A Bank of Canada official said that the outlook for the global economy is positive, and that this bodes well for Canada.

Sheryl Kennedy, deputy governor also called for policy action to ensure that the economy remains able to adapt to global trends.

Kennedy spoke to the Greater Saskatoon Chamber of Commerce today about the process of economic adjustments, but she has also addressed the current economic climate.

She noted that the economy was judged to be operating at, or just above, its production capacity at the end of 2006, following weaker-than-expected growth in the second half of the year. “While the global economy has been expanding in a robust fashion, U.S. economic growth slowed in 2006, with weakness concentrated in the housing and automotive sectors,” she noted.

However, Kennedy said that, “This weakness does not appear to have spread to the rest of the U.S. economy, and with signs that a significant amount of the adjustment in these sectors has already taken place, U.S. economic growth is expected to pick up through 2007.”

The global economy is expected to grow by 4.7% in 2007, and 4.5% in 2008, she said. “Non-energy commodity prices are expected to decrease modestly from the very high levels reached toward the end of 2006,” she added.

“This global outlook bodes well for Canada. Real GDP growth should average about 2.5% in the first half of 2007, rising to about 2.75% in the second half of the year. In 2008, growth is projected to stay in line with the growth of potential output, estimated to be 2.8%, keeping the economy operating near its full production capacity,” she said, adding that the underlying trend of inflation, as measured by core CPI inflation, should be close to 2% through 2008.
Total CPI inflation is expected to average just above 1% in the first half of 2007, returning to the 2% target in 2008.

“The risks to this outlook for the Canadian economy are reasonably well balanced,” Kennedy noted. “The biggest downside risk is sharper or more prolonged weakness in the U.S. economy, and the upside risk comes from the strength of the Canadian housing market and credit growth putting upward pressure on demand and inflation. In addition, there remains a small possibility of a disorderly resolution of global imbalances, particularly if policy-makers fail to take appropriate actions.”

As for preserving the economy’s ability to adjust to evolving global markets, Kennedy said, “All policy-makers have a key role in promoting efficiency, productivity, and further economic flexibility.”

“In the financial sector, which I know best, securities regulation needs to be made simpler and more efficient. And generally, many business regulations need to be harmonized across Canada and some across the NAFTA region,” she said. “And barriers within Canada to the free movement of goods, services and labour need to be removed. Tackling this issue is especially important now, as shortages of skilled labour are becoming more pronounced. And it will become even more important as demographic challenges begin to intensify. It would be helpful if trades and professional designations were recognized and fully transferable across the country, and if we could resolve the difficult issue of recognizing the qualifications of many talented immigrants.”

“A related policy area that supports productivity and flexibility is education and training. Canadian workers benefit — indeed, the whole economy benefits — when they have the knowledge and skills required to take advantage of change and opportunity,” she added.

She also called for greater efforts to reduce global trade barriers, and work to resolve global imbalances in an orderly fashion. “The United States needs to increase its savings rate, while Asia and the OPEC nations need to increase their domestic consumption. And some countries, particularly China, need to develop more flexibility in their currency arrangements,” she said.