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Sliver of hope that Canada’s slump is temporary

A cyclist passes the Bank of Canada in Ottawa in this file photo.


Canada's economy sputtered at the end of 2012.

Here's the sliver of hope that the slump was temporary, and that at least acceptable growth could come in 2013: Executives say they are poised to ramp up investment, hiring levels are strong and there is little inflation.

The Bank of Canada's latest quarterly Business Outlook Survey finds a significant increase in investment intentions, as 43 per cent of respondents said they planned to spend more on machinery and equipment over the next 12 months, compared with 37 per cent who said so three months earlier. (Twenty-three per cent said spending would be lower, compared with 29 per cent in the autumn.)

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Business investment is an important indicator for the central bank right now.

The housing market, which powered the recovery, is slowing and something has to pick up the slack. The most likely candidates are investment and exports.

Consumer demand is unlikely to be a source of growth because high levels of household debt likely will restrain spending. Federal and provincial governments are cutting spending, meaning the public sector will be a drag on growth.

The Bank of Canada can support business investment and exports by keeping interest rates low. Policy makers will be willing to do so as long as inflation remains at bay.

With the benchmark rate at 1 per cent for more than two years, one would think inflation would be an emerging threat.

Amazingly, prices remain subdued. The Business Outlook Survey shows that expectations for prices of goods and services that are bought and sold are little changed from the previous survey in October.

More than half the respondents said they expect inflation will stay between 1 per cent and 2 per cent, the lower end of the Bank of Canada's comfort range of 1 per cent to 3 per cent. Only 2 per cent of respondents said they thought inflation would exceed 3 per cent over the next 12 months.

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That speaks to the faith of executives in the Bank of Canada to achieve its inflation objective.

But inflation also is subdued because of considerable slack in the economy. Only 28 per cent of executives said they would have "some difficulty" meeting an unexpected increase in demand, compared with 44 per cent in the autumn.

That's an important indicator of inflation.

When companies struggle to keep up with demand, inflation tends to rise. The absence of any pressure on production capacity will allow the central bank to keep borrowing costs low. The Bank of Canada's policy decision next week will be an easy one.

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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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