Surprise Bank of Canada chief stands ready to nurture economy

By Louise Egan and Randall Palmer

OTTAWA (Reuters) - Canada tapped an outsider on Thursday to head its central bank, bringing in the well-respected head of the Canadian export credit agency, who immediately stressed the need to nurture a choppy economic recovery.

Incoming Bank of Canada Governor Stephen Poloz, 57, worked at the central bank for 14 years earlier in his career. But he has spent the last 14 years at Export Development Canada.

Poloz takes over as central bank chief on June 3 when Mark Carney leaves, a surprise for markets, which had tipped Carney's senior deputy Tiff Macklem as the most likely choice. Carney becomes governor of the Bank of England on July 1.

In his debut with reporters, Poloz was careful not to contradict the views that Carney and the central bank expressed in their quarterly economic report last month.

"We are in a recovery that is not as vigorous as would normally be expected and ... I think it will be necessary to nourish it, I don't know for how long," Poloz said in an introductory news briefing in Ottawa.

Canada's economy recovered well from the 2008-09 recession thanks to aggressive government spending, tax cuts and record-low interest rates. But growth stalled last year, with the economy recording its slowest two quarters of growth since the crisis.

The Bank of Canada has kept its key rate on hold at what it describes as a stimulative 1 percent since 2010. But it has signaled for the past year that the next move will be a rate hike, not a cut.

Poloz said exports now needed to fuel the Canadian economy, and he believed this was already starting to happen. Canada unexpectedly recorded a trade surplus in March, the first monthly surplus after a year of deficits.

"In my judgment, it's looking promising. I hope you agree with that," he said, turning to Carney, who smiled broadly: "Yes, absolutely," Carney replied.

Analysts do not expect Poloz to rethink central bank policies, especially because of his experience working there earlier in his career. The bank, which guards its independence jealously, targets inflation of 2 percent, but has said it will be flexible with the timeline for reaching that target in difficult economic times.

"The move was a surprise, but I don't look for any change in monetary policy," said Craig Wright, chief economist at Royal Bank of Canada.

Unlike the U.S. Federal Reserve or the Bank of England, there are no discernible "hawks" or "doves" among the Bank of Canada's six governing council members because the council reaches decisions by consensus and takes pains to speak from a common script at public appearances.

Poloz will serve a seven-year term.

In a Reuters poll on April 10, Poloz was seen as the second most likely candidate to get the job after Macklem.

Poloz appeared upbeat about signs of gradual cooling of the once-hot Canadian housing market and a slowing in record-high household debt levels in Canada - both top concerns of Finance Minister Jim Flaherty.

"Of course it's a concern in the sense of where we are," Poloz said. "However, the evolution appears to be constructive, and I think that's great, for us to continue to watch that and to, if you like, nurture that process of a return to more normal conditions."

Economists have said Poloz has the credentials to succeed as governor and that he was viewed as a governor-in-waiting in his previous period at the central bank.

FOLKSY COMMUNICATOR

He is a good communicator, described by one person as "folksy" in his speeches but also whip-smart. He worked at a private-sector financial research firm in Montreal for five years after leaving the central bank.

Poloz joined EDC, a quasi-independent organization that provides loans to importers of Canadian goods, in 1999 as its chief economist and became president of the agency in 2010.

One possible strike against him was the perception among some market players that he may be more sympathetic than his predecessors to exporters' complaints about the strong Canadian dollar and lean towards a weaker currency.

RBC assistant chief economist Paul Ferley dismissed that notion.

"This would do a disservice to Poloz's early career at the central bank where the priority is to set monetary policy to achieve an appropriate rate of inflation," he said.

Poloz will have only about a month to transition to his new role, much shorter than the four months Carney had between his appointment in October 2007 and his first day of work in February 2008.

This is the third time in a row that the top job at the Bank of Canada has gone to an outside candidate rather than to the most senior internal policymaker, in this case Macklem.

Macklem said in a statement that he would stay with the bank and looked forward to working with Poloz.

