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Economy back even stronger

Bank of Canada says economy bouncing back stronger, still worries about loonie

By Julian Beltrame – Canadian Press

The Canadian economy is bouncing back from the recession stronger than previously believed, despite ongoing worries about the impact of a strong dollar, the Bank of Canada said Thursday as it left interest rates untouched at the lowest level practicable.

In July, Bank of Canada governor Mark Carney appeared to go out on a limb in declaring the recession over – one of the first to do so – but now the central bank says even Carney underestimated the rebound.

“Stimulative monetary and fiscal policies, improved financial conditions, firmer commodity prices, and a rebound in business and consumer confidence are supporting domestic demand growth in Canada,” the bank said in a statement.

“Combined with recent information on inventory adjustments and automotive production, this suggests that GDP (gross domestic product) growth in the second half of 2009 could be stronger than the bank projected in July.”

The unexpected strength will not impact interest rates, however. The bank said it will keep its key policy rate at the 0.25 per cent until at least next July, as it promised to do in the spring.

The strength in the domestic economy was borne out by July trade numbers that suggest the return of spending by Canadian consumers, with an 8.3% pop in imports.

The troubled export sector didn’t fare badly either, gaining 3.3% – 5.9% in volume terms – on the back of auto production.

All this was done at a time when the Bank of Canada had been repeatedly warning about the impact on exports of a dollar persistently above 90 cents US, well beyond the bank’s expectations of about 86 cents.

“To me it shows the bank is increasingly confident in the view… the recession is over and the economy is turning the corner,” said Douglas Porter, chief economist with the BMO Capital Markets.

“I also think they are slowly but surely downgrading their concern about the currency. I think they just want to make sure it doesn’t get way out of line and that’s just part of what the verbal assault is aimed at, and they’ve been somewhat successful at that.”"

The Bank of Canada gave no new estimates of growth for the second half of this year beyond the prediction it will be stronger than it initially forecast in July. At that time, the bank said the current third quarter would bounce back modestly by 1.3% and the second quarter would rebound to three per cent growth.

Most economists now expect the third quarter will see growth between 2.5 and three per cent.

The bigger worry, said Scotiabank economist Derek Holt, is what happens next year. Ironically, he says, a bigger immediate bounce could result in weaker growth to come.

Holt said he believes many Canadian companies, with the exception of the auto sector, remain stuck with a significant backlog of unsold product and are not yet poised to ramp up production.

“That means… any recovery in Canadian production and export activity is likely to remain seriously muted and delayed in comparison to other countries,” he said.

The bank’s statement suggests Carney is still worried about the impact of the dollar on growth in the export sector – primarily autos, auto parts and forestry – but possibly not as much as in the past.

“In its conduct of monetary policy at low interest rates, the bank retains considerable flexibility, consistent with the framework outlined in (April),” the Thursday statement read. The April framework was a reference to increasing the money supply through quantitative easing.

But Porter noted caution came at the tail of the one-page statement and is more tamely phrased than in previous warnings.

He said there was almost zero chance that Carney would intervene in the currency trading, hoping his remarks will be sufficient to keep the dollar from rising too high, too fast. So far, he said, words appear to be working.

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