Bank of Canada: 2013 is the year normal growth returns

The Bank of Canada doesn't see much improvement in the Canadian economy during the next year or so. As such, the Bank has decided to maintain the overnight rate to 1 percent. A wise decision, indeed.

From today's press release:

The outlook for the Canadian economy has weakened since July, with the significantly less favourable external environment affecting Canada through financial, confidence and trade channels.  Although Canadian growth rebounded in the third quarter with the unwinding of temporary factors, underlying economic momentum has slowed and is expected to remain modest through the middle of next year.

Domestic demand is expected to remain the principal driver of growth over the projection horizon, though at a more subdued pace than previously anticipated.  Household expenditures are now projected to grow relatively modestly as lower commodity prices and heightened volatility in financial markets weigh on the incomes, wealth and confidence of Canadian households. Business fixed investment is still expected to grow solidly in response to very stimulative financial conditions and heightened competitive pressures, although it will be dampened by the weaker and more uncertain global economic environment.  Net exports are expected to remain a source of weakness, owing to sluggish foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

Overall, the Bank expects that growth in Canada will be slow through mid-2012 before picking up as the global economic environment improves, uncertainty dissipates and confidence increases.  The Bank projects that the economy will expand by 2.1 per cent in 2011, 1.9 per cent in 2012, and 2.9 per cent in 2013.

The weaker economic outlook implies greater and more persistent economic slack than previously anticipated, with the Canadian economy now expected to return to full capacity by the end of 2013. (emphasis original)

For those of you scratching your head and wondering why it'll take so long for full capacity to return, you should know that Canada's current capacity utilization rates are near the lowest non-recessionary levels they've been in two decades.

Also, it's significant that the Bank's statement highlights the fact that fiscal austerity in Europe and elsewhere is contributing to restrain growth across the advanced economies.