Quarterly Canadian Monetary Policy Report Released

July 23, 2009

Under a new more transparent format, Canada’s central bank today released a full 25-page policy report.  It previously released lengthy explanations of its assumptions and expectations in April and October but condensed 8-page updates in July and January.  Many of the latest major points were included in Tuesday’s scheduled interest rate announcement.  Among the reports highlights are:

  • Real Canadian GDP is expected to drop 3.5% at a seasonally adjusted annual rate(saar) in 2Q following the first quarter’s decline of 5.4% saar.
  • Positive growth begins in the current third quarter of 2009, one quarter sooner than projected in April’s report.  Growth is initially weak at 1.3% saar this quarter but then accelerates to 3.0% in 4Q and 4.0% in 1H10.  From 4Q10, the presumption is that Canadian domestic demand expands faster than U.S. domestic demand.
  • Calendar year growth rates are penciled in at negative 2.3% in 2009 but positive 3.0% in 2010 and 3.5% in 2011.  Recovery stems from more normal financial market conditions, fiscal and monetary stimulus, completion of the housing adjustment, which has been a huge drag, and a favorable inventory cycle swing.
  • The global and domestic recoveries are at a nascent and therefore vulnerable stage.  Continuing macroeconomic support is “critical” to the baseline forecast.  Public spending accounts for at least a percentage point of economic growth in 2008, 2009, and 2010.  Even in 2010, government expenditures will match the growth contribution of personal consumption.  Net exports continue to be mostly a drag, cutting GDP growth next year by 0.8 percentage points (ppts) after enhancing such by just 0.4 ppts this year.
  • Global GDP is projected to drop 1.7 in 2009, then rise 2.3% next year and 3.9% in 2011.  China’s growth path was revised up.  Some other economies were revised down.
  • A U.S. activity index has been unveiled, which weights sectors according to their importance in Canada’s sensitivity to U.S. trends.  This index recovers faster than U.S. GDP, just as it previously fell more sharply than U.S. GDP.
  • Potential real GDP growth — the non-inflationary pace with fully utilized productive resources — has been revised significantly downward to 1.1% this year, 1.5% next year and 1.9% in 2011.  Nine months ago, officials had estimated potential GDP growth of 2.4% in 2009, 2.5% in 2010, and 2.5% in 2011.
  • As a result, Canada’s output gap does not get as large as before.  Such is 3.5% now.
  • Core Canadian CPI is projected to bottom out at 1.4%, higher than the 0.9% trough forecast three months ago.  Core inflation stickiness reflects resilient wages.  As before, core and total inflation converge upwardly on the 2.0% target, which they reach in 2Q11.
  • Financial conditions have improved in Canada since the prior Monetary Policy Report and are more favorable than in many other advanced economies.
  • A “stronger and more volatile Canadian dollar” is identified as a main source of downside risk to growth and inflation.
  • Unless the perceived glide path of inflation takes an unacceptable turn upward, officials are promising not to begin raising the 0.25% overnight money target before 3Q10.
  • Policy retains “considerable flexibility.”  This euphemistic central bank-talk means that although the Bank of Canada did not follow others into quantitative easing, contingency plans have been worked out in the case that such becomes necessary.

Central banks, including Canada’s, are working from similar play books.  Nothing in this report deviates remarkably from what other monetary officials, including Fed Chairman Bernanke earlier this week, have been saying about economic conditions, their prospects, and what policymakers ought to be doing.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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