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April 2008
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World economy slowing — U.S. economy on the brink of recession
- The U.S. economy is on the brink of recession but is likely to recover in the second half of 2008.
- The slumping housing market and tighter credit conditions will keep economic growth flat early in the year with a decline likely in the second quarter.
- However, the combination of a fiscal stimulus package and accommodative monetary policy will bolster consumer spending in the second half of the year.
- The economy’s momentum will pick up pace in 2009 with real GDP growth of 2%.
- The U.S. trade sector will be a support for the economy this year and next.
- Persistent upward inflation pressures due to high energy and food prices will keep inflation on the Fed’s radar screen.
- But, policymakers are likely to keep policy biased towards ease near-term and to lower the funds rate to 1.50% to kick-start stronger growth and shore up investor confidence.
Terms of trade improvement to help Canadian economy to outperform U.S. growth
- Canada’s economy will slow but will slightly outperform the U.S. economy, with support coming from high prices for Canadian natural resource exports.
- Domestic demand will slow modestly due to credit tightening.
- Canada’s trade sector will act as a significant drag on Canada’s economy this year and next.
- The core inflation rate is expected to remain below 2% this year, with the all-items CPI likely to drop to 1% mid-year.
- We are calling for the Bank of Canada to lower the overnight rate to 2.75% to mitigate downside risks to the growth outlook coming from a weakening U.S. economy, tight credit conditions and a strong Canadian dollar.
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