides more detail on these revisions along with the implications for the Bank’s outlook for inflation.The quarterly pattern of growth in Canada is one of an economy avoiding a recession but by the barest of margins. The central bank is projecting a 0.4% annualized decline in the fourth quarter followed by no growth in first quarter of 2009. (Growth in the third quarter of 2008 is projected to remain in the positive column, rising 0.8%.) This base case forecast clearly leaves the Canadian economy vulnerable to falling into recession in the face of any intensification of the negative factors weighing on the economy. Growth returns the positive column in the second quarter of 2009 of about 0.8% followed by relatively stronger activity in the second half of next year with growth in the third and fourth quarters averaging 2.2%. On an annual basis, this quarterly profile translates to growth of 0.6% in 2009 (unchanged from a projected 0.6% gain expected this year) but then jumps to 3.4% in 2010. The bump up in growth starting during the second half of next year and continuing through 2010 was attributed in Tuesday’s statement to “improving credit conditions, the lagged effects of monetary policy actions and stronger global growth.”
ght:100%">For the U.S. economy, the central bank reiterated the view that it is “judged to be in recession through the first quarter of 2009.” Although no quarterly growth numbers were provided in today’s report, it can be inferred that the central bank is also assuming declining growth in the fourth quarter of this year if not the third quarter as well along with a decline in the first quarter of 2009. Today’s MPR provides annual growth numbers of 1.2% for 2008 and -0.1% for 2009, which represents a downward revision from growth projected in July of 1.6% and 1.5% over the same period. Activity rebounds strongly in 2010, rising 3.2% with the strengthening attributed to “low policy interest rates, the gradual elimination of excess supply in the housing sector, and the normalization of credit conditions.”
The downward revisions to growth have contributed to the central bank significantly reducing their outlook for inflation in Canada next year. In the July update, core inflation was expected to average between 1.9% and 2% through the year. With greater slack emerging in the economy, along with downward pressure in housing prices, core inflation is now projected to average between 1.6% and 1.7% in 2009.
These same factors have also contributed to overall inflation being revised lower as well, although the extent of the cuts are more sizeable as a result of a downward revision to the outlook for energy prices. For example, WTI oil prices have been cut from an average next year of more than US$140/barrel to an average of US$83/barrel. As a result, overall inflation is expected to average 1.7% and 1% over the first and second halves of 2009, respectively, revised down from 3.6% and 2% projected in July.
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Today’s MPR"> makes clearthat the greater risks to the Canadian economy are with respect to weaker growth rather than to higher inflation. The report reiterated the comment contained in Tuesday’s interest rate announcement that “some further monetary stimulus will likely be required.” Our own forecast has the overnight rate dropping to 2.00% by the end of this year. If the central bank’s more negative assessment of growth in both Canada and the United States is realized, additional cuts in the overnight rate may be warranted.
Paul Ferley, Assistant Chief Economist, RBC Economics Research
ght:100%">For the U.S. economy, the central bank reiterated the view that it is “judged to be in recession through the first quarter of 2009.” Although no quarterly growth numbers were provided in today’s report, it can be inferred that the central bank is also assuming declining growth in the fourth quarter of this year if not the third quarter as well along with a decline in the first quarter of 2009. Today’s MPR provides annual growth numbers of 1.2% for 2008 and -0.1% for 2009, which represents a downward revision from growth projected in July of 1.6% and 1.5% over the same period. Activity rebounds strongly in 2010, rising 3.2% with the strengthening attributed to “low policy interest rates, the gradual elimination of excess supply in the housing sector, and the normalization of credit conditions.”
The downward revisions to growth have contributed to the central bank significantly reducing their outlook for inflation in Canada next year. In the July update, core inflation was expected to average between 1.9% and 2% through the year. With greater slack emerging in the economy, along with downward pressure in housing prices, core inflation is now projected to average between 1.6% and 1.7% in 2009.
These same factors have also contributed to overall inflation being revised lower as well, although the extent of the cuts are more sizeable as a result of a downward revision to the outlook for energy prices. For example, WTI oil prices have been cut from an average next year of more than US$140/barrel to an average of US$83/barrel. As a result, overall inflation is expected to average 1.7% and 1% over the first and second halves of 2009, respectively, revised down from 3.6% and 2% projected in July.
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Today’s MPR"> makes clearthat the greater risks to the Canadian economy are with respect to weaker growth rather than to higher inflation. The report reiterated the comment contained in Tuesday’s interest rate announcement that “some further monetary stimulus will likely be required.” Our own forecast has the overnight rate dropping to 2.00% by the end of this year. If the central bank’s more negative assessment of growth in both Canada and the United States is realized, additional cuts in the overnight rate may be warranted.
Paul Ferley, Assistant Chief Economist, RBC Economics Research