Canada: Slack will grow

The economic downturn that started in 2007, as exports slowed in response to the deflating US housing bubble, continues to worsen. Sharply deteriorating conditions in global financial markets, generalised softness in the US economy and receding commodity prices are amplifying export weakness and dragging down domestic spending. Output has been contracting since August 2008, and slack is projected to grow until the global financial crisis has run its course and external demand bounces back in 2010. The domestic banking and housing sectors are in relatively good shape, however, and no government bail-outs have taken place.
Excess capacity and lower commodity prices are alleviating inflation pressures, allowing the Bank of Canada to boost its expansionary stance. The general government is expected to move into deficit in 2009 and 2010, a largely cyclical outcome that is not alarming and leaves room to absorb eventualities but underlines the need to keep a lid on discretionary expenditure increases.


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