(Reporting by David Ljunggren and Louise Egan; Editing by Janet Guttsman, Peter Galloway and Paul Simao)

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Obama, Mexican president talk economy, security

MEXICO CITY (AP) — Acknowledging uncertainty ahead, President Barack Obama said Thursday the U.S. will cooperate with Mexico in fighting drug-trafficking and organized crime in any way Mexico's government deems appropriate. Mexican President Enrique Pena Nieto emphasized that the security relationship must be expanded to focus on trade and commerce.

Appearing alongside Pena Nieto at a news conference, Obama recommitted the U.S. to fighting the demand for illegal drugs in his country and the flow of illegal guns across the border to Mexico, even as the southern neighbor rethinks how much access it gives to American security agencies.

"I agreed to continue our close cooperation on security, even as the nature of that cooperation will evolve," Obama said. "It is obviously up to the Mexican people to determine their security structures and how it engages with other nations — including the United States."

Obama's remarks come as Pena Nieto, in a shift from his predecessor, has moved to end the widespread access that U.S. security agencies have had in Mexico to help fight drug-trafficking and organized crime. The White House has been cautious in its public response to the changes, with the president and his advisers saying they need to hear directly from the Mexican leader before making a judgment.

Pena Nieto, speaking at the news conference in Spanish, downplayed the notion that the new arrangement would mean less close cooperation with the United States. "There is no clash between these two goals," he said.

He said Obama told him the U.S. will "cooperate on the basis of mutual respect" to promote an efficient security strategy.

The two leaders met Thursday on the first day of Obama's three-day trip to Mexico and Costa Rica, his first visit to Latin America since winning re-election. Obama was met at the steps of his plane by an honor guard and a bugler before heading to the National Palace for his meetings with the Mexican leader.

Seeking to put a new spin on a long-standing partnership, Obama is promoting jobs and trade — not drug wars or border security — as the driving force behind the U.S.-Mexico relationship. But security concerns nonetheless shadowed the visit.

"With the new Mexican administration coming into office, it certainly stands to reason that President Pena Nieto would want to take a look at the nature of our cooperation," said Ben Rhodes, Obama's deputy national security adviser. "So we're currently working with the Mexicans to evaluate the means by which we cooperate, the means by which we provide assistance."

The White House, hoping to move the discussion surrounding the president's trip beyond security, has emphasized in recent days a desire to boost economic ties to Mexico.

Already the economic relationship between the two countries is robust, with Mexico accounting for $500 billion in U.S. trade in 2011 and ranking as the second-largest export market for U.S. goods. A stronger Mexican economy would result in even more trade and job growth on both sides of the border, Obama aides say.

Among the cadre of advisers traveling with the president is Michael Froman, a longtime White House international economic adviser who was nominated by Obama just hours before the trip to serve as the next U.S. Trade Representative.

A host of other pressing issues are vying for Obama's attention as he launches his quick trip to Mexico and then to Costa Rica. Among those issues are possible chemical weapons use in Syria, the arrest of three more people in connection with the Boston Marathon bombings, and the delicate immigration negotiations underway on Capitol Hill.

Obama will be looking for a nod of support for the immigration effort from Pena Nieto. The Mexican leader is expected to back the effort, although it's unlikely he will take a public position on specific components of any pending legislation in order to avoid the impression that Mexico is meddling in U.S. domestic politics.

Still, Pena Nieto's support — particularly for stricter border security efforts — could help Obama sell the measure to wary Republicans, many of whom have long opposed giving legal status to people in the country illegally before securing the border. A bipartisan Senate bill Obama is backing would make a pathway to citizenship for people in the U.S. illegally contingent on a secure border.

"They are critical to our ability to secure the border," Rhodes, the Obama adviser, said of Mexico. "All the immigration plans that have been contemplated put a focus on securing the border as an essential priority and starting point for immigration reform."

On Friday, Obama will speak to an audience of Mexican students before heading to Costa Rica for talks with Central American leaders. His meetings there are expected to focus on bolstering regional economic cooperation, as well as security issues.

___

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Obama in Mexico for talks on economy, security

MEXICO CITY (AP) — Seeking to put a new spin on a long-standing partnership, President Barack Obama is promoting jobs and trade — not drug wars or border security — as the driving force behind the U.S.-Mexico relationship. But security concerns are shadowing his two-day visit, given Mexico's recent moves to limit American law enforcement access within its borders.

