Economic growth forecasts Household spending, business investment will account for Canada’s growth to end of 2014
OTTAWA (Reuters) — The Bank of Canada has raised its economic growth forecasts for the first three quarters of 2012 and repeated a warning about high household debt.
The report, which pointed to the popularity of home equity lines of credit (HELOC) as part of the problem, came a day after the bank held its key interest rate at one percent.
The bank surprised markets by saying some modest withdrawal of monetary stimulus “may become appropriate” to bring inflation to its two percent target over the medium term.
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An improvement in sentiment due to a stronger U.S. outlook and European action to resolve its debt crisis explains the stronger growth forecasts for Canada, the bank said.
Although there is a reduced chance of an “extreme negative event” in Europe, the bank still flagged the euro zone’s debt woes as the biggest risk to the Canadian outlook.
Household spending and business investment will account for almost all of Canada’s moderate economic growth through to the end of 2014, the central bank said in its quarterly Monetary Policy Report.
Canadians will start to save a little more and growth in residential investment will slow over the next 2 1/2 years, the bank said.
However, it sees the ratio of household debt to income rising further from near-record highs as spending remains strong relative to gross domestic product.
The bank, which has repeatedly expressed concern about Canadians taking on too much debt at current low rates, said borrowing through HELOCs had mushroomed to $64 billion in 2010 from $8 billion in 2001.
This type of debt has funded about three percent of aggregate consumer spending in Canada in recent years, up from less than one percent in 2001.
“Home equity extracted through additional borrowing cannot fund higher consumption indefinitely,” the report said.
The bank raised its forecasts for each of the first and second quarters to 2.5 percent, annualized, from 1.8 percent in January. It also revised upward its third-quarter growth projections but lowered the forecast for the fourth quarter and throughout 2013.
Also contributing to growth is a projection of robust business investment, in addition to moderate growth in household spending.
High oil prices typically boost incomes in Canada but are unfavourable right now because prices for the type of crude Canada exports have fallen while those for its oil imports have risen.
Exports will remain weak and are not expected to regain their pre-recession peak until the end of 2013.
Government spending as a contribution to growth is actually seen as a notch stronger this year than anticipated in January, despite the cutbacks in recent federal and provincial budgets.
