Weak global conditions to keep Canada in slow lane until 2013 OECD

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The risk of a new major (global) contraction cannot be ruled outOTTAWA — With global conditions weakening, Canada’s economy will remain in the slow growth lane until the middle of next year, the Organization for Economic Co-operation and Development predicts in a new forecast.The OECD projects Canada’s economy will grow by 1.5% in the final three months of this year, and advance only 1.8% in 2013.Next year’s projection is half a point below the Bank of Canada’s official forecast, although the two institutions agree that 2014 will see an improvement to 2.4% growth.The Bank of Canada may need to raise its benchmark lending rate by the second half of next year to avoid inflation, the OECD said.While growth will remain “moderate” until the middle of 2013, “economic slack is not large,” the OECD said.Canadian household debt has surged to a record amid low interest rates, prompting policy makers to warn of risks to the country’s financial system.The OECD said the tightening of mortgage-insurance rules by the government in June will cool house prices. “If housing- market imbalances worsen, the government should respond with further macro-prudential measures,” the OECD said, referring to regulatory steps rather than monetary action.Overall, the Paris-based organization’s analysis mirrors that of the Canadian central bank and that of many private sector economists in most respects.The OECD blames weak export markets abroad, government austerity and high household indebtedness at home as the key reasons for the lacklustre projections.But its outlook for Canada is still far stronger than for Europe, which is expected to remain in recession through most of 2013.And Canada’s growth rates are stronger than the average in the 34 nations of the OECD, which includes most of the industrialized world.While the international organization does not see the Canadian economy slumping, it cautions that policy-makers should be prepared for shocks.“Federal and provincial budget consolidation is needed and welcome, but if new shocks were to weaken underlying growth materially, the pace of debt reduction should be slowed,” the report states.The report’s outlook for the world is decidedly bleaker than for Canada, pointing out that after five years of crisis, the global economy is again weakening, and risks proliferate.“The risk of a new major contraction cannot be ruled out,” said Pier Carlo Padoan, the OECD’s chief economist, citing the ongoing recession in the euro area, a below-par economy in the U.S., and a slowdown in many emerging markets.Referring to the problems in Europe, he said it is “not difficult to imagine a situation in which something goes wrong.”If that happened, Canada would be impacted through the trade, financial market and confidence channels, the OECD said, but noted that the country is much more dependent on the U.S., whose economy is better balanced.In fact, the OECD anticipates the U.S. will speed up faster than Canada’s next year at 2% and in 2014, at 2.8% growth.Because the U.S. is starting from further behind, Canada will still maintain an advantage in the recovery over its southern neighbour, however. For instance, the organization projects Canada’s unemployment rate will fall below 7% by 2014, while in the U.S., it is expected to remain close to 8%.With files from Bloomberg

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