Growth, Inflation & All That!

Last week, Mark Carney, the Bank of Canada’s Governor, gave his latest assessment of the Canadian Economy.  In a nutshell, the BoC has underestimated Canadian economy in terms of growth, and capacity utilization.   

It may be that making GDP prediction when all levels of governments undertook massive simulative programs was bound to be problematic.  In fact, the BoC now recognizes that they may have overestimated the gap between potential and actual growth, a function of under estimated the permanent destruction of capacity Vs. temporary idle state, and also overestimating the growth in Canadian productivity. 

Mark Carney’s view of inflation remains optimistic – unlike some, he takes the view that the worse (in terms of increase) and despite the recent expansion of the diffusion index on manufacturer’s prices remains within the BoC’s favorite range.

 

From WCI:  But there's another thing that could be happening, although it will take a few months to confirm. If you look at that graph, the sharpest reduction in core CPI inflation over the past three years didn't happen during the recession. The drop at the end of 2007 coincided with the first time the CAD reached parity with the USD in almost 35 years. Even those who weren't sure if you should by multiplying or dividing prices by the exchange rate could see that we were paying more for many consumer goods than were American consumers, and the resulting consumer revolt forced many Canadian retailers to reduce their prices

Moreover, with limited inflation pressures from our southern neighbors it is difficult to see, in the internet age, how sellers will be able to increase prices (see my Ipad entry).  When Canadians look at prices for goods and services they can easily compare with what that same item would cost in the U.S.   On the downside, the combination of the persistent strength of the Canadian dollar and Canada’s poor relative productivity performance could exert a larger-than-expected drag on growth and put additional downward pressure on inflation.

However, the BoC remains cautious on the outlook for the economy; Canadian housing prices across the country are back to their pre crisis trend line.  This appears to be the one dominant factor that has propelled the economy, whereas the rest of the OECD economies remain mired in problems.

As a trading nation, Canada is particularly aware of the downside risk; the global economic recovery could be more protracted than currently projected.  There is a risk that sovereign credit concerns could intensify, leading to higher borrowing costs and a more rapid tightening of fiscal policy in some countries. Either of these factors would restrain global private demand relative to the Bank’s base-case projection.

Finally, my growth target for Canada remains unchanged at 3.1% for 2010.  Although the Q1 numbers were released a few days ago at 3.2% -- in line with my estimates, these figures are likely to be revised by 1% to 2% (the BEA is often wrong with its early figures).  For what its worse some Canadian economists are talking Q1 GDP growth in Canada of 5.5%.