Central bank expects peak increase of 4.3%
Eric Beauchesne
Sun
Bank of Canada Governor Mark Carney said Canadians will be paying more to drive their cars, heat their homes and eat in the upcoming year. Photograph by : Chris Wattie, Reuters
OTTAWA — Canadians will pay a lot more to fill their gas tanks and heat their homes, and a bit more to fill their bellies, Bank of Canada Governor Mark Carney warned in explaining where the average family can expect to be hit by what it now predicts will be a surge in inflation to more than four per cent by year end.
“The price of natural gas and gasoline for our cars is going up,” Carney told a news conference after the bank warned that the annual increase in the cost of living would reach 4.1 per cent late this year before peaking at 4.3 per cent early next year. “I think we’re all aware of that, we live with that on a daily basis.”
And food prices are “firming” up, but not dramatically, he added
Offsetting those increases will be an easing in price inflation for less frequently purchased goods, such as cars and houses, as well as some services, he said after the release of the bank’s Monetary Policy Report Update.
While the central bank expects the spike in the cost of living to be temporary, it admits there are significant risks that the cost of living could rise even more, just as it warns that economic growth could be even weaker than the one per cent now forecast for the year, which is already the weakest growth in more than a decade.
And some analysts suspect that the central bank is being “optimistic” on both inflation and economic growth.
“The Bank of Canada remains remarkably optimistic,” said Patricia Croft, chief economist at Phillips, Hager & North Investment Management Inc.
“I think the U.S. is already in recession, and I think the Canadian economy is beginning to fray around the edges,” she said. “Employment growth was negative in June. House prices are now declining for the first time in a decade … . I think there are significant uncertainties going forward.”
TD Bank economist Pascal Gauthier also felt the central bank was overly optimistic.
“As for downside risks, we remain more pessimistic …,” Gauthier said. “The likelihood remains high that growth could disappoint, while energy prices or their trickle-down to final goods prices will be higher yet.”
Analysts with an Ontario think-tank estimated that Canada and Ontario in fact both slipped into mild recessions in the first half of this year, with back-to-back contractions in the first and second quarters.
The Institute for Policy Analysis at the University of Toronto also projected Canadian economic growth this year would be only 0.6 per cent.
The recessions, however, will be milder than the recession of 1990-91, which was a “doozy,” said institute economist Peter Dungan.
The Bank of Canada says the worst is already behind Canada.
It projects the economy recovered from its first-quarter contraction to expand at an annual pace of 0.8 per cent in the spring quarter, thus avoiding a technical recession of back-to-back quarterly contractions.
“The Canadian economy remains robust,” Carney said.
And it projects that was the start of a recovery that will see growth steadily increase from an annual pace of 1.3 per cent this summer to 3.4 per cent in 2010. However, it expects that the economy will grow by only one per cent this year before accelerating to an average of 2.3 per cent next year.
It is final domestic demand — spending in Canada by consumers, businesses and governments — that will drive growth over this and the coming two years, it said.
“Recent increases in global commodity prices led to higher wages and salaries, higher government revenues, higher corporate profits and equity valuations, and stronger investment growth, particularly in the energy sector,” it said.
Meanwhile, trade will continue to act as a significant drag on the economy this year, though that drag will ease as the U.S. economy recovers in 2009 and 2010, the central bank said.
“While the bank is relatively upbeat on global growth and the Canadian economic outlook in 2009-10, they are still sounding relatively relaxed about the inflation outlook,” said BMO Capital Markets economist Douglas Porter.
Carney was also upbeat about the improvement in credit conditions in Canada, the health of its banking system, and the impact of oil prices.
He said high petroleum prices are a small plus for Canada‘s economy, and not just in oil-rich regions.
“There are variety of industries that feed into the energy industry, including manufacturing industries in Ontario and other areas of Central Canada; there are wealth effects in portfolios; there are wage effects for secondary and tertiary industries spread across the country,” he said.
“And that puts us, in the industrialized countries, in very rare company.”
© The Vancouver Sun 2008
