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Canada's second-half growth is slightly stronger than had been expected, reflecting in part a rebound in auto production and pent-up demand for housing, the Bank of Canada said Thursday in releasing its Monetary Policy Report. The Canadian economy is expected to emerge from the recession with a 2.4 per cent contraction in gross domestic product in 2009, the bank said.

This will be followed by growth of 3 per cent in 2010 and 3.3 per cent in 2011, slightly weaker than had been forecast in July, the bank said.

"The bank's base-case projection incorporates the following key assumptions: a Canada/U.S. exchange rate averaging 96 cents U.S.; energy prices in line with recent futures prices; prices for non-energy commodities increasing progressively as the global economy recovers; and global credit conditions continuing to gradually improve," the central bank said.

Here's what the bank said will contribute to the recovery:

Stimulus, household wealth and a well-functioning financial system

The recovery of the Canadian economy is expected to be supported by a number of domestic factors - notably, the substantial amount of monetary and fiscal stimulus, the recent increase in household wealth, and our well functioning financial system. It also hinges on the resumption of growth in the global economy and the associated firming of commodity prices, which will provide support to both domestic demand and exports. However, the high value of the Canadian dollar will act as a drag on demand for Canadian products. Overall, the recovery in Canada is projected to be somewhat more modest than the average of previous cycles.

Consumer spending

Consumer spending is expected to grow at a solid pace throughout the projection horizon. In the near term, improvements in wealth and in consumer confidence, as well as the re-emergence of demand postponed from previous quarters, will help to fuel spending.

As these effects diminish, growth in consumer spending should be supported by the recovery in the growth of labour income. Growth in housing investment is projected to be brisk until early 2010, and then to slow down as the effects of temporary factors - such as pent-up demand and the home renovation tax credit - subside and affordability declines. In the wake of a short, severe recession, and with residual economic uncertainty, the personal savings rate remains elevated over the projection horizon.

Business investment

Business fixed investment is projected to recover in early 2010, following five quarters of contraction. As in past cycles, growth in business investment is expected to lag the recovery, given the large amount of unused capacity, and then to rebound strongly once the recovery is well under way. The gradual improvement in financial conditions and economic activity, as well as higher commodity prices, should help to boost business spending.

In light of recent information, firms are now expected to draw down their inventories at a slower pace than in July.

Exports to U.S. will recover

As detailed in the July report, Canadian exporters should benefit disproportionately from the U.S. recovery in 2010/2011 since the projected growth in the Bank's U.S. activity index is considerably higher than that in U.S. real GDP over this period.

The higher Canadian dollar will, however, dampen the expansion of exports. Import volumes are projected to increase at a solid pace, in line with the recovery in the domestic economy, the rebound in exports, and the past appreciation of the Canadian dollar.

As growth in the Canadian economy resumes, excess supply will gradually be absorbed, and the economy is expected to reach its production capacity in the third quarter of 2011.

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