Arriving in Mexico City on Thursday on his first trip to Latin America since winning re-election, Obama was met at the steps of his plane by an honor guard and a trumpeting bugler. He greeted top Mexican officials before heading to the National Palace for meetings with President Enrique Pena Nieto, who took office in December. The two leaders were to speak at a joint news conference Thursday evening.

Obama is looking for more details from Pena Nieto about changes he is making to the robust security relationship between the neighboring countries. In a shift from his predecessor, Felipe Calderon, Pena Nieto has moved to end the widespread access U.S. security agencies have had in Mexico to help fight drug trafficking and organized crime.

The White House has stepped carefully in its public response to the changes, with the president and his advisers saying they need to hear directly from the Mexican leader before making a judgment.

"With the new Mexican administration coming into office, it certainly stands to reason that President Pena Nieto would want to take a look at the nature of our cooperation," said Ben Rhodes, Obama's deputy national security adviser. "So we're currently working with the Mexicans to evaluate the means by which we cooperate, the means by which we provide assistance."

The White House, hoping to move the discussion surrounding the president's trip beyond security, has emphasized in recent days a desire to boost economic ties to Mexico.

Already the economic relationship between the two countries is robust, with Mexico accounting for $500 billion in U.S. trade in 2011 and ranking as the second-largest export market for U.S. goods. A stronger Mexican economy would result in even more trade and job growth on both sides of the border, Obama aides say.

Among the cadre of advisers traveling with the president is Michael Froman, a longtime White House international economic adviser who was nominated by Obama just hours before the trip to serve as the next U.S. Trade Representative.

A host of other pressing issues are vying for Obama's attention as he launches his quick trip to Mexico and then to Costa Rica. Among those issues are possible chemical weapons use in Syria, the arrest of three more people in connection with the Boston Marathon bombings, and the delicate immigration negotiations underway on Capitol Hill.

Obama will be looking for a nod of support for the immigration effort from Pena Nieto. The Mexican leader is expected to back the effort, although it's unlikely he will take a public position on specific components of any pending legislation in order to avoid the impression that Mexico is meddling in U.S. domestic politics.

Still, Pena Nieto's support — particularly for stricter border security efforts — could help Obama sell the measure to wary Republicans, many of whom have long opposed giving legal status to people in the country illegally before securing the border. A bipartisan Senate bill Obama is backing would make a pathway to citizenship for people in the U.S. illegally contingent on a secure border.

"They are critical to our ability to secure the border," Rhodes, the Obama adviser, said of Mexico. "All the immigration plans that have been contemplated put a focus on securing the border as an essential priority and starting point for immigration reform."

On Friday, Obama will speak to an audience of Mexican students before heading to Costa Rica for talks with Central American leaders. His meetings there are expected to focus on bolstering regional economic cooperation, as well as security issues.

___

Follow Julie Pace at http://twitter.com/jpaceDC

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Harper says trend still positive for domestic economy

OTTAWA (Reuters) - Canada's economic performance remains generally positive, Prime Minister Stephen Harper said on Thursday, despite some bad economic data and downgrades to economic forecasts for 2013.

"We can expect we're going to have good months and bad months in terms of numbers. The trend lines remain generally positive," Harper told reporters in Calgary.

Economists in a Reuters poll published on Thursday cut their 2013 growth forecasts to 1.6 percent from 1.8 percent. Last week a report showed the biggest monthly job losses in March since 2009.

(Reporting by Scott Haggett; Writing by Louise Egan; Editing by Leslie Adler)

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Hockey helps Canada's economy grow again in January

By Louise Egan

OTTAWA (Reuters) - Canada's economy bounced back from a year-end slump in January thanks to factories, mines and the return of professional ice hockey, but growth still looks too weak to match the central bank's upbeat outlook and interest rates are unlikely to budge until 2014.

Gross domestic product expanded by 0.2 percent in the month, Statistics Canada said on Thursday, following the weakest two quarters since the 2008-09 recession and a 0.2 percent contraction in December.

A comeback in the manufacturing sector helped spark the turnaround, along with strength in the mining and energy sectors and the delayed start of the country's beloved hockey season after National Hockey League players and owners settled a months-long labor dispute.

