Slow recovery to hold rates down: Desjardins

By John Powell | September 20, 2010 | Last updated on September 20, 2010
2 min read

Canada’s economic recovery is weak, fragile and wrought with a fairly high risk of a relapse into recession, reports the Desjardins Group Economic Studies team.

The economists point to a cooling housing market and the winding down of government stimulus programs as indicators of slow to moderate growth in the future.

“Interest rates will stay very low until both investors and monetary authorities are convinced that the global recovery is on a solid footing,” said François Dupuis, Desjardins Group’s vice-president and chief economist.

Desjardins believes that the course of the U.S. economy, combined with the current global uncertainty, should prompt the Bank of Canada to stop raising rates until next spring.

Regionally, Desjardins sees the resource-producing provinces of Western and Atlantic Canada doing very well. Ontario will still manage to grow 3.5% in 2010 and 2.6% in 2011, and, as the result of pressure to cut spending and a heavier tax burden for individuals, Quebec will not be able to match that performance. The hike in the Quebec Sales Tax and health contribution, as well as other fees, will affect household expenditures.

Real GDP growth is therefore expected to be a mere 2.7% in 2010 and 2.3% in 2011.

“Unemployment should end the year 2011 at 6.7%, a better performance than Ontario (8.4%) and the country as a whole (7.5%),” says Yves St-Maurice, director and deputy chief economist with Desjardins Group.

Desjardins doesn’t predict much in the way of good news for the U.S. on the economic front. At 2.6% for 2010 and 2.4% for 2011, the growth forecast reflects a labour market that is slow to bounce back, a housing market still in the throes of a profound restructuring, and households that are trying to get their financial affairs in order by saving more.

“All this will make it hard for the Fed to justify a rate increase before 2012, particularly since inflation will remain subdued,” said Dupuis.

The Business Cycle Dating Committee of the U.S.-based National Bureau of Economic Research (NBER) seems to support the Desjardins observations.

Even though recovery has been ongoing for more than a year, NBER does not think the U.S. economy has returned to “operating at normal capacity” yet.

When it comes to the global picture, though, despite the weak performance from industrialized countries, Desjardins Group predicts that global growth should reach 4.1% in 2010 and 3.8% in 2011. Emerging nations will make an invaluable contribution to world output, posting an average increase in real GDP of 5.9% this year and 5.5% the year after. China will be on top with 9.8% in 2010 and 8.9% in 2011.


John Powell