28 January 2009

IMF cuts global forecast, forecasts weak Canadian rebound

This article is excerpted from the 28 January 2009 edition of “globeandmail.com”.

The International Monetary Fund has cut its outlook for the Canadian economy, and is now projecting a weaker rebound than other forecasters.

In a global outlook released Wednesday, the IMF said Canada's economy would contract by 1.2 per cent this year. While that it is in line with other projections, the organization now expects the economy to grow by just 1.6 per cent in 2010.

The forecast is markedly more pessimistic than the assumptions in Tuesday's federal budget. And while it matches the Bank of Canada's outlook for 2009, it calls for a much less robust rebound in 2010, which the central bank has pegged at 3.8 per cent.

Referring to the IMF's 2010 outlook, Eric Lascelles, chief economics and rates strategist at TD Securities, said it is “the weakest figure we have seen, and it appears that the IMF has revised the Canadian outlook downward by the most of any ‘advanced economy.' …

“Despite wide-ranging policy actions, financial strains remain acute, pulling down the real economy,” the IMF said in an updated forecast.

“A sustained economic recovery will not be possible until the financial sector's functionality is restored and credit markets are unclogged,” the Fund added.

The outlook was even worse for advanced countries such as the United States and the euro area, whose economies are seen contracting by 1.6 per cent and 2 per cent respectively.

The IMF said emerging market economies would be the only source of growth, expanding 3.3 per cent in 2009 and 5 per cent next year, but those forecasts as well were below projections made less than three months ago.

The IMF said it expects the world economy to gradually recover in 2010 and growth to resume to around 3 per cent….

The IMF said that the risks of deflation were heightened because of a housing slump in many key economies and a global financial crisis but said that the most likely outcome was that the world will escape a sustained bought of falling prices, as it did after the last scare in 2002-2003.