Things are looking up for the Canadian economy following its dismal first quarter contraction, but the country’s close trade ties with the United States – which is being confronted with an unprecedented three-pronged economic battering – will likely keep forecasts on shaky ground this year.
Economists expect Canada to skirt a recession this year as downside risks to the economy subside. However, risks to the outlook are high because economists are divided on the fate of the U.S. economy.
"The message from economists for 2009 is that the U.S. economy will either stagnate or surge back to life, which is of no use for those trying to get a handle on U.S. economic prospects," Beata Caranci, director of economic forecasting at TD Financial Group said in a quarterly report. She said economic forecasts varied because of the numerous shocks hitting the U.S. at once.
"It is unprecedented to have a collision of an oil price shock, a two-year decline in home prices and a credit crisis," she said, adding the duration of credit crunch was the most uncertain factor.
Caranci said a number of supportive domestic factors – such as jobs, wages and house price growth – should help the Canadian economy expand by about 1% in 2008 after contracting 0.2% in the first quarter. But gross domestic product would likely remain below a predicted 1.4% rise in the U.S.
She said Canadian growth would continue to suffer from falling exports and lower investment as a result of tighter credit conditions, while high oil prices would have a mixed impact.
"The biggest negative influence on the Canadian economy will continue to be flow from the export sector, which has already contracted for three consecutive quarters," Caranci said. She said this would not improve until the U.S. economy begins to show signs of a sustained improvement in the second quarter of 2009.
Dawn Desjardins, assistant chief economist at RBC Capital Markets said reduced odds of a U.S. recession has improved Canada’s economic prospects.
She said the Bank of Canada’s decision to keep interest rates at 3% was another sign that downside risks were abating.
This was reflected in leading indicator of economic activity index, which inched up 0.2% in May for its first increase since January, Statistics Canada figures showed yesterday. It pointed to a rise in the stock market and house prices, which would likely support the economy in the coming months.
However, Desjardins said the impact of inflation on the Canadian economy was becoming a greater concern amid rising gasoline and energy prices. She said the May consumer price index, which is due to be released by Statistics Canada Thursday, likely rose 0.6% for an annual gain of 1.5%.
"While inflation has been subdued in Canada, it has been propelled by a laundry list of transitory factors and recent data have shown that the near-term trend in inflation has started to pick up," Desjardins said. (Tire Review/Akron)
