Bank of Canada sees 4.8 percent contraction in first quarter

30 minutes ago - Reuters By Louise Egan

OTTAWA (Reuters) - The Canadian economy will contract by an exceptionally sharp 4.8 percent in the first quarter of this year and continue to shrink through mid-year, but the recovery will be swifter than in the past two recessions, the Bank of Canada said on Thursday.
Signaling the economy is now in the most dramatic part of the downturn, the central bank said gross domestic product likely shrank by an annualized 2.3 percent in the fourth quarter of last year and would decline by 1 percent in the second quarter of this year before returning to growth.
"The projected return to balance of the Canadian economy is faster than either of the recoveries following the 1981-82 and 1990-92 recessions," it said in its quarterly economic outlook. It said the growing output gap would not be eliminated until mid-2011 but this would be about a year or more faster than in the past, partly because inflation expectations are better anchored and the central bank has therefore been able to cut interest rates to lower levels.
On Tuesday, it dropped its overnight rate by one-half point to a 50-year low of 1 percent. "In addition, Canada enters this recession with greater fiscal flexibility and stronger corporate balance sheets than in the recession of the 1990s," the bank said.
Its projections of three quarters of recession this time contrasted with six quarters in 1981-82 and four quarters of contraction in the early 1990s.
The bank repeated its projection of falling prices in the second and third quarters but suggested there was no evidence of persistent deflationary pressure. Core inflation, which excludes volatile items and guides monetary policy decisions, will remain below its 2 percent target for all of 2009. Both total inflation and core inflation will return to 2 percent in the first half of 2011.
Credit conditions in Canada remain better than in other major economies, the bank said, although it sees weak demand and tighter conditions leading to weaker growth in lending to businesses in the months ahead. Lending to households has slowed modestly but is still growing at a rate well above the historical average, it said.
One of its assumptions in its base-case projection is that the Canadian dollar would be worth 82 U.S. cents on average, or $1 equaling C$1.22.