OECD Slashes Canada Forecasts, Urges BoC To Delay Rate Hikes To 2013

OECD Slashes Canada Forecasts, Urges BoC To Delay Rate Hikes To 2013

Household spending seen to moderate

–Low cost of capital to sustain strong business investment growth

–Exporters face “significant headwinds” from strong C$, sluggish U.S. recovery

By Nirmala Menon

Of DOW JONES NEWSWIRES

OTTAWA -(Dow Jones)- The Organization for Economic Cooperation and Development slashed Canada’s growth forecasts Monday, saying the outlook has weakened ” significantly” because of a deteriorating external environment, and called on the central bank to delay rate hikes to 2013 as lower commodity prices and economic slack weaken inflationary pressures.

Still, Canada will fare better than most advanced countries with gross domestic product growth of 2.2% this year, the second-best performance among Group of Seven nations after Germany, according to the OECD’s projections in its twice-yearly Economic Outlook. Growth is expected to slow to 1.9% in 2012, just behind the U.S. and Japan which are seen to share the top spot in the G-7. In May, the OECD had forecast Canada’s economy would grow 3% this year and 2.8% in 2012.

The Paris-based think-tank said Canada and the U.S. will be the strongest G-7 countries in 2013, with growth of 2.5%.

It said financial-market turmoil from the euro-zone debt crisis has sapped the confidence of Canadian consumers already burdened by high levels of household debt, curbing consumption growth. Exports will likely be restrained by weak U.S. recovery and the strong Canadian dollar.

“In light of heightened economic risks, interest-rate increases should be delayed until 2013,” the OECD said. Indeed, if downside risks materialize, the central bank should cut interest rates, it added.

The Bank of Canada’s benchmark overnight rate has stood at 1.00% since September 2010, and it’s likely to stand pat again at the last policy decision of the year on Dec. 6. Governor Mark Carney told reporters last week that the Bank “won’t tie” its hands to a path for rates, and that its projections assume “some” removal of monetary stimulus through 2013. In October, it forecast GDP growth of 2.1% in 2011, 1.9% in 2012 and 2.9% in 2013.

The OECD said government austerity measures and softening employment growth in the private sector are likely to moderate household spending.

The corporate sector’s finances are sound and low cost of capital should continue to sustain strong business investment growth, it said. But exporters will continue to face “significant headwinds” from the strong Canadian dollar and sluggish recovery in the U.S., where some three-quarters of Canadian exports are shipped.

“Despite some depreciation in recent months, the strong exchange rate should continue to depress the competitiveness of Canadian export-oriented manufacturers,” the OECD said.

It said Canada’s sound financial system and the government’s “strong credibility” affords it some fiscal space to respond to possible negative shocks. The government has some flexibility to delay or relax the pace of fiscal consolidation if external demand or labor market conditions deteriorate further, it said.

“Structural reforms will need to take some more of the burden of promoting growth, allowing some under-financing in the short term,” the OECD said. ” Further shifts towards a growth-friendly tax mix would be warranted, with a greater role for environmental and value-added taxes, while eliminating inefficient and poorly targeted tax expenditures.”

Website: http://www.oecd.org

-By Nirmala Menon, Dow Jones Newswires; 613-237-0668; nirmala.menon@ dowjones.com

(END) Dow Jones Newswires 11-28-110514ET Copyright (c) 2011 Dow Jones & Company, Inc.

 

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