OTTAWA - Canada's recovery is becoming more solidly entrenched, but there won't be a sharp rebound in job growth for some time, Bank of Canada governor Mark Carney said Thursday in his latest policy report.
Carney cautioned that the long-term potential for growth in Canada will be muted - in the two-per-cent range - unless Canadians become much more productive than they've been in the past few years.
The outlook put a damper on what was otherwise a mildly upbeat analysis of the economy, in which the Bank of Canada says the world and Canadian economies are rebounding from recession faster than previously thought.
Risks of a stall, or double-dip recession, are receding, the bank says, and economic growth throughout the year will be slightly stronger than it had predicted in October.
"Economic growth is expected to become more solidly entrenched over the projection period as self-sustaining growth in private demand takes hold," the bank said in its quarterly update.
In another indication the recovery is underway, the Office of the Superintendent of Bankruptcy said total bankruptcies declined by four per cent in November compared to October, with corporate failures falling 7.7 per cent
Although Canada emerged from the slump at a more sluggish pace than predicted, it will soon make up for lost time, the bank said.
It projected the economy will grow by 4.3 per cent annualized this spring, four per cent in the third quarter and 3.8 per cent in the final quarter of 2010 - all several ticks higher than it forecast three months ago.
Overall, growth will average 2.9 per cent this year and 3.5 per cent in 2011, a small overall improvement from the forecast made in October.
But in an accompanying news conference, Carney pointed out that even those growth rates are well below what normally occurs following a deep recession.
And the recovery, while not a classic jobless one, will be light on creating significant employment opportunities.
"We don't see a sharp rebound in employment, but the table is being set to improve," he said.
For Canadians, Carney's message means that low interest rates are here to stay for another six months at least, said Bank of Montreal economist Sal Guatieri. That means mortgage rates will be "low well into the usually strong spring home-selling season."
The longer term prospects worry Carney, however. He said unless Canadians become more productive, the country's potential growth will hover around 1.9 per cent, well below the 2.7 per cent growth assumed in the early part of the decade.
Earlier this month, Parliamentary budget watchdog Kevin Page also highlighted the low potential for longer-term growth - the ability for the economy to expand without causing inflation - as a key reason Ottawa will find it difficult to get out of deficit.
But economist Dale Orr said there is a way out of the low growth trap. As long as firms innovate in order to boost production with fewer workers, Canadians' standard of living will be unaffected, he said.
"The key is standard of living and that is GDP per person, not GDP in total," he pointed out. "Look at Saskatchewan, they've been doing really well the last couple of years and their labour growth is about zero."
Despite the risks and remaining challenges, Carney said the prospects for the economy are improving at the right time, just as government spending is being wound down.
He said the impact of Ottawa's stimulus spending likely peaked at the end of 2009, representing about two per cent of GDP, and will peter out throughout 2010 before turning negative in 2011.
"One of the core messages in the report is that 2010 should mark the hand off from growth that is heavily influenced by (government stimulus) to growth that is largely determined by the private sector," he said.
"What we expect to see is broader consumption demand, and... a resumption of investment activity in the corporate sector."
Even the long-suffering manufacturing and export sectors will get a small lift, taking advantage of higher growth in the U.S. and increased global demand for commodities Canada has to sell.
The one sector of the economy due to cool off is the housing market, the bank said, because pent-up demand is receding and prices have returned to pre-recession levels.
TD economist Craig Alexander agreed with the assessment, saying the recovery, while modest, "is for real" and without "significant risk of a double dip."
Looking backward, Carney said the recession in Canada was "more modest" than other major advanced countries, partly because of the solid banking sector and strong corporate and household balance sheets.
At its peak, more than 400,000 jobs were lost, and gross domestic product shrank by 3.3 per cent in total, lower than the U.S., the United Kingdom, Europe and Japan.
Carney expressed confidence the private sector will soon start pulling its weight. By 2011, the private sector will be the sole driver of Canadian growth, he said.
In other projections, the Bank of Canada forecast the U.S. economy will rebound to 2.5-per-cent growth this year, while the world economy will register a 3.7-per-cent advance, both higher than previously projected although still relatively low.
The main engine of global growth remains China, however, which is expected to be back close to double-digit growth this year.