The data suggests the economy is starting the year on a more solid footing after disappointing 0.6 percent annualized growth in the fourth quarter.

But economists are betting the first quarter will fall far short of the central bank's projected 2.3 percent growth.

"Once the darling of advanced economies, Canadian economic growth is expected to converge to be more in line with its peers," said Mazen Issa, macro strategist at TD Securities.

Canada recovered much more quickly from the 2008-09 recession than did the United States and others but has been spinning its wheels for several months as exports and manufacturing sputtered.

That has forced the Bank of Canada to acknowledge there is more slack in the economy than it had anticipated. As a result, it has gradually softened its talk of an interest rate increase, and this month said rates will remain on hold "for a period of time".

Issa said the January report was in line with TD's forecast of 1.6 percent growth in the first three months of the year, "and the broader narrative of a gradual grind higher over the course of the year."

The central bank will publish updated forecasts alongside its next interest rate decision on April 17.

Manufacturing expanded 1.2 percent in January as gains in fabricated metals and wood products offset a decline in transportation equipment.

The mining, quarrying and oil and gas extraction industry expanded 0.2 percent, while the arts and entertainment sector got a one-time boost of 4.1 percent as Canadians flocked to hockey arenas and sports pubs after the NHL labor dispute ended.

Players and owners reached a deal in January to end a four-month lockout of players. Canada has NHL teams in Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Ottawa and Montreal.

Industries that shrank in January included agriculture and forestry, construction, and finance and insurance.

In a separate report, Statscan said Canadian industrial product prices increased 1.4 percent in February from January, the biggest jump since June 2008 as prices for petroleum, coal and other commodities charged higher.

The Canadian dollar hit its strongest level in more than a month - at C$1.0145 versus the U.S. dollar, or 98.57 U.S. cents - immediately after the release of data. It later retreated and was little changed from Wednesday's North American close of C$1.0165, or 98.38 U.S. cents.

The solid GDP report along with an inflation rate that is below the Bank of Canada's 2 percent target has confirmed market expectations that the bank will hold rates at the current 1.0 percent until 2014.

"We're looking at possible downward growth revisions from the BoC again ... alongside slightly higher spare capacity estimates. We continue to expect an incrementally more dovish Monetary Policy Report in a couple of weeks," said Derek Holt, economist at Scotiabank.

Global forecasters surveyed by Reuters in February predicted the next rate hike will be in the first quarter of 2014. However, traders are pricing in a slight bias towards a rate cut later this year, based on yields on overnight index swaps, which trade based on expectations for the policy rate.

(Editing by Jeffrey Hodgson; and Peter Galloway)

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Hockey helps Canada's economy grow again in January

By Louise Egan

OTTAWA (Reuters) - Canada's economy bounced back from a year-end slump in January thanks to factories, mines and the return of professional ice hockey, but growth still looks too weak to match the central bank's upbeat outlook and interest rates are unlikely to budge until 2014.

Gross domestic product expanded by 0.2 percent in the month, Statistics Canada said on Thursday, following the weakest two quarters since the 2008-09 recession and a 0.2 percent contraction in December.

A comeback in the manufacturing sector helped spark the turnaround, along with strength in the mining and energy sectors and the delayed start of the country's beloved hockey season after National Hockey League players and owners settled a months-long labor dispute.

The data suggests the economy is starting the year on a more solid footing after disappointing 0.6 percent annualized growth in the fourth quarter.

But economists are betting the first quarter will fall far short of the central bank's projected 2.3 percent growth.

"Once the darling of advanced economies, Canadian economic growth is expected to converge to be more in line with its peers," said Mazen Issa, macro strategist at TD Securities.

Canada recovered much more quickly from the 2008-09 recession than did the United States and others but has been spinning its wheels for several months as exports and manufacturing sputtered.

That has forced the Bank of Canada to acknowledge there is more slack in the economy than it had anticipated. As a result, it has gradually softened its talk of an interest rate increase, and this month said rates will remain on hold "for a period of time".

Issa said the January report was in line with TD's forecast of 1.6 percent growth in the first three months of the year, "and the broader narrative of a gradual grind higher over the course of the year."

The central bank will publish updated forecasts alongside its next interest rate decision on April 17.

