* Macklem sees growth range of 2-2.5 pct for Q3 and Q4
* Says rates stay low to aid export, investment recovery
* Says growth of 2.5 pct needed to absorb economy's slack
By Leah Schnurr
TORONTO, Oct 1 The Bank of Canada cut its
third-quarter economic growth forecast sharply on Tuesday and
said the crucial export sector might recover more slowly than
expected, making clear interest rates will remain low until the
Senior Deputy Governor Tiff Macklem said the central bank
now expects annualized growth in the third and fourth quarters
to be in the 2 to 2.5 percent range before strengthening next
year. In its monetary policy report released in July, the bank
said third-quarter growth would be 3.8 percent and
fourth-quarter growth would be 2.5 percent.
"Near-term growth now looks a little less choppy than
initially projected," Macklem said.
The bank's July projections overestimated the second-quarter
impact on growth of severe flooding in Alberta and a
construction strike in Quebec, both in June. The economy grew
1.7 percent in the second quarter, compared with the bank's
estimate of 1 percent.
Macklem said the economy must grow by at least 2.5 percent
to put a meaningful dent in excess slack. This suggests that
process will not start until 2014.
Stating a goal for the growth rates gives markets extra
guidance on the timing of the bank's next interest rate hike.
The rare level of detail provided in Macklem's outlook marks a
departure by the bank from its usual practice of refraining from
making even broad-stroke forecasts in speeches, much less in
statements by deputies.
"It is now clear that from a Bank of Canada point of view,
excess slack is not expected to begin being absorbed before
early 2014, and that is at the earliest," said Jimmy Jean, an
economic strategist at Desjardins Capital Markets.
"Most likely, this implies a longer horizon for the output
gap's closure," he said.
The bank will publish more detailed forecasts in its next
quarterly update on Oct. 23.
The bank has kept its key interest rate unchanged at 1
percent, a near-record low, since September 2010.
"With inflation subdued, monetary policy remains highly
stimulative to provide time for the recovery in exports and
investment to take hold," Macklem said.
Forecasters in a Reuters poll conducted in August predicted
the bank would begin raising rates in the fourth quarter of
Canada recovered quickly from the 2008-09 recession, largely
due to strong consumer spending and a housing boom. But with the
household debt-to-income ratio at a record high because of low
interest rates, policymakers are eager to see consumers take a
backseat while businesses, particularly exporters, pick up the
The bank expects, in general, household and government
spending combined to contribute about 1.5 percentage points of
To reach the targeted 2.5 percent growth, net exports and
investment would need to contribute at least 1 percentage point.
"That means together exports and investment need to grow by
at least about 4 percent after taking into account their import
content," Macklem said.
In the past year, net exports and investment in fact
contributed nothing to growth, he said.
IMPACT OF U.S. SHUTDOWN
On the economic impact on Canada of the U.S. government
shutdown after lawmakers failed to agree on a budget, Macklem
said: "The short answer is the uncertainty that this ongoing
brinkmanship is bringing is not helpful."
The impact will be relatively small if the shutdown is
short-lived, he said, but a longer paralysis like the one in
1995-96 could have more serious implications.
"If you look at the market response you can see today it's
relatively muted, which means the market is assuming, hoping
this will be relatively short-lived," he said.
"Certainly if it does last a long time. At the end of '95
into early '96 there was a 28-day shutdown and that did have a
measurable impact, so it certainly could happen."
Macklem said a predicted shift in demand in Canada toward
exports and business investment - important to help ensure a
healthier economic growth rate and reduce reliance on consumer
spending - had proved elusive.
"There is a risk that this rotation is delayed further," he
Exporters have lost competitiveness since 2000 in large part
because of the appreciation of the Canadian dollar versus the
greenback, Macklem said.
That currency strength is one of the reasons the Bank of
Canada has kept interest rates so low for so long, he said in a
response to a question from the audience after the speech.