The slow North American recovery will chug along over the next two years, the Organization for Economic Co-operation and Development says, while warning that a weakening real estate market in both Canada and the U.S. poses a downside risk to the rebound.
Canada’s economy will grow 3 per cent this year, 2.3 per cent in 2011 and 3 per cent in 2012, the Paris-based OECD said Thursday in its latest outlook for member countries, and the unemployment rate will drop from 8.1 per cent this year to 7.4 per cent by 2012.
The slowdown and tepid pickup are a function of household finances being stretched, wage growth starting to moderate and government stimulus spending winding down, the OECD said, as well as global uncertainties that are restraining demand for Canadian exports.
“Substantial economic slack should gradually diminish but keep inflation pressures subdued,” the OECD report said. Even though Canadian borrowing costs are still low by historical standards, with the Bank of Canada’s benchmark rate at 1 per cent, Governor Mark Carney and his rate-setting panel “should delay further rate hikes until early 2011 when a recovery in private demand is expected to gain firmer traction,” the OECD said.
After that, “a gradual pace of tightening would be appropriate,” the report said, in keeping with what most economists predict. A “downward correction” in home prices could further crimp demand, it said.
In the United States, the slowing recovery will mean gross domestic product growth sputters to 2.2 per cent in 2011 after a 2.7-per-cent expansion this year. U.S. economic growth will then pick up to a 3.1-per-cent pace in 2012, helping the jobless rate fall to 8.7 per cent that year from 9.7 per cent in 2010, the report said.
“The pace of recovery is projected to remain moderate through 2011-2012 as households continue to rebuild net worth and the unemployment rate declines slowly,” the OECD said of the United States, adding that the Federal Reserve should keep interest rates at record low levels next year “as inflation remains well contained and the economy continues to run well below capacity.” The entire OECD, which has 33 members, will expand 2.8 per cent this year, with growth slowing to 2.3 per cent in 2011 before returning to 2.8 per cent in 2012.
The OECD-area recovery could turn out to be stronger than expected, the group said, as companies and households repair their balance sheets and gain confidence. Still, the OECD warned of “significant risks” such as renewed drops in U.S. and British home prices, as well as high government debt loads and “possible abrupt reversals” in government bond yields.
“The challenge will be to guide the transition from a policy-driven recovery to self-sustained growth,” the report said. “As stimulus is withdrawn, policy will have to provide a credible medium-term framework, including for the financial sector, to stabilize expectations and strengthen confidence.”
Collaboration among major economies through the Group of 20 emerging and developed nations “will be essential,” the OECD also said, noting that “protracted unilateral action” by faster-growing economies to slow the flow of capital “is likely to have little – or even counterproductive – effects and risks triggering protectionist moves.”
