Bank of Canada cuts growth forecast, warns again of higher rates

By Louise Egan and Randall Palmer

OTTAWA (Reuters) - The Bank of Canada on Wednesday chopped its economic growth forecast for the country and left interest rates unchanged but still insisted the next move in interest rates would likely be a hike.

In the last Monetary Policy Report before Governor Mark Carney leaves for the Bank of England, the Bank of Canada sharply downgraded growth expectations for the first and second quarters to below its 2.1 percent estimate of potential growth, meaning slack was continuing to grow.

It cut its prediction for 2013 annual economic growth to 1.5 percent -- matching this week's International Monetary Fund forecast -- from the 2.0 percent it saw in January, and hopes for 2.8 percent growth in 2014.

Nonetheless, as it has over the past year, the central bank warned of the prospect of higher interest rates down the road.

"With continued slack in the Canadian economy, the muted outlook for inflation, and the constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required..." the central bank stated.

RATE HIKE PUSHED OUT?

The bank's governing council reached its interest rate decision on Tuesday and released it on Wednesday with its quarterly Monetary Policy Report.

In the report, the Bank of Canada figured the economy's spare capacity grew to 1-1/4 percent in the first quarter, from the 1 percent it saw in January for the fourth quarter of 2012.

As a result, it will take longer for the economy to hit full capacity and for total and core inflation to rise to the bank's 2 percent target. It now sees this happening by mid-2015, whereas in January it had predicted the second half of 2014.

"It likely pushes (an interest rate hike) out even further. It's likely we won't have higher rates in Canada until well into 2015," said Bank of Nova Scotia chief currency strategist Camilla Sutton.

Sal Guatieri, senior economist at BMO Capital Markets, said the market had already pushed out its expectations for the next hike. "We still look for the bank to remain on hold until the second half of next year," he said.

The culprits for the lower growth this year are downward revisions to growth in government spending, more contraction in housing than forecast, and less-than-expected business investment. It saw signs that factors weighing on business investment were "likely to persist for some time."

Concern over housing is one reason Carney has not dropped the bank's year-long tightening bias as some economists have suggested. But the insistence that the next movement in interest rates is likely up rather than down has also boosted the Canadian dollar.

The bank said the currency's persistent strength was influenced by safe-haven flows and spillovers from global monetary policy, and this continued to restrain export growth.

Despite the export troubles, one bright prospect is the U.S. housing recovery, which the bank projects will boost Canadian export growth by 1 percentage points per year.

Canada has been an outlier among major developed economies, eschewing the unconventional quantitative easing used by the U.S. Federal Reserve, the Bank of England and now the Bank of Japan.

Before Wednesday's statement, global forecasters pushed back their forecasts for the Bank of Canada's next hike to the third quarter of 2014 from the first quarter in a poll in February.

Yields on overnight index swaps, which trade based on expectations for the policy rate, showed traders slightly scaled back their bets of a rate cut later this year.

The Canadian dollar moved was little changed after the announcement at C$1.0265 to the U.S. dollar, or 97.42 U.S. cents, but weaker than Tuesday's North American close of C$1.0205, or 97.99 U.S. cents.

Canadian inflation has long been below the 2 percent target -- overall annual inflation was 1.2 percent in February. The Bank of Canada said that in addition to spare capacity, inflation was subdued by competitive pressures on retailers.

Among those competitive pressures, it noted the expansion of big-box stores, the arrival of large U.S. retailers, and increased online and cross-border shopping, stimulated by the strong Canadian dollar.

(Additional reporting by Alastair Sharp, Cameron French and Solarina Ho in Toronto; Editing by W Simon)

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Canada trims growth outlook despite February jobs surge

OTTAWA (Reuters) - The Canadian government cut its forecast for 2013 economic growth on Friday, based on private sector estimates, even as new employment data for February hinted at a comeback after the two weakest quarters since the 2008-09 recession.

The weaker, near-term outlook, while expected, is another challenge for the Conservative government, which is grappling with a significant hit to revenues as it puts the final touches on its budget for the 2013-14 fiscal year.

The numbers will form the basis for Finance Minister Jim Flaherty's fiscal projections in the next budget, expected before the end of March.

"The growth projections are slightly lower in the near term, as I expected ... mainly in 2013, 2014," Flaherty said after a meeting with the 11 private sector economists surveyed by his office.

"The factors involved there are the continuing issues, challenges in Europe and the United States," he said.

Breaking with his usual practice, Flaherty did not give precise figures. But five of the economists gave reporters their individual growth forecasts for this year, ranging from 1.5 percent to 1.8 percent. The average forecast in October was 2.0 percent.

"We still expect to see at least better numbers than we saw in the last half of 2012," said Avery Shenfeld, chief economist at the Canadian Imperial Bank of Commerce.

The news came after Statistics Canada data on Friday showed that following losses in January, the job market added 50,700 net new positions in February, above the 8,000 expected by market players.

Most of the gains were in the services industries while manufacturers saw hefty layoffs for the second straight month.

The jobless rate stayed the same at 7.0 percent as more people participated in the labor market.

But the data, based on interviews with households, is very volatile from month to month and analysts have noted that the outsized job growth in late 2012 bore little relation to economic growth which slowed to a crawl.

