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A file photo of a Walmart store in Okotoks, Alta.

Chris Bolin/chris bolin The Globe and Mail

Canada, which fought off recession much longer than its peers in the Group of Seven nations, will trail them down the road to recovery, according to new projections by the Organization for Economic Development and Co-operation.

All G7 economies save those of Canada, Britain and Italy will expand in the third quarter, the Paris-based OECD said Thursday. Canada's gross domestic product will contract at an annual rate of 2 per cent in the period, the weakest of the three laggards and advance at a rate of 0.4 per cent in the final three months of the year, the OECD said.

Germany will lead with growth at an annual rate of 4.2 per cent in the third quarter. The economies of the United States, Japan and France also will grow this quarter, allowing the OECD to revise its outlook for the G7 in 2009 to a contraction of 3.7 per cent from 4.1 per cent in June.

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Describing the estimates as basic interim revisions between more thorough biannual updates, the OECD didn't provided detailed analysis of the individual countries. The forecasts are based on an economic model that takes GDP reports from the first half of the year and combines them with the latest "high frequency" data to extrapolate where each G7 economy is headed.

"Given the positive economic news and based on incoming high-frequency indicators, OECD short-term forecasting models point to an earlier recovery than envisaged a few months ago," Jorgen Elmoskov, acting head of the Paris-based organization, said in the report. "As a consequence, the unprecedented rate of deterioration in labour market conditions witnessed over the past year should ease. Nonetheless, numerous headwinds imply that the pace of the recovery is likely to be modest for some time to come."

The OECD's projection contrasts with other forecasts, including that of the Bank of Canada, which predicts the country's economy has resumed growing. The OECD and the Bank of Canada use different methods to come up with their outlooks.

Still, the latest addition to the bevy of economic forecasts competing for the public's attention promises to be amplified by Stephen Harper's political opponents because it calls into question the prime minister's assertion earlier this year that Canada would be among the first countries to escape the most dramatic global downturn since the Second World War.

Liberal Leader Michael Ignatieff declared two days ago that his party would no longer support Mr. Harper's Conservative government, setting the stage for a possible election this autumn. Mr. Ignatieff made clear the economy would be the central issue of any campaign.

But the latest OECD estimates are far from a clear condemnation of Canada's economy or Mr. Harper and Finance Minister Jim Flaherty's handling of it.

Canada stayed above water in the second and third quarters of 2008, a period during which the rest of the G7 countries recorded at least one quarterly contraction. For all of 2009, Canada's GDP will shrink 2.5 per cent, the second-best performance after France, whose economy will decline 2.1 per cent, according to the OECD.

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Some economists played down the report, saying the OECD methodology fails to reflect what actually appears to be happening.

Michael Gregory, an economist at BMO Nesbitt Burns in Toronto, noted that the OECD forecast puts much weight on traditional indicators via a quick tracking model. Canada's slump was violent, he said, so many indicators reflect a sharp, sudden erosion, which, while severe, was short.

Statistics Canada tracking has already shown economic growth in June, he noted, and, for example, economists already know there was a large jump in manufacturing output in July. And the housing market, which also experienced a fast slump, has come back remarkably.

In fact, Canada Mortgage and Housing Corp. said in a report Thursday that housing starts should rebound in the second half of this year.

"Improving activity on the resale market and lower inventory levels in both the new and existing home markets are expected to prompt builders to increase residential construction," CMHC said.

In late July, the Bank of Canada projected the economy would expand this quarter, meaning the recession would have lasted for about nine months.

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"The OECD's global forecast revisions expect Canada to remain in recession [in the third quarter] in contrast to many forecasts and the BoC's view," Bank of Nova Scotia economists said in a research note. "If so, we still think the vulnerability lies in bloated inventories that will have Canada lagging a global production recovery."

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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