OTTAWA, Dec. 27 /CNW/ - In its Economic Outlook for 2011, released today, the Canadian Chamber of Commerce observes that the Canadian economy has transitioned into a period of subdued growth.
After an initial strong rebound from the recession, Canada's economy lost some of its swagger, expanding at a sluggish 2.3 per cent annual rate in the second quarter of 2010 and a meager one per cent in the third quarter.
"The Canadian economy is chugging along but not at full steam," says Perrin Beatty, President and CEO of the Canadian Chamber of Commerce. "A number of factors are expected to constrain growth below 2.5 per cent in 2011," says Beatty.
Those factors are:
- More prudent spending by Canadian households as they focus on repairing their finances. Canadians borrowed heavily during the recession and recovery phase, racking up unprecedented debt levels. A softer employment picture and tepid wage gains will also add to consumer caution.
- The cooling of Canada's red-hot housing market. Many home sales were pushed forward in advance of new tighter mortgage insurance rules, anticipated interest rate hikes and the introduction of the Harmonized Sales Tax (HST) in Ontario and British Columbia. With housing demand retreating, housing starts receded from their April 2010 peak but should stabilize in 2011, albeit a lower annual average than 2010.
- The winding down of fiscal stimulus and the focus of governments on constraining annual program spending growth to balance their books by mid-decade. Government spending will make a considerably smaller contribution to overall real GDP growth in 2011.
- Sluggish U.S. demand and the high Canadian dollar—both will likely constrain exports. The rate of growth in imports should cool, reflecting the expected moderation in Canadian household spending. Nonetheless, with the level of imports remaining above exports, the trade balance is expected to remain in deficit.
However, business investment, particularly in machinery and equipment (M&E), is the bright spot in the outlook and will be a major driver of economic growth in 2011-12.
"With strong headwinds buffeting the economy and competitive pressures remaining fierce, it is encouraging to see the increased push by Canadian companies to invest in productivity-enhancing goods," says Beatty.
Imports of M&E reached a 13-year high in October, and a number of factors will support increased capital investment going forward, including the strong Canadian dollar, the continuation of low borrowing costs, high corporate cash balances and the elimination of tariffs on a range of M&E.
"We believe Canada's relatively strong fundamentals—an enviable fiscal position, a strong banking system, widening interest rate differentials and favourable commodity prices—will save the loonie from excessive downside pressures. These forces should hold the Canadian dollar near and slightly above parity in 2011 and 2012," says Beatty.
The Canadian Chamber of Commerce expects the Bank of Canada to stay on the sidelines until the summer of 2011 and predicts the overnight target rate will reach two per cent by year-end 2011 and three per cent by year-end 2012. It also cautioned that these are very uncertain times for the global economy and risks abound.
The Canadian Chamber's 2011-12 Economic Outlook can be viewed at www.chamber.ca.
The Canadian Chamber of Commerce is the vital connection between business and the federal government. It helps shape public policy and decision-making to the benefit of businesses, communities and families across Canada with a network of over 420 chambers of commerce and boards of trade, representing 192,000 businesses of all sizes in all sectors of the economy and in all regions.
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