Friday, November 20, 2009

Dollar should weigh on Q3 recovery: BofC

Canada's economy performed worse than expected in the third quarter and while now recovering, it risks further setbacks due to the sharp rise of the Canadian dollar, Bank of Canada Governor Mark Carney said on Thursday.

Carney said the bank's projection last month of 2% annualized growth in the third quarter did not likely materialize but the overall outlook, including the strongest domestic spending profile in the G7 next year, remained the same.

"Recent indicators suggest somewhat softer growth relative to that 2% projection but the expectation is that the overall profile of the growth in that projection -- so accelerating growth in the fourth quarter and into 2010 for Canada -- remains valid," he said in a press conference following a speech in New York.

Finance Minister Jim Flaherty earlier on Thursday suggested he thought the economy could have stood still in the third quarter, saying he agreed with the Organisation for Economic Co-operation and Development's forecast that the growth profile for that quarter was "flattish."

Quarterly growth figures will be released on Nov. 30 and analysts are mixed on whether the economy stopped shrinking.

"There continues to be a great debate over whether Canadian Q3 GDP will manage a positive figure, in keeping with most of its peers on the world stage. This is far from a foregone conclusion," said Eric Lascelles, chief economics and rates strategist at TD Securities.

Growth has been slowed down by the appreciation of the currency against the U.S. dollar and its volatility, Carney said, a line the bank has taken repeatedly in recent weeks.

"The current strength in our dollar is expected, over time, to more than fully offset the favorable developments since July," he said.

Carney shed no new light on the bank's thinking on the exchange rate or whether it would have to take action to prevent the currency from derailing growth and inflation.

Nor did he show any concern that a sudden revival of the housing market could create a housing bubble, as some have suggested, saying it was partly the result of pent-up demand after a hiatus and partly the result of low rates.

Carney repeated the bank's conditional pledge to hold benchmark interest rates at a record low until the end of June 2010.