Manufacturing expanded 1.2 percent in January as gains in fabricated metals and wood products offset a decline in transportation equipment.

The mining, quarrying and oil and gas extraction industry expanded 0.2 percent, while the arts and entertainment sector got a one-time boost of 4.1 percent as Canadians flocked to hockey arenas and sports pubs after the NHL labor dispute ended.

Players and owners reached a deal in January to end a four-month lockout of players. Canada has NHL teams in Vancouver, Calgary, Edmonton, Winnipeg, Toronto, Ottawa and Montreal.

Industries that shrank in January included agriculture and forestry, construction, and finance and insurance.

In a separate report, Statscan said Canadian industrial product prices increased 1.4 percent in February from January, the biggest jump since June 2008 as prices for petroleum, coal and other commodities charged higher.

The Canadian dollar hit its strongest level in more than a month - at C$1.0145 versus the U.S. dollar, or 98.57 U.S. cents - immediately after the release of data. It later retreated and was little changed from Wednesday's North American close of C$1.0165, or 98.38 U.S. cents.

The solid GDP report along with an inflation rate that is below the Bank of Canada's 2 percent target has confirmed market expectations that the bank will hold rates at the current 1.0 percent until 2014.

"We're looking at possible downward growth revisions from the BoC again ... alongside slightly higher spare capacity estimates. We continue to expect an incrementally more dovish Monetary Policy Report in a couple of weeks," said Derek Holt, economist at Scotiabank.

Global forecasters surveyed by Reuters in February predicted the next rate hike will be in the first quarter of 2014. However, traders are pricing in a slight bias towards a rate cut later this year, based on yields on overnight index swaps, which trade based on expectations for the policy rate.

(Editing by Jeffrey Hodgson; and Peter Galloway)

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Canadian economy shows signs of recovery in January

OTTAWA (Reuters) - Canada's hard-pressed economy showed signs of recovery in January, when the nation posted its best trade performance in almost a year and building permits eked out modest growth after the biggest two-month fall in 24 years.

Canada is struggling to cope with weak exports, tough competition, uncertain foreign markets and a strong Canadian dollar, which combined to produce a 0.2 percent drop in gross domestic product in December.

Exports grew faster than imports in January, when the trade deficit shrank to just C$237 million ($230 million), Statistics Canada said on Thursday.

The deficit - less than the C$600 million predicted by market operators - represented the best performance since a C$21 million trade surplus in March 2012. Statscan revised December's deficit to C$332 million from an initial C$901 million.

"The improvement in the trade picture, small as it may be, is an important first step for the Canadian economy this year," Francis Fong of TD Economics said in a note to clients. "After an undeniably weak 2012, exports are going to be increasingly looked to as a driver of growth, given that households and government are expected to moderate spending.

"Over the course of 2013 and through 2014, global economic growth should accelerate, particularly in the U.S., and this should provide Canada's export sector with the shot-in-the-arm it needs to post a more sustained recovery."

The data, along with figures that showed a widening trade deficit in the United States, helped push the Canadian dollar slightly higher. By 9.55 a.m. (1455 GMT) it was trading at C$1.0292 to the U.S. dollar, or 97.16 U.S. cents. It had closed at C$1.0315 versus the U.S. dollar on Wednesday.

January exports rose by 2.1 percent - the greatest month-on-month increase since the 4.3 percent jump seen in December 2011 - thanks mainly to higher volumes for crude oil and crude bitumen as well as precious metals.

Imports increased by 1.9 percent on higher volumes, mainly due to higher shipments of energy products. Imports of metal ores and industrial machinery also grew.

"Higher imports might suggest more robust domestic activity in the month. What argues against this, however, is that much of the monthly rise in import volumes was due to energy and metal ores. Other key import categories were not as strong," wrote Derek Holt and Dov Zigler, economists at Scotia Capital.

Exports to the United States - which took 74.2 percent of all Canadian exports in January - rose by 2.6 percent while imports were up 2.1 percent. As a result, Canada's trade surplus with the United States increased to C$4.25 billion from C$4.03 billion in December.

Separately, Statscan said the value of Canadian building permits edged up by 1.7 percent in January after posting the biggest two-month fall in almost a quarter century.

