Governments and consumers will lead Canadian recovery in 2010

OTTAWA, Jan. 19 /CNW Telbec/ - Government and consumer spending will account for most of Canada's economic growth in 2010, according to the Conference Board's Canadian Outlook - Winter 2010.

"Canada's economic outlook is much brighter than it looked this time last year, but the forecast for recovery remains muted," said Pedro Antunes, Director, National and Provincial Forecast. "Fiscal stimulus by government is expected to bolster the economy and will compensate for soft growth in private sector investment and exports. Propped up by low borrowing rates and rising confidence, consumers will loosen their purse strings in 2010."

Both the U.S. and Canadian economies came out of recession in the third quarter of 2009. After contracting by an estimated 2.5 per cent last year, real gross domestic product in Canada is forecast to grow by 2.8 per cent in 2010. Should U.S. employment improve more quickly than anticipated, the rebound in U.S. growth could be stronger in 2010, which would lead to a more robust recovery in Canadian exports and GDP.

Low financing rates, coupled with a rebound in household net worth and consumer confidence, are forecast to push up real consumer spending by 1.9 per cent in 2010. Employment, however, will remain weak, with growth of just 1 per cent. The unemployment rate is expected to inch up to 8.6 per cent on average this year, as more people re-enter the workforce to search for employment.

Private investment spending is expected to be the weak point of the domestic recovery. In 2009, companies slashed investment in structures and machinery due to reduced cash flow, weak demand and tight credit conditions. Real investment spending fell by an estimated 14.5 per cent in 2009. Despite improving business conditions, industry is still running at record low capacity. Private investment is expected to grow by only 3.4 per cent in 2010.

Although current inflation readings are higher than the Bank of Canada's most recent projections, inflationary pressures are contained and the conditions appear to be in place for the Bank to refrain from pushing up interest rates until mid-year. Over the next two years, the Bank's challenge will be to unwind monetary stimulus slowly enough to avoid choking off the recovery - but rapidly enough to prevent any low-interest-rate-induced "irrational exuberance."

Downside risks to the forecast rise over the medium term (beyond 2010). The massive fiscal stimulus and associated deficits in the U.S. and across the globe will have to be borne down the road. Depending on how quickly governments implement restraint, global - and Canadian - economic growth in 2011 could be lower than currently forecast.

For further information: Brent Dowdall, Media Relations, Tel.: [phone] ext. 448, E-mail: [email protected]