Conditions right for economy recovery

Bank of Canada governor Mark Carney says the elements are in place for an economic recovery to begin later this year, and develop in "full force" in 2010.

"The prospect of [the economy] getting better is there. The policies in place for it to get better are absolutely there," Mr. Carney said in an interview broadcast Sunday on the CBC.
"Part of what is driving recovery in 2010 is policy. It is the fact that monetary policy has been aggressively eased, and secondly there is a big fiscal policy response, not just in Canada but around the world. Those actions are going to start hit later this year, and then really with full force in 2010."

Even with a recovery, however, Mr. Carney suggested the economy will not return to the "heady days" prior to the onset of the credit crisis, beginning in the summer of 2007. "That's not likely. It is not likely because there will be an overhang from the financial mess in other countries. It is going to take some time for [this] to be rectified and it is very [likely] that the new equilibrium ... is not going to be at the same level."

Nevertheless, he said he is encouraged by some recent key economic indicators, such as an upturn in consumer and business confidence; a stabilized real estate market; and drawdowns in business inventories, which the governor added are happening "quickly" in Canada.

"It will make this half of the year bad," the governor said of the impact of businesses cleaning out inventory.

"But once you have cleaned out the inventory stock then that means you start producing more."

The governor's optimism comes at a time when analysts -- including those who have been among the most bearish -- indicate the worst may be over and the stage is set for growth. The U.S. economy in the first quarter shrank by a deeper-than-expected 6.1%, largely due to a record US$103- billion drop on an annualized basis in business stockpiles. However, economists say that should clear the way for positive growth in the U.S. economy, perhaps as early as the current quarter.

Meanwhile, in Canada, Bank of Nova Scotia chief economist Warren Jestin, among the most pessimistic analysts over the past year, said Friday that the worst is over for the Canadian economy, and that a "sluggish" recovery is underway.

In its most recent monetary policy update, the Bank of Canada projected that Canadian GDP in the first quarter will contract by a record 7.3%, and for the year the economy would sink 3%, followed by a 2.5% gain in 2010.

That is a downgrade from its outlook earlier in the year, when it expected a contraction of 1.2%, followed by robust growth of 3.8% in 2010.

According to the central bank, the expected upturn is conditional on the United States, Britain and Europe making "major progress" in stabilizing their financial systems.
Mr. Carney said the bank's revision in last month's outlook was due to an "accumulation of data, events and perspectives" that unfolded after the release of its January update. "We didn't put out a projection in January and then take three months off to play hockey. We made adjustments."

He acknowledged, however, such backpedalling "could" hurt the central bank's credibility, but he said he believes the Bank of Canada responded properly to the "dramatic" and unforeseen drops in production and trade.

To deal with the weaker-than-expected economy, the central bank lowered its benchmark lending rate to a record low, 0.25%, and signalled it would remain there until June of next year. In the interview, Mr. Carney said the rate commitment is an "absolutely conditional promise," based on inflation remaining tepid.

The interest rate commitment is the central bank's efforts to bring down borrowing costs by influencing the short end of the yield curve. But Mr. Carney opted, for the time being, not to introduce additional unorthodox monetary polices, most notably quantitative easing.
"We are only going to use [quantitative easing] tools if we need them -- and only to the extent that we need them," the governor said.

("Conditions right for economic recovery later in year:
BOC's Carney" prepared by Paul Vieira/Financial Post)