By Greg Quinn
July 23 (Bloomberg) — The Bank of Canada said today the country’s recession is ending as commodity prices and consumer confidence improve, while the pace of the recovery will be muted by a strong currency.
Output will expand at a 1.3 percent annualized pace in the July-September period, the central bank said. That replaced the prior estimate of a 1 percent contraction, marking the end of a recession that started in the fourth quarter of last year.
“This recovery isn’t as robust as previous recoveries have been,” Governor Mark Carney told reporters today in Ottawa after publishing its Monetary Policy Report. “The dollar is an important brake on the pace of growth.”
Carney kept his main interest rate at 0.25 percent two days ago, the lowest since the central bank was founded in 1934, and repeated he plans to leave it there through June 2010 unless there is a shift in the inflation outlook. The economy won’t operate at its full potential until the middle of 2011, today’s report said. This, and a stronger Canadian dollar, will help keep inflation below policy makers’ 2 percent target.
“It’s not like this has been an easy time for the economy,” said Charmaine Buskas, senior economics strategist at TD Securities in Toronto. “It’s just not as if the world is going to collapse anymore.”
Dollar, Stocks Rise
The Canadian dollar appreciated 1.2 percent to C$1.0867 per U.S. dollar at 4:16 p.m. in Toronto, compared with C$1.0997 yesterday. Canadian stocks also rose, as the Standard & Poor’s/TSX Composite Index added 243.33 points, or 2.3 percent, to 10,675.68, the highest since June 11.
The yield on the overnight index swap due in 10 months, a security based on investor expectations of where the Bank of Canada’s rate will be at that point, rose to 0.39 percent today, the highest since April 3.
The central bank’s forecast assumes Canada’s currency will average 87 U.S. cents through 2011, and the report said recent strength reflects higher commodity prices and “generalized weakening of the U.S. dollar.” Carney told reporters the currency’s strength is an important risk to the economy and that he’s watching it “very closely.”
Inflation to Slow
Consumer prices will decline 0.7 percent on a year-over- year basis this quarter, the report said. The core inflation rate, which excludes eight volatile items and is used by policy makers as a guide to future price trends, will slow to 1.4 percent in the fourth quarter.
Consumer prices will climb at an annual rate of 2 percent in the second quarter of 2011, one quarter earlier than the bank predicted in April.
Canada’s economy will shrink 2.3 percent this year, and then grow 3 percent in 2010 and 3.5 percent in 2011, the report said. The bank’s previous predictions were for a contraction of 3 percent this year, then growth of 2.5 percent and 4.7 percent in the next two years, respectively.
If the central bank is correct and the recession ends after three quarters, it would be the shortest such contraction since at least 1957, according to Statistics Canada.
“This somewhat more favorable short-term outlook reflects a more modest retrenchment in household and business spending, as negative effects on confidence dissipate, financial market conditions improve, and the terms of trade increase more quickly than previously anticipated,” the report said.
U.S. Economy at ‘Trough’
A “nascent” recovery in the global economy will help support Canada’s future exports, the report said. The U.S. economy “is at its trough,” the report said, and “Canadian exporters will benefit disproportionately from the U.S. recovery in 2010-11” as the U.S. housing market and automotive industries resume growth.
The report said that financial markets in Canada and elsewhere are improving, while noting that much of the improvements abroad “are linked to government interventions” and further progress depends on U.S. and European banks fixing their balance sheets.
The bank made no direct mention of plans to implement so- called quantitative easing. Asked if the Bank of Canada has ruled out using the policy, Carney said the “extreme financial risk from beyond our borders” has eased. Quantitative easing creates new money to purchase government or private assets to encourage new bank lending.
Senior Deputy Governor Paul Jenkins also said he is satisfied with Statistics Canada’s investigation into reports some data may have been leaked and used to trade the Canadian dollar. The Bank of Canada learned about suspected leaks of economic data weeks before unusual movements in currency markets triggered a security review by Statistics Canada, according to documents obtained by Bloomberg News.