The increase, less than the 5.3 percent expected by market analysts, follows revised drops of 10.4 percent in December and 16.5 percent in November.

Canada's booming housing industry, boosted by low interest rates, helped the economy recover from the worst of the 2008-09 recession. In a bid to head off a possible bubble, the government stepped in last year to clamp down on the sector with tighter mortgage rules. This has since cooled the market.

($1=$1.03 Canadian)

(Editing by Jeffrey Hodgson; and Peter Galloway)

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Canadian economy weak in 4th quarter, shrinks in Dec

OTTAWA (Reuters) - Canada's economy sputtered in the final quarter of 2012 as businesses sharply cut back inventories, resulting in the weakest six months since the 2008-09 recession, Statistics Canada data showed on Friday.

The report also showed the economy shrank in December, and the slowdown will likely add pressure on the Bank of Canada to keep stimulus in place for longer and weigh on the Conservative government as it prepares its next budget.

Gross domestic product expanded by 0.6 percent, annualized, Statistics Canada said, as shrinking stockpiles and a battered manufacturing sector offset strong consumer spending and increased business investment. The growth rate was in line with recently reduced forecasts.

"The key thing to note is a general theme of softness in all sectors of the economy, but it is encouraging to note that at least we did see a bounce back in business investment following the decline we saw in the third quarter," said Mazen Issa, a macro strategist at TD Securities.

"Heading forward, the Canadian economy is going to have a bit of a tough time trying to grow above its trend rate. That's largely dependent on how the U.S. performs this year."

It was the worst quarterly performance since the second quarter of 2011, when the economy contracted 0.8 percent in the aftermath of the Japanese earthquake and tsunami.

Excluding that extraordinary effect, the last time the economy fared worse was at the end of the recession in the second quarter of 2009, when it shrank 3.6 percent.

Statscan revised third-quarter growth to 0.7 percent from 0.6 percent previously.

Canada's economy has long recovered from the recession but last year struggled to gain traction. While it grew faster than the United States in the fourth quarter, it underperformed its neighbor for much of the year.

The economy shrank 0.2 percent in December. For 2012 as a whole it expanded 1.8 percent, down from the 2.6 percent pace seen in 2011.

But in a sign growth may improve in 2013 as most economists predict, the RBC Canadian Manufacturing Purchasing Manager's Index showed manufacturing activity grew in February at the fastest pace in five months.

The GDP report was not a huge shock. Forecasters had marked down their targets in recent weeks after a spate of downbeat data. And the Canadian dollar strengthened, as investors had been bracing for the possibility of an even worse number.

At 10:49 a.m., the currency was trading at C$1.0287 to the greenback, or 97.21 U.S. cents, compared with C$1.0314 at Thursday's North American close.

RATE-HIKE BIAS

The growth estimate is the last major piece of data before the Bank of Canada's interest rate announcement on March 6, when it is expected to hold rates at 1 percent.

Markets are more interested in whether central bank chief Mark Carney will eliminate his hawkish tilt.

Carney, who will step down this year to head the Bank of England, has been signaling for months that he intends to hike rates but last month adopted a more dovish tone, saying such a move was "less imminent."

The GDP report "is not a huge surprise, but it will keep markets watching next week's policy meeting to see whether this data results in a further modification to the Bank of Canada's statement," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

Global forecasters this week pushed back expectations for the central bank's next rate hike to the first quarter of 2014.

BUSINESS INVESTMENT COMEBACK

Consumer spending was the main driver of growth, increasing 0.7 percent for the second straight quarter.

But the upturn in business investment was also a welcome development, as Carney has urged the private sector to beef up spending to kick-start the economy.

Business and government capital investment rose 0.5 percent, and trade also provided a small boost.

However, in a big drag on GDP, businesses stockpiled only about C$5.7 billion in inventories in the fourth quarter, compared with C$13.5 billion in the third period.

The mining and oil and gas industries contributed most to growth in the quarter, partially offset by manufacturing.

(Additional reporting by Andrea Hopkins, Alastair Sharp and Euan Rocha in Toronto and Alex Paterson in Ottawa; Editing by Jeffrey Hodgson and James Dalgleish)

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