10 February 2009

Carney expected to stand firm on bullish outlook

The following is excerpted from the February 9th edition of "National Post".

Bank of Canada governor Mark Carney is expected to tell skeptical MPs Tuesday morning that the basic tenets underlining his rather optimistic economic outlook remain largely intact, even after January's startling job-loss statistics.

Members of the all-party House of Commons finance committee say they want to know why the central bank's forecast - 3.8% growth in 2010 and a recession less painful than in other countries -- is so radically different from private-sector economists...

Analysts say the governor will likely highlight a number of factors in his favour. Among them: the central bank had already incorporated a rather bleak first-quarter performance in its forecast; measures to ease credit flows are beginning to take effect; and the large amount of fiscal stimuli proposed in Canada and the United States has yet to work its way through the system.

"It would be very unusual for the governor to disavow the forecast he just put together a few weeks ago," said Carlos Leitao, chief economist at Montreal-based Laurentian Bank Securities.

Mr. Leitao said Mr. Carney, while remaining firm, will no doubt remind MPs of the downside risks to his forecast, such as the failure of a proposed U.S. financial recovery plan - expected to be outlined Tuesday by U.S. Treasury Secretary Timothy Geithner - to restore stability to financial markets.

Michael Gregory, senior economist at BMO Capital Markets, said as far as he's concerned, "the tenets of the Bank of Canada's arguments are sound." He added, though, there is a disagreement about how fast, and how strong, the global economy recovers, which then drives up demand for Canadian-made goods.

In its most recent monetary policy update, the Bank of Canada said the "anticipated normalization" of the global financial system, together with stimuli from both monetary and fiscal policy, would help drive growth starting in the latter half of this year - with fourth-growth output hitting 3.5%, then 3.8% for 2010.

Mr. Leitao, who is in midst of revising upward his 2010 forecast from 2%, said people seem to have forgotten the bank's outlook for early 2009 - a 4.8% contraction in the first quarter, which was among the most pessimistic in the market. That was to follow a fourth-quarter GDP decline of 2.3%. "They built that into their view."

Mr. Gregory added that efforts by Ottawa to free up credit, such as buying insured mortgages from banks, appear to be working. He noted that the banks' posted rate on a five-year mortgage has dropped 140 basis points in recent months to a level not seen since November of 2005. Plus, Ottawa has yet to implement measures in its budget aimed at filling in the gap left behind by non-traditional lenders, such as giving Export Development Canada the power to enter the domestic market.