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Tiff Macklem

Lars Hagberg/The Globe and Mail

The Bank of Canada's senior deputy governor is striking a much less optimistic tone than his boss, indicating the central bank will not be raising interest rates any time soon.

That was the message as the central bank warned Tuesday that it's slashing its near-term forecast for economic growth in Canada as it awaits an "elusive" rebound in exports and business investment.

Belatedly falling into line with most private-sector forecasts, the central bank now says gross domestic product will grow at an annual pace of just 2 per cent to 2.5 per cent in the second half of the year.

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The bank's previous forecast was for annual growth of 3.8 per cent and 2.5 per cent in the third and fourth quarters, respectively.

Senior deputy governor Tiff Macklem made the downgrade in a Toronto speech Tuesday, sounding more downbeat than Bank of Canada Governor Stephen Poloz did just two weeks ago in Vancouver.

"We need a rotation in demand towards exports and business investment," Mr. Macklem said in his first speech since June, when he lost out to Mr. Poloz in the race for the central bank's top job. "Unfortunately, this rotation has proven elusive."

Adding to the less-optimistic outlook is the U.S. government shutdown, triggered by a congressional standoff over spending priorities. "The uncertainty that this ongoing brinkmanship is creating is not helpful," Mr. Macklem acknowledged.

The central bank had also expected the initial impact of the June Alberta floods and the Quebec construction strike to be worse. As a result, it underestimated second-quarter growth, which came in at nearly 2 per cent compared with the 1 per cent it had forecast. The bank's next quarterly monetary policy report on Oct. 23 is expected to contain more details on the bank's new outlook.

CIBC World Markets chief economist Avery Shenfeld said it will likely take until at least the second half of next year for the economy to gather any sustained momentum, suggesting the Bank of Canada won't raise its key interest until early 2015. The overnight rate has been held at 1 per cent since September 2010.

With inflation subdued and the business climate so uncertain, the central bank appears content to leave its key rate unchanged for some time still.

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In his speech, Mr. Macklem said that in "broad strokes" the bank expects consumers and the government sector to contribute about 1.5 per cent of growth going forward. The other key drivers – exports and business investment – must contribute as well if the economy is to reach its full potential, he explained.

But as Mr. Macklem pointed out: "In the past year, net exports and investment made no contribution to growth."

Canada's GDP must expand by at least 2.5 per cent a year just to keep up with the natural growth of production capacity.

Mr. Macklem went on to deliver a sobering analysis of what he characterized as a "gut wrenching" period for Canada's hard-hit export sector since the Great Recession. The country, he explained, has lost a huge share of global trade in the 2000s, and its coveted piece of the massive U.S. market.

The country also lost 9,000 exporters between 2008 and 2010 – or 20 per cent of its pool of exporters.

Mr. Macklem blamed the rise of China, but also Canada's skewed "trade geography." He said the country has been over-exposed to slower-growing countries, such as the U.S. and Europe, and underexposed to fast-growing emerging markets.

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He also said fading competitiveness of Canadian business, mainly due to the higher Canadian dollar and lagging productivity, has hurt exports.

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