Recession is over? - Bank of Canada

By Paul Vieira and Derek Abma, Canwest News ServiceJuly 24, 2009

Canada's first recession in nearly 20 years has come to an end, according to the Bank of Canada, with the economy set to return to growth in the coming months as business and consumer confidence improves.

Canada's economic downturn, which had been ongoing for three-quarters of a year, is giving way to renewed growth in the current quarter as a result of improved credit markets and higher levels of consumer confidence, the central bank said in its monetary policy report on Thursday.
"We believe the economy will grow this quarter," bank governor Mark Carney told reporters at a media conference Thursday. "The rate of growth will pick up to the end of the year and into 2010."

The Bank of Canada's latest forecast is for economic growth of 1.3% for the current quarter ending Sept. 30, followed by a healthy 3% gain for the final three months of 2009.
In its previous forecast in April, the Bank of Canada anticipated the economy would shrink 1% in the current three-month period.

"It is there in black and white, that the recovery has effectively begun," said Douglas Porter, deputy chief economist at BMO Capital Markets. "I think it is astonishing how quickly the economy turned to the good in the last four or five months."

Finance Minister Jim Flaherty was also upbeat about an economic rebound,: "Recent news economically is more encouraging than it's been in recent months."

The Bank of Canada's latest ray of economic sunshine follows results of its business survey released last week that showed 61% of respondents expected their sales levels to improve in the coming 12 months. That was up from 30% when the same survey was taken three months earlier.

On Thursday, Carney said Canada -- along with the rest of the world -- is recovering largely because of extraordinary monetary and fiscal stimulus measures governments and central banks have implemented since the start of the financial crisis last fall.

For example, the Bank of Canada's key policy rate as low as it can go at 0.25%, and it has pledged to keep it there until June of next year.

"It is early days, and it is a long road," Carney said. "But things are unfolding as we broadly expected them to -- a little faster in terms of some of the recovery of confidence in financial conditions."

Carney warned the labour market would be slow to adjust to the pickup in momentum. Between October and June, the Canadian economy has lost 454,000 jobs, pushing the unemployment rate from 6.2% to 8.6%.

BMO's Porter said unemployment can expect to be at an elevated rate for some time.
"One of the last things to turn around is employment," he said.

Porter said the time lag between economic recovery and labour-market recovery is a result of employers waiting "to make sure the recovery is for real."

And as they see the need to boost production, companies will take initial steps such as moving part-time workers to full-time positions and having employees work overtime before they actually hire new staff.

Also Thursday, the Conference Board of Canada said its monthly consumer-confidence index was up for the fifth straight month. The measure rose 0.8 points to 82.9 in July, with a particularly positive change in consumers' attitudes toward the current period being a good time to make major purchases.

The Ottawa-based think-tank said although the July increase was marginal, the gradual improvement in sentiment indicates "consumers do indeed see a light at the end of the tunnel."
That report came one day after a Statistics Canada said retail sales rose a better-than-expected 1.2% in May, led by a 2.4% increase in automotive products.

And earlier this week, in its monthly monetary policy announcement, the Bank of Canada revised its forecast, saying the economy would contract 2.3% this year and grow 3% in 2010.
It had previously expected a 3% decline this year and 2.5% growth next year.

On Thursday, the Bank of Canada specified that some of the elements helping the economy recover this year would be better-than-expected improvements in consumer spending and housing sales.

Despite the upward revisions, however, the central bank suggested household spending is expected to remain "cautious" for the remainder of this year and next in light of a weak labour market, and stock-market losses sustained late last year and during the early part of 2009. The savings rate, meanwhile, is expected to remain "elevated" for the next several years.
The Bank of Canada said inflation, which influences its interest rates, has come in higher than expected as wages continue to increase despite weak productivity and an excess supply of goods.
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