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Canadian economy stalling as exports hit hard: Bank of Canada

OTTAWA - The economy has sharply deteriorated to near recessionary levels and the cost of filling the tank and putting bread on the table is going to go sharply higher, Canadians were told Thursday.


OTTAWA - The economy has sharply deteriorated to near recessionary levels and the cost of filling the tank and putting bread on the table is going to go sharply higher, Canadians were told Thursday.

A bleak economic assessment came from the Bank of Canada's quarterly monetary report, which warned that Canadian exports, particularly from manufacturers in central Canada, will be hard hit this year by the U.S. slump and tight money in the credit markets.

At the same time, reports said the price of gasoline will soar as crude prices skyrocket on world markets and the cost of everything made from flour - from bread to cakes and bagels - will also go up.

Bruce Cran, president of the Consumer Association of Canada, said Canadians will likely have to change the way they eat and "perhaps it's time to give some serious thought to buying on the basis of choosing goods that are actually produced near where you live."

"So if you've got a grandmother who's got recipes on how to can food during the summer that will last through the winter, maybe you should salvage those while the going's good."

In Laval, Que., Prime Minister Stephen Harper acknowledged that "the increasing prices of certain products in certain regions of the country limit the budgets of Canadian families."

But he said Canada and its diversified economy are in a good position to weather the economic storm that is brewing in the United States and abroad.

"Canada is not an island, and our trade-intensive economy is expected to grow more slowly over the next two years," the prime minister acknowledged in a speech to a Quebec audience.

"The economic slowdown in the United States, the difficult credit market, global financial volatility, (and) the drop in the American dollar, represent the biggest challenges for us."

The Bank of Canada assessment gave a clearer understanding of what the central bank's governing council was weighing Tuesday when it slashed its key interest rate by half a percentage point to three per cent.

After predicting in January that an upturn would begin this quarter, the bank now says Canada has entered an economic flat spot with growth in the current quarter barely above recessionary levels at a 0.3 per cent annualized rate, and won't recover fully until 2010.

The bleaker outlook for the economy comes amid other potential bad news for Canadian consumers, who already face rising fears about losing their jobs in central Canada's battered manufacturing sector:

-CIBC World Markets predicted Thursday that the Canadian average gasoline prices, now about $1.23 a litre, will top $1.40 this summer and $2.25 by 2012 as crude oil prices continue to soar and reach US$225 a barrel in four years. That could mean the cost of filling the tank could rise to $80 this summer and $135 in four years.

-The country's largest bread maker, Canada Bread Co. (TSX:CBY), warned that consumers can expect to pay more for bread, bagels and other flour-based products after a 32 per cent drop in first-quarter profit amid "significant margin compression due to rising wheat prices."

But Bank of Canada governor Mark Carney said Canada won't fall into recession thanks to the relatively strong internal economy buttressed by oil and mineral exports and the record number of Canadians who have jobs.

"The decline in exports ... is counterbalanced and in our view more than counterbalanced by the strong domestic demand," he said.

Still, Carney noted that the bank will likely have to put more stimulus into the economy over and above the 1.5 percentage points it has cut from the overnight rate since December.

Several economists, including TD Bank's Don Drummond and Ted Carmichael of JP Morgan Securities, suggested that if anything Carney is sugar-coating the situation.

Both predicted the economy will actually advance only 1.1 per cent this year and that next year's growth will also be lower.

"Our forecast anticipates that weak growth and below target core inflation will prompt the bank to ease further, cutting the policy rate (50 basis points) to 2.50 per cent by July 2008, before going on hold," Carmichael said.

Part of the reason more rate easing is needed is that tight credit conditions have increased the cost that the chartered banks pay for capital, causing them to pass on only a portion of the central bank's stimulus to businesses and individuals in the form of lower borrowing costs.

The Bank of Canada estimates that commercial interest rates are up to three-quarters of a point a higher than might otherwise be the case given the bank's monetary actions. As well, obtaining credit has become more difficult, particularly for businesses.

"There has been a tightening of credit, but certainly it's much better in Canada in this situation than it is in the other major economies," Carney said.

He said Canada's banks have not seen the same elevated funding costs as in the U.S. and are better capitalized, which has allowed them to lend more broadly.

While it was reluctant to use the word recession, the bank said the American economy will contract slightly during the first half of this year, before growth resumes thanks to the tax-rebate package passed by the U.S. government, lower interest rates and higher exports encouraged by the weak U.S. dollar.

Still, the advance will be weaker and take longer than first thought, and that will prevent Canada, which sends about 75 per cent of its imports to America, from mounting a quick recovery.

The U.S. slump is also dragging on global growth, projected at 3.7 per cent this year and 3.5 per cent next, well below last year's 4.9 per cent advance.

"These global developments will have consequences for the Canadian economy," the bank says.

"First, exports are projected to decline this year. Second, turbulence in financial markets will continue to make financing in capital markets more costly and difficult for Canadian businesses and banks. Third, business and consumer sentiment in Canada is expected to soften somewhat."

The bank says credit conditions and the Canadian economy won't return to normal until late 2009 or possibly 2010.

As it reported Tuesday, the bank has scaled back its growth projection for the Canadian economy to 1.4 per cent this year and 2.4 per cent next, then 3.3 per cent in 2010.

The bank also expects Canada's inflation to remain below two per cent for the next two years and looks for commodity prices to slip about 15 per cent and oil prices to drop to just $100 US a barrel in the next two years as global demand cools.

One strength in the Canadian economy continues to be housing - a key difference from the United States.

"Demand should ease, since affordability has deteriorated and economic growth is expected to slow," the bank says.

"However, a general reversal in house prices is unlikely as there are few signs of excess housing supply."

Bruce Cran, president of the Consumer Association of Canada, said Canadians will likely have to change the way they eat as rising commodity costs are making all types of food - from fresh produce to bread to meat - more expensive.

"I think you're probably going to see some changes in the way people choose their food and perhaps it's time to give some serious thought to buying on the basis of choosing goods that are actually produced near where you live," he said.

"So if you've got a grandmother who's got recipes on how to can food during the summer that will last through the winter, maybe you should salvage those while the going's good."

 
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