Bank of Canada sees bumpy road ahead

HEATHER SCOFFIELD

Globe and Mail Update

Toronto — The Canadian economy is having more trouble than expected in adjusting to a new world of high commodity prices, a strong Canadian dollar and global competition, the Bank of Canada says.

As a result, the most the Canadian economy can hope to grow over the next two years is 2.8 per cent, the central bank says in its quarterly outlook.

Behind that calculation is a more pessimistic view of Canada's productivity.

The bank now estimates that Canada's productivity will only grow by 1.5 per cent per year for the next two years, down from 1.75 per cent.

“The modest realized pace of productivity growth is consistent with an economy that is undergoing significant structural adjustments in the face of large movements in commodity prices, the marked appreciation of the Canadian dollar, and new sources of competition from emerging Asia,” the bank says. “This adjustment is ongoing and may be having a larger and more protracted impact on productivity growth than previously projected.”

The next few quarters will probably be a bit bumpy, the bank said. The U.S. slowdown is hurting Canadian exporters and lower energy prices are sapping some of the momentum in the energy sector. “This implies some downward pressure on the growth of corporate profits and government revenues in the future,” the bank says.

Still, the softness will be short lived and the Canadian economy, in tandem with the United States, will pick up in the second half of 2007, the report says.

And consumer spending will likely remain strong throughout, as people borrow against their houses.

As such, interest rates are fine where they sit now the report stated, reiterating sentiments expressed earlier this week when the central bank left rates unchanged for the second time in a row