"It would be difficult to see job gains on this order going forward, so we should see a pullback in coming months," said Sal Guatieri, senior economist at BMO Capital Markets.

On average, some 29,000 jobs were created a month over the past six months.

Paul Ferley, assistant chief economist at the Royal Bank of Canada, was slightly more upbeat.

"Certainly, it bodes well for growth to rebound in the first quarter after disappointing gains through the second half of last year," he said.

JOB-FILLED RECOVERY

Indeed, financial markets welcomed the news which coincided with an unexpectedly sturdy increase in U.S. hiring in February and the lowest U.S. unemployment rate in four years.

The Canadian dollar strengthened to a one-week high after the strong Canadian and U.S. employment data. The currency rose to C$1.0234 to the greenback, or 97.71 U.S. cents, soon after the employment data. It later pared the gains slightly to C$1.0283.

Unlike the U.S., Canada had already recovered all the jobs lost during the global downturn of 2008 by early 2011 and in the past 12 months it added another 336,000.

But the economy has struggled to gain further traction in recent months. Exports remain weak and a steep discount on the price of Canadian oil is cutting into the Conservative government's revenues.

Flaherty said that although government revenues would take "a significant hit" from lower-than-expected growth in nominal gross domestic product, Ottawa would eliminate its budget deficit, previously estimated at C$26 billion for this year, in the 2015/2016 fiscal year as promised.

"There are a number of measures we can take to do that, and you'll see them in the budget," he said.

The main opposition party, the New Democrats, urged the ruling Conservatives to focus on bolstering growth, not more spending cuts.

"The news from Canada's private sector economists is worrying and in stark contrast to what Minister Flaherty has been telling Canadians," said Peggy Nash, the party's spokeswoman on finance policy.

"What Canadians need is a real plan to spur investments and create jobs, not more reckless cuts," she said.

2013 BETTER THAN 2012

Most policy makers insist that 2013 looks brighter than last year, when the economy grew just 1.8 percent. The Bank of Canada expects annualized growth of 2.3 percent in the first quarter versus 0.6 percent in the fourth.

The central bank signaled this week it is in no rush to raise interest rates after a prolonged pause. It still said its next move would be a hike rather than a cut.

There was fresh evidence on Friday that Canada's recently booming housing market, a top concern for the government in Ottawa, was cooling.

Housing starts climbed in February from January, the Canada Mortgage and Housing Corp said, but the six-month trend level showed a continuation of a downward slope that began in the middle of 2012 when the market peaked.

The labor productivity of Canadian businesses edged up 0.1 percent in the fourth quarter after two consecutive declines, Statscan said. But overall in 2012, productivity also increased by a paltry 0.1 percent compared with a 0.9 percent gain in the United States.

(Additional reporting by Alex Paterson in Ottawa and Solarina Ho and Alastair Sharp in Toronto; editing by Jeffrey Hodgson and Leslie Gevirtz)

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China to stress social wellbeing over growth

BEIJING (AP) — China's government promised its people Tuesday deficit-fueled spending to fight corruption, improve the despoiled environment and address other quality-of-life issues that a growing number of Chinese are demanding.

In a speech outlining government plans at the opening of the annual National People's Congress, outgoing Premier Wen Jiabao signaled that leaders would no longer emphasize growth at all costs and would down-shift development to put priority on social programs.

"We must make ensuring and improving people's wellbeing the starting point and goal of all the government's work, give entire priority to it, and strive to strengthen social development," said Wen, who will step down at the end of the legislative session.

The session will complete China's once-a-decade leadership transition that began with a Communist Party congress in November that appointed Xi Jinping as party leader and as the country's new chief along with a new cohort of leaders in the Politburo. Xi will formally be named president, replacing outgoing Hu Jintao, during the 13-day session.

Wen's address, though given by the outgoing premier, and the accompanying budget presented by the government Tuesday are consensus documents approved by the new leadership and reflect Xi's priorities.

Overall government spending will increase 10 percent to 13.8 trillion yuan ($2.2 trillion) helped by a 50 percent increase in the coming year's fiscal deficit. Defense spending will increase 10.7 percent to 720 billion yuan — a slight slowdown from last year's increase of 11.2 percent.

There was special emphasis on reducing energy consumption, improving conservation and solving the country's serious air, soil and water pollution.

"In response to people's expectations of having a good living environment, we should greatly strengthen ecological improvement and environmental protection," Wen said. "The state of the ecological environment affects the level of the people's wellbeing and also posterity and the future of our nation."

Hundreds of soldiers, police and plainclothes security officers, equipped with fire extinguishers and anti-explosive blankets, ringed the Great Hall of the People and the adjacent Tiananmen Square for the opening session.

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China defends massive growth in military spending

BEIJING (AP) — China is defending its booming military spending, saying its vast investments in the armed forces have contributed to global peace and stability.

However, in a break with previous years, no figure for this year's defense budget was presented at a news conference held Monday on the eve of the opening of the annual legislative session. Spokeswoman Fu Ying said the figure would appear in the overall budget to be released Tuesday.

Chinese defense spending has grown substantially each year for more than two decades, and last year rose 11.2 percent to 670.2 billion yuan ($106.4 billion), an increase of about 67 billion yuan.

Only the United States spends more on defense.

Fu cited U.N. peacekeeping and anti-piracy patrols as examples of China's contribution to world peace and stability.

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