Canadian growth forecasts cut as U.S. struggles: Reuters poll

TORONTO Thu Jul 14, 2011 12:35pm EDT

TORONTO (Reuters) - Canada's economic growth outlook for the rest of this year and next has dimmed, hurt by a deepening slowdown in the United States, its biggest trading partner, the latest Reuters poll of economists showed.

The hit to gross domestic product (GDP) will be dramatic in the quarter just passed, according to the survey of 21 economists taken in the past week. GDP growth is expected to slow to 1.5 percent, annualized, from 3.9 percent in January-March.

That is a huge downgrade from the 2.7 percent second quarter growth rate forecast in a poll just three months ago and shows just how sharp the slowdown has been over that short period. Growth stalled in April, largely due to a slump in auto production.

Economists are optimistic the economy will rebound, however, with the consensus calling for 2.9 percent annualized growth in the current quarter, barely changed from expectations in April, and 2.8 percent as 2011 draws to a close.

A worsening sovereign debt crisis in Europe, which this week threatened to ensnare a G7 nation, Italy, as well as softening demand from the United States -- by far Canada's biggest export market -- has darkened prospects for the economy.

"Our major trading partner, the U.S., lost a good bit of traction through the spring and even early summer, with the slowing job growth the latest testament to that," said Sal Guatieri, a senior economist with BMO Capital Markets.

"Of course that will undermine Canadian exports."

News on Friday that U.S. jobs growth effectively ground to a halt last month unsettled financial markets. Canada, with about one-tenth of the population, created about a third more jobs during the same month, underscoring its relative strength.

Many economists note that Canada, a major energy and commodity exporter, has one of the healthiest economies among the Group of Seven countries.

But Canada's GDP now is projected to grow an average 2.8 percent in 2011, down from 3 percent expected in April. The consensus for 2012 slipped to 2.6 percent. That compares with 2.8 and 3.0 percent expected for the U.S.

Canada's unemployment rate, currently at 7.4 percent and far below the U.S. rate of 9.2 percent, is projected to fall to 7.3 percent by end-year, lower than the 7.5 percent forecast in the previous poll. The jobless rate is expected to average 7.2 percent in 2012 compared with 7.3 percent forecast in April.

INFLATION EXPECTATIONS RISE

Core inflation, which excludes volatile food and energy prices, was expected to come in at 1.8 percent this year, a rise from the median 1.5 percent economists predicted in the April poll. The central bank aims to keep inflation at the midpoint of a 1 to 3 percent range.

Overall Canadian inflation rose to its highest level in more than eight years in May, raising prospects that the central bank could increase interest rates sooner than previously expected.

But despite the inflation data, many economists have pushed back their forecasts for the Bank of Canada's next rate hike due to external risks.

"One of the things that we're going to see is a positive thrust from monetary policy, because interest rates are still very low and very accommodative," said Sheryl King, an economist and strategist at BofAML.

All 37 forecasters in Wednesday's Reuters interest rate poll said the Bank of Canada would hold its interest rate at 1 percent when it meets to set rates this month. The median forecast was for the next hike to take place in the fourth quarter of this year.

(Polling by Teresa Ruiz; additional writing by Jeffrey Hodgson; Editing by Ross Finley and Ron Askew)

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