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IMF downgrades growth outlook for Canada while central bank governor is optimistic

09-21-2011 11:06 BJT

OTTAWA, Sept. 20 (Xinhua) -- Canada's umemployment rate will climb higher through the rest of this year and in 2012, the International Monetary Fund (IMF) said on Tuesday, but the Governor of Canada's central bank says he remains confident Canada and the United States can dodge another recession.

The IMF said in its World Economic Outlook report that the western economies are "entering a dangerous phase". It predicts Canada's economy will grow by 2.1 percent this year and 1.9 percent next year. Less than five months ago, the IMF forecast 2.8 percent growth this year and 2.6 percent next year.

The IMF said that its downgrade of Canadian growth projections is a spill-over from problems in the U.S. Like its southern neighbor, Canada has a stubborn level of unemployment - at 7.3 percent, which is expected to rise to 7.7 percent next year.

In a speech to business leaders in eastern Canada, Bank of Canada governor Mark Carney said on Tuesday that he is optimistic that the Canadian economy can dodge a new recession.

Carney said that he believes there is a strong chance of a new U.S. recession, and said that European policy-makers need to stabilize the region's banks and economies. But he said that Canadian politicians and business leaders can protect the country from foreign economic problems.

Carney was expected to raise interest rates this fall, but earlier in Sept. the Bank of Canada held the benchmark overnight lending rate at 1 percent, and observers here do not expect it to rise anytime soon.

Carney urged businesses to invest in the Canadian economy to make it more competitive and productive. The Bank of Canada chief has said several times this year that the lack of capital investment in Canadian manufacturing has made it less competitive than it was before the 2008 recession.

He called "high debt loads and unpredictable politics" in the United States and Europe toxic, and said it is "important to distinguish between the willingness to act and the ability to address the current challenges."

Jim Flaherty, Canada's finance minister, acknowledged on Monday that the western economy is in "a period when global economic activity has weakened, becoming more uneven and uncertain. Thanks to our sound economic and fiscal fundamentals, Canada is in a better position to weather global headwinds."

Flaherty noted the IMF's Fiscal Monitor forecasts Canada will continue to have by far the lowest total government net debt-to- GDP ratio in the entire G7 (33.3 per cent in 2016 compared to the G7 average of 92.9 per cent).

"Canadians gave our Government a strong mandate to stay focused on what matters --creating jobs and economic growth. As we have said all along, the economic recovery remains fragile, and we are not immune to the volatile global economic environment, largely due to a problem of confidence in efforts of governments to reduce their deficits," Flaherty said.

Flaherty will be attending IMF, World Bank and G20 meetings later this week. He urged European countries to deal with their sovereign debt situations and to ensure their financial systems are adequately capitalized.

Opposition politicians in Canada called for a new round of stimulus spending to create jobs.

New Democratic Party financial critic Peggy Nash said that the government must intervene in the economy to protect the jobs of Canadian workers.

"What the IMF is saying is that Canada's unemployment rate is going to climb and that economic growth is going to decrease and so what we're concerned about is the real economic hardship that Canadians are facing and increasingly will face and we're trying to get this government's attention," Nash said. "We want them to wake up and start paying attention to the reality that so many Canadians are facing."

"What we need to be doing is investing in our economy, infrastructure investment, stop cutting the services and programs that Canadians need.. I think we need to invest in our country, invest in our infrastructure and invest in the hardworking Canadians who just want a decent job so they can support themselves and their families," Nash added.

The Canadian government ended its multi-billion dollar infrastructure reconstruction stimulus program about a year ago and plans to cut spending to reduce its deficit.

In its report, the IMF said the western economies are in trouble, with "nothing beyond a weak and bumpy recovery is in the cards." Developing economies like China, Turkey, Lithuania, Peru and Indonesia will grow at much healthier rates, the IMF said.

In his speech, Carney said that Canadian companies must increase their links with faster-growing emerging markets. He said high commodity prices for Canadian raw materials helps offset the struggles of the country's manufacturing system, but business leaders need to reach out to make partnerships in the developing world.

"Regardless of what happens in the United States or Europe, these challenges and opportunities need to be seized through sustained efforts here in Canada," Carney said. "The underlying currents those forces that affect the long-term outlook for our businesses and economy are much stronger.''

"The Bank of Canada does not expect a recession in the United States, although the risk has clearly risen," he said. "The U.S. economy is close to stall speed, where a negative feedback loop between weak employment, consumer demand, and business hiring and investment could emerge. The possibility that markets themselves could tip the balance cannot be dismissed."

Carney said that the European situation is "fragile but fixable; manageable if it is managed."

However, he said that the move by central banks last week to guarantee unlimited liquidity for banks on the continent for the rest of 2011 to avoid a funding crunch that cripples global finance must be followed by "swift and sizable" actions.

Carney said that European banks need to be guaranteed sustainable levels of capital, and governments need to take fiscal action to prevent bond yields from soaring.

"Ultimately, Europe's problems cannot be solved by fiscal austerity alone.

Editor:Yang Jie |Source: Xinhua

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