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Mark Carney, Governor of the Bank of Canada, holds a press conference to discuss the contents of the Monetary Policy Report at the National Press Theatre in Ottawa on Wednesday, October 26, 2011.Sean Kilpatrick

Europe is hurtling toward a recession that will be worse than anticipated just weeks ago, darkening the outlook for Canada and its key trading partners.

The United States will feel the pinch of both the European slump and its own troubles, despite signs that Canada's chief export market is getting back on its feet. Emerging markets, especially those that export heavily to Europe, are also slowing down. And while Canada trades far less with Europe than with countries like the United States and China, it will still feel the sting of a weaker global backdrop through "financial, confidence and trade channels," the Bank of Canada says.

Bank of Canada Governor Mark Carney and his policy team made those comments Tuesday as they held their main interest rate at 1 per cent, for a 10th consecutive time, warning that Europe's downturn will be "more pronounced" than they projected in October in what was already a gloomy quarterly forecast.

Mr. Carney and his colleagues cited a deteriorating and increasingly unpredictable external climate in explaining their decision, adding that recent signs of improvement in Canada and the United States could prove to be short-lived as the euro zone crisis weighs on economies everywhere.

The warning comes early in a week when global markets threaten to swing back and forth as investors grope for hints that a crucial European summit on Dec. 9 in Brussels will yield real progress at stemming a melodrama which has dragged on for more than two years, escalating in recent weeks to dangerous new levels.

Some Canadian firms that do significant business in Europe are taking a wait-and-see approach, but overall confidence among exporters has dropped to its lowest level since the recession, according to a semi-annual survey released this month by Export Development Canada.

Exports were a key reason why the economy grew at a 3.5-per-cent annual pace in the third quarter, Statistics Canada said on Nov. 30, and consumer spending in the U.S. – still the destination for about 75 per cent of Canada's exports, far more than European markets – has been surprisingly strong of late. However, that same report from Statscan also showed business investment fell during the three-month period, the first quarterly drop since 2009.

Don Lang, executive chairman of CCL Industries Inc., a Toronto-based specialty packaging company, said his company does about 40 per cent of its business in Europe, so he is naturally concerned. Nonetheless, he said his customers and suppliers have all been anticipating a European downturn for a while, and he hasn't yet seen the kind of pullback one might expect.

More important, the company has increased its business with emerging markets in Asia and Latin America over the past decade, to about 19 per cent from low single-digits, and is concentrating its new investments in those regions, "because that's where the growth is."

"We're going to protect our market share and positions in all the countries that we operate in," he said. "But the majority of our new capital is going to the developing world, and developing economies."

André Navarri, president and chief operating officer of Bombardier Transportation, said the impact from the debt crisis is minimal. He noted, though, that most of Bombardier's rail customers are in Northern Europe, which has so far suffered much less impact than southern nations like Greece, Spain and Italy.

Mr. Carney has urged Canadian businesses to avoid feeling "paralyzed" by global uncertainty and to forge ahead with steps that will make them less dependent on the U.S. and Europe, where demand could be subpar for years.

On Nov. 23, he abandoned his script during a speech in Montreal, assuring his audience that Canada's financial system can function "in difficult times," and that Canada's attractiveness to global investors will make it easier for companies to obtain access to capital at reasonable rates even as conditions tighten around the world.

Last week, the Bank of Canada and five other major central banks launched a co-ordinated bid to keep the world financial system sufficiently greased, and prevent a Lehman Brothers-esque scramble for cash that cripples credit markets. Most analysts, though, saw the move as a Band-Aid that buys European governments a bit more time to do their part to ensure a lasting solution.

"Additional measures will be required to contain the European crisis," Mr. Carney said Tuesday.



With files from reporter Bertrand Marotte in Montreal

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