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Ocotber 2008
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Global economic outlook takes a turn for the worse
- The dramatic worsening in financial markets starting in mid-September and the attendant credit tightening is expected to impede global growth for the remainder of this year and going into 2009.
- The U.S. economy is likely falling into recession and the U.K. and Eurozone economies are slipping.
- In response, central banks around the globe have been both pumping liquidity into the system and trying to shore up faltering financial institutions. The U.S. administration has passed an aggressive (US$700 billion) package to buy various distressed assets held by financial institutions — Troubled Asset Relief Plan (TARP).
U.S. economy headed for weaker second-half growth
- The U.S. economy was the second quarter’s growth leader, but momentum is fading fast as support from tax rebates wanes and the credit crisis takes its toll.
- Growth in the U.S. economy is expected to turn negative during the second half of this year, with declines continuing into the first quarter of 2009.
- TARP and other policy actions are expected to ease credit tightening, thus allowing positive growth to return during the last three quarters of next year.
- The U.S. housing market is showing signs of sales bottoming, although prices are declining at record rates.
- Consumers are hamstrung by falling net worth, high energy and food costs, and restrictive lending standards.
- Export growth has been a lifeline for the U.S. economy, but support will dwindle as trading partners flag and the U.S. dollar revives.
- Concerns about the high headline inflation rate are likely to dissipate as economic growth slows.
- The Fed is expected to ease policy again in October. Persistent financial system stress means that Fed will also maintain liquidity provisions.
Canada's weak growth numbers mask firm domestic demand
- Canada’s weaker-than-expected overall GDP rate in the first half of 2008 masked continuing strong domestic demand.
- Early signs of moderating housing and labour demand have tempered the outlook for growth in second half but do not point to a recession ahead.
- However, the trade sector will continue to constrain GDP growth in the second half of 2008 as a result of the expected greater weakness in the U.S. economy.
- The first half’s disappointing growth performance, weakness in the U.S. economy and tight credit are generating clear downside risks to the economic outlook.
- Canada’s headline inflation rate doubled between April and August, but the core rate remained in the lower end of the Bank of Canada’s target band.
- We expect the Bank of Canada to ease 50 basis points by the end of this year.
- The Canadian dollar is likely to remain range-bound for the remainder of this year before depreciating next year.
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