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Paul Darrow/paul darrow The Globe and Mail

Batten the hatches. Canadian exports -- a key driver of the economy -- are in for a bumpy ride as global economic conditions deteriorate.

The country's net exports are expected to remain a "major" source of weakness, the Bank of Canada said as it left interest rates unchanged Wednesday. In a notable shift from its last announcement, the central bank said the need for rate hikes has diminished.

The reason for that weakness -- tepid global demand and "ongoing" competitiveness challenges, particular the persistent strength of the Canadian dollar.

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The decision comes a week after a report showed economic activity contracted in Canada in the second quarter -- largely because of a 2.1-per-cent slide in exports. Some of that was due to temporary factors -- wildfires in Alberta, supply disruptions stemming from Japan's troubles -- but not all. Manufacturers continue to grapple with a triple whammy of lacklustre U.S. demand, a strong currency and rising global competition.

The bleaker outlook comes as the Canadian Federation of Independent Business's monthly poll shows the weakest confidence reading in two years.

Several banks have downgraded their growth expectations. UBS, for example, slashed its growth rate for Canada to 2.2 per cent this year from its previous estimate of 2.9 per cent, and to 2 per cent next year from 2.3 per cent, partly because of weaker activity in the U.S.

To add salt to the wounds, a report today by the World Economic Forum showed Canada has tumbled out of the top ten in terms of global competitiveness. Canada slid two spots to 12th place overall.

"Canadian businesses do not appear to be adapting adequately to globalization or building effective global value chains as quickly as their international competitors," it said.

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More

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