Recovery uneven: hot start to give way to cool second half of 2010, says CIBC

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OTTAWA - Canada's economy is headed for a rough second half in 2010 as it faces a slowdown in housing construction and employment growth and the likelihood of rising interest rates, according to one of Canada's big banks.
The CIBC's latest forecast says the economy is rebounding strongly after almost a year in recession, but that recovery will hit a serious speed bump in the second half of 2010.
That's because the fuel propelling growth now - a hot housing market feeding construction and jobs, and a factory sector working to replenish depleted inventories - will likely run out of steam by the summer.
"The growth we see in the next couple of quarters might give us a false sense of optimism," said CIBC chief economist Avery Shenfeld.
"It's not like there's a calamity facing the economy in the second half of 2010. It's just the sources of growth we'll be benefiting from in the first half simply won't be around."
The CIBC forecast is for the economy to grow by about 3.4 per cent annualized in the first half of the year, but slow to about 1.7 per cent in the second. It says growth will average 2.3 per cent for the year, well below the Bank of Canada's three per cent estimate.
That first-half growth will cause the housing market and prices to keep expanding, then come to a screeching halt in the second half of the year, the CIBC said.
And while the CIBC says Canada will see the economy add 34,000 net jobs a month from January to June, that momentum will slow to between 10,000 and 16,000 a month for the rest of 2010.
Shenfeld says the second-half slump will not be sharp enough to constitute a double-dip recession, but it will be felt by Canadians.
Meanwhile, the early rebound will likely be enough to get Bank of Canada governor Mark Carney to move off his "lower bound" policy and start raising rates, thereby further dampening growth.
The C.D. Howe panel of economists also sees the central bank succumbing to fears of inflationary pressures with too-low interest rates later this year.
In its monetary policy report Thursday, six of C.D. Howe's panel of 10 economists believe the bank will raise the trend-setting overnight rate to 0.75 per cent from the current 0.25 per cent in July. Some saw the rate going only to 0.5 per cent and one had it jumping to 1.5 per cent.
By mid-2011, the consensus of the panel was that the bank's policy rate would hit two per cent, still modest by historic standards, but all but certain to lead to higher mortgage rates.
The hot and cool nature of the recovery will be even more acute in the United Sates and exert an impact on Canada, particularly in the key export market, the CIBC said.
The inventory build-up and government stimulus has heated up the U.S. economy, which will grow about 3.7 per cent in the first half. But there too the momentum won't be sustained and gross domestic product will cool to less than one per cent in the second, it said.
Shenfeld says the danger of a second dip, particularly in the U.S., will emerge in 2011, when most of the current round of government stimulus is exhausted and the U.S. starts feeling the heat from government deficits approaching 10 per cent of the economy.
Some prominent economists, such as Nobel laureate Paul Krugman, has estimated the odds of a second economic dip in the U.S. at about 30 per cent and urged a second round of stimulus.
"One could imagine if too many governments take too hard a line on getting deficits down in a hurry, and also bring in dramatic tightening in banking regulations, you could turn 2011 into a disappointment," said Shenfeld.
"If we do it will be a policy error," he added.

Organizations: CIBC, Bank of Canada

Geographic location: Canada, OTTAWA, U.S. United Sates

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