Carney warns on growth

Mark Carney, the governor of the Bank of Canada, warned yesterday the country has to boost its troubling productivity record or face years of sputtering economic growth that would be hard-pressed to surpass the 2% mark.

For now, the central bank reiterated an economic recovery is under way, boosted by improved global prospects and government stimulus, with growth to peak in the second quarter of this year, at a 4.3% annualized pace, according to its latest forecast introduced yesterday. Business investment and the pace of export growth are set to ramp up through 2010, while the red-hot activity in Canadian real estate will peter out once pent-up demand subsides and affordability declines, it indicated.

But growth slowly and surely tapers off each and every quarter, hitting 2.2% expansion in the final three months of 2011, when the economy is scheduled to have reached potential.

After that, however, output is to remain limited unless productivity improves, Mr. Carney suggested.

"We have a productivity performance that has been relatively disappointing in recent years, and until we see an uptick in productivity, at least at this stage, looking for real growth much north of 2% is not yet a realistic prospect," the governor said.

The central bank said potential output, or the level at which an economy can operate without triggering inflation, is expected to grow 1.5% this year and 1.9% in 2011.

Mr. Carney said current evidence gathered suggests it won't grow "much stronger" than that in the years afterward, and real GDP growth would "broadly" track that pace.

Productivity growth is widely considered the best way to increase a society's standard of living, as income gains are produced with less effort. But there are, in essence, only two ways to accomplish this: Employ more workers, which will be next to impossible with an aging population, or give the existing workforce better tools to generate more production.

"The distressing thing is Canada's productivity has been terrible," said Craig Alexander, deputy chief economist at Toronto-Dominion Bank. "Economists keep having their fingers crossed that we will see an improvement, but it never materializes."

Recent data from Statistics Canada underlined this point, indicating productivity weakened during the recession -- generally unheard of, because during downturns firms scale back payrolls and hours worked, thereby boosting production per employee.

Mr. Alexander said companies should take advantage of the strong Canadian dollar to acquire productivity-enhancing technology, as much of it is priced in U.S. dollars. And that might be underway, as data indicate business investment in machinery and equipment jumped over 25% annualized in the third quarter.

He added governments have taken the right steps by reducing corporate taxes and scrapping levies on capital investment. The harmonization of federal and provincial sales taxes, in Ontario and British Columbia, are also bound to help.

Pressure on Canadian firms to invest will mount, as the central bank's outlook talked about the United States emerging as an exporting powerhouse.


"U. S. exports are expected to grow substantially, supported by a weak U.S. dollar and a faster-than-anticipated recovery in overseas economies," the Bank of Canada said in its forecast. "Higher productivity growth and lower unit labour costs have also made U.S. goods more competitive."

This surge in U.S. exports was one reason the Bank of Canada upgraded its forecast for the U.S. economy, to 2.5% growth this year from its previous call for a 1.8% expansion.

Mr. Carney said the U.S.'s growing export presence might squeeze Canadian exporters further.

"The competitive environment for exporters has intensified without question," he said. "It is more competitive and it is not just U.S. competition," citing the gains made by emerging economies.

Further, external demand will remain at "absolute low" levels in the United States, with Mr. Carney citing U.S. housing starts. They should climb to 700,000 units this year from 550,000 last year -- but well below the 2.1 million peak hit prior to the financial crisis.

(prepared by Paul Vieira/Financial Post/National Post)




REVISED OUTLOOK

Notable changes to the central bank's updated forecast, compared with last October

CANADA

Now GDP growth 2.9% in 2010, 3.5% in 2011

Then 3% in 2010, 3.3% in 2011

UNITED STATES

Now GDP growth 2.5% in 2010, 3.9% in 2011

Then 1.8% in 2010, 3.8% in 2011

GLOBAL ECONOMY

Now GDP growth 3.7% in 2010, 4.1% in 2011

Then 3.1% in 2010, 4.1% in 2011

Source: Financial Post