OTTAWA - The global recovery is strengthening, but still needs a boost from massive "extraordinary" stimulus measures to sustain growth, the Bank of Canada said Tuesday.
And the central bank also signalled once again it intends to keep interest rates at historic lows until at least mid-year despite growth returning to the Canadian economy.
"Economic growth in Canada resumed in the third quarter of 2009 and is expected to have picked up further in the fourth quarter," bank governor Mark Carney and his policy-making council said in an accompanying note.
"Nevertheless, considerable excess supply remains, and the bank judges that the economy was operating about 3.25 per cent below its production capacity in the fourth quarter of 2009."
The statement, which included a minor downgrade in projected growth for this year, suggests Canada will be taking a message to the G7 meeting of finance ministers and bank governors in early February that now is not the time for governments to exit stimulus strategies.
In the statement Tuesday, the bank said it would do its part by keeping its trendsetting rate at 0.25 per cent until at least mid-year.
To reinforce the commitment, it extended its emergency lending instruments to April, allowing chartered banks to access funds at the historically low rate.
The bank said the private sector won't become the sole driver of domestic demand until 2011.
As well, the bank tweaked its October economic growth forecast for this year a tenth of a point lower to 2.9 per cent. However, it said 2011 would be slightly better than it thought, with growth projected at 3.5 per cent.
Some analysts saw a brightening hue to Carney's language from October.
Scotiabank economist Derek Holt noted that central bank removed from its text an earlier comment that "significant fragilities remain," and forecast that global expansion would be somewhat stronger in 2010 and 2011 than it thought three months ago.
As well, a new report on leading indicators from Statistics Canada, released half an hour before the bank's announcement, offered more evidence that economic activity picked up last month. The index rose 1.5 per cent, the biggest one-month advance since 1958, with none of the 10 major components registering losses.
Economists are now projecting that Canada's gross domestic product grew by between three and four per cent in the last three months of 2009, and will likely advance at a similar pace this winter.
Given the firming conditions, Holt said it was becoming increasingly difficult for Carney to justify a policy rate near zero.
"The justification for giving away free money is a lot tougher now," he said, even if growth is muted.
But analysts also pointed out that Carney does not want to signal too early he is thinking of raising interest rates for fear of stoking the dollar, which would make exports an even harder sell in foreign markets.
The bank blamed low American demand and the high loonie, currently trading near 97 cents US, with restraining growth in Canada, and leaving the heavy lifting to consumers and homebuyers.
The bank's minor adjustments on growth rates puts it more in line with many private sector economists, particularly the Conference Board, which Tuesday estimated growth of 2.8 per cent for this year.
As the bank noted, Canada's export-dependent manufacturing sector will continue to be weighted down by the strong dollar and the weak consumer recovery south of the border.
A new industrial outlook report from the TD Bank shows just how enfeebled Canadian factories have become by the global meltdown of 2008 and 2009. While manufacturing output will outperform the overall economy in the next few years, it has sunk so far that by the end of 2011 it will still be below levels of a decade ago, the report said.
In another aspect of the Bank of Canada statement, the central bank said inflation has been rising faster than anticipated but it did not appear to be overly concerned at this point.
Although economists say inflation likely hit 1.6 per cent in December, after being below zero through much of the summer and part of the fall, the bank said it still doesn't believe it will return to the two per cent target until the third quarter of 2011.