Canada’s slowing economy may need rate cuts: OECD

By Greg Quinn

Bloomberg

Canada’s economy is slowing because of weaker foreign demand and may need new stimulus from the central bank and government if things get worse, the Organization for Economic Cooperation and Development said.

Gross domestic product will grow 1.9% next year, the Paris-based OECD predicted Monday, down from its May forecast for a 2.8% expansion. The outlook for this year was pared to 2.2% from 3% in May, and it estimated 2013 growth of 2.5%.

Finance Minister Jim Flaherty said last week he may offer additional stimulus if required, adding the risks to the global recovery from Europe’s debt crisis are increasing. Bank of Canada Governor Mark Carney has kept his key lending rate at 1% since September 2010 and has said the economy won’t fully recover until well into 2013.

“Output is projected to expand at a slow pace as exports are restrained by sluggish external demand,” the OECD report said. “Domestic spending should sustain growth but at a moderate rate, as high debt and waning sentiment curb consumption growth.”

Consumers may be discouraged from spending by debts that are a record 150% of disposable income and by a weak job market marked by government cutbacks and slow private hiring, the OECD said. Unemployment will be little changed next year at 7.3% from this year’s 7.4% according to the report.

“Risks are skewed to the downside,” the OECD said, and if they materialize “the Bank of Canada should ease monetary policy via further interest rate cuts, which in a downside scenario would be consistent with the inflation target.”

The Bank of Canada has predicted inflation will slow to 1% in the second quarter of next year from 2.7% this quarter. The bank acts to keep inflation in the middle of a 1% to 3% band.