Europe's debt quagmire, a flagging U.S. rebound and slowing growth in China are taking the steam out of Canada's economic outlook.
Canada's top policy makers said the country's prospects for this year and next have deteriorated as a slowing global economy weighs on exporters and cuts into confidence at home.
Consumer and business spending is expected to slow and unemployment is expected to hover close to the current 7.1-per-cent level for years, factors that will likely keep interest rates near emergency levels until as late as 2013.
Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty insist Canada and its top trading partner, the United States, won't slide back into another recession. However, both suggested that outlook depends on European leaders to contain a debt crisis before it pushes the region into a serious slump.
Mr. Carney on Tuesday left the Bank of Canada's key interest rate at 1 per cent for a ninth consecutive decision. Canada will feel the effects of weak U.S. growth that will persist until mid-2012, and a "brief recession" in the euro zone, he noted.
The bank chopped its forecasts for 2011 and 2012 and said the Canadian economy will not return to full capacity until the end of 2013, 18 months later than policy makers had projected in July. And Mr. Flaherty said the economic projections that underpinned his latest budget face a "significant downgrade."
The gloomier outlook comes ahead of a crucial gathering of European leaders on Wednesday and a Group of 20 summit next week in France, both aimed at stemming the euro zone debt mess before it engulfs the continent's banking system and tips the world economy back into recession. The slowdown is already affecting Canadian financial conditions, consumer and business confidence, and trade, the central bank said, also warning that while its forecast assumes the European crisis will be contained, that notion is "clearly subject to downside risks."
Even if the European situation doesn't worsen, through the end of 2012 Canada will see "very modest" growth that's just enough to "keep the unemployment rate treading water," said Leslie Preston, an economist at Toronto-Dominion Bank.
The Bank of Canada said the economy will grow 2.1 per cent this year instead of its July call of 2.8 per cent, and 1.9 per cent in 2012, down from 2.6 per cent. In 2013, the economy will grow a healthier 2.9 per cent, roughly equal to the average for the two decades before the crisis.
In the meantime, household spending will "grow relatively modestly," the bank said Tuesday, as lower commodity prices and volatility in markets weigh on Canadians' sense of financial well-being. Business investment will continue to grow but will also be "dampened" by the global outlook.
All of which means the bank will likely leave interest rates untouched for much of 2012 and possibly into 2013, economists said. Indeed, despite hotter-than-expected inflation readings in recent months, bank policy makers said Tuesday that the drop in energy prices since the summer and a slowdown in big emerging markets like China will tame inflationary pressures everywhere.
Some Canadian companies say they've come to accept that their traditional markets will be lukewarm as governments and consumers unwind the massive debt they incurred in recent years.
"These are marathon issues, they're not sprint issues,'' said Tom Schmitt, president and CEO of Purolator Courier Inc., Canada's largest courier company. "We're probably talking about years of a little bit of bumpiness along the road."
Similarly, Don Lang, executive chairman of CCL Industries Inc., a Toronto-based specialty packaging company, said a "pullback" in orders through much of the developed world is still better than a downturn.
"From our perspective, it's business as usual," Mr. Lang said. "Positive growth is positive growth, so there are still lots of opportunities for businesses that are well-placed."