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Bank of Canada overly optimistic on GDP: National Bank

Bank of Canada's Mark Carney

Where's the growth?

The Bank of Canada's prognosticators appear to be wide of the mark when it comes to their expectations for economic growth in the first quarter.

At least that's what National Bank Financial economist Krishen Rangasamy contends.

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He argues in a recent report that February's results, which showed the economy taking an unexpected dip of 0.2 per cent, were so bad that, absent a "miracle" in March, growth in the first quarter will fall well short of the central bank's latest forecast of 2.5 per cent.

"Even assuming an overly optimistic 0.5 per cent increase in March output, Q1 GDP growth is likely to print around 2 per cent," he said.

Slower than expected growth means the slack in the economy is not going to be taken up as quickly as policy makers think. And the presence of economic slack – more formally, a gap between actual and potential output – reduces the probability that the bank will decide to hike interest rates this year.

"Assuming no change to the monetary policy rate projections after Q1 of 2012, the output gap doesn't close through the projection horizon."

Clouds across the Atlantic

A month or so ago there were hopeful signs that the U.S. economy was revving up. Unfortunately, the latest economic indicators are dampening the cautious optimism.

The latest jobs report, for example, indicates that the recovery is not getting the necessary traction.

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And the concerns aren't just domestic.

Watch for a negative impact on the U.S. from the economic slowdown in Europe, says Brockhouse Cooper economist Pierre Lapointe.

Contrary to the thesis that the U.S. and Europe have "decoupled" – meaning that the U.S. can fare better than Europe in terms of industrial growth – the two are actually "desynchronized," he says in a recent report.

That means the United States hasn't yet felt the shock of European austerity measures and tighter financial conditions, but that it will at some point.

"As European banks pull back from funding U.S. borrowers and refocus on core activities at home, the impact will be felt in the United States," he says.

"This should compound existing weaknesses in the United States."

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Europe's weakening core

European policymakers face a massive challenge in the face of growing signs of a weakening economy.

The latest figures show that the euro zone unemployment rate in March rose to 10.9 per cent from 10.8 per cent, the eleventh monthly increase in a row.

Of course, the situation is worse in the poorer southern and peripheral economies. But there are worrying indicators of deterioration in core labour markets as well, says Capital Economics' chief European economist Jonathan Loynes.

Germany's national unemployment rate, for example, rose to 6.8 per cent from 6.7 per cent in April.

Although this could be a "one-off" event, there was also weakness in April manufacturing numbers, Mr. Loynes said in a recent report.

The German index slumped to 46.2 from 48.4, a 33-month low, he points out.

"Overall, there may be a growing 'consensus' on the need for growth in the euro zone. But with unemployment rising and industry slumping, a prolonged recession looks much more likely."

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About the Author
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More

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