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IMF's forecast at odds with Ottawa's

From Thursday's Globe and Mail

OTTAWA — Ottawa's projection of a robust economic rebound next year - the basis of the budget's forecast return to surpluses in four years - was undermined by an International Monetary Fund report that the global slump will stretch into 2010.

In a revised forecast released yesterday, the Washington-based IMF slashed its projection for global growth to just 0.5 per cent in 2009, the slowest pace since the Second World War.

But it is on the speed of global recovery next year that the IMF forecast is most at odds with some of the assumptions in Tuesday's federal budget. The IMF said it expects global growth of 3 per cent next year - a level that is still considered recessionary and could make it difficult for the Canadian economy to grow at the healthy clip forecast in the budget.

"The world economy is facing a deep downturn," the IMF said in an updated global forecast released yesterday. "The outlook is highly uncertain, and the timing and pace of the recovery depend critically on strong policy actions."

The IMF's revisions show just how difficult it has been for even the most well-equipped forecasters to get a handle on how fast the world economy is collapsing. Yesterday's report marked the third time since October the fund has cut its outlook for the global economy.

That underscores the risk to Ottawa's economic outlook, which is based on the average of private-sector forecasters. In assembling this week's budget, Mr. Flaherty assumed U.S. growth of 2.1 per cent for next year, rosier than the IMF's outlook of 1.6 per cent.

The Finance Minister is jumping to the conclusion that credit will be flowing again, and U.S. demand for the rest of the world's products will have regained some health, economists warned.

"This is not going to be a rapid recovery," said Derek Holt, senior vice-president of economics at Scotia Capital Inc. "Following any banking crisis anywhere around the world, you would not expect a snap-back in growth."

The U.S. number is critical, because Canada can't recover until the United States does, said Mr. Holt, whose forecast for Canada is the same as the IMF's. "We're a small, open economy," Mr. Holt said. "We get hit through the trade side."

The IMF is forecasting a tepid recovery of just 1.6 per cent for Canada in 2010 after a contraction of 1.2 per cent this year. That compares with Ottawa's forecast of a 0.8-per-cent contraction this year and growth of 2.4 per cent next year.

The IMF numbers assume stimulus in the G20 countries of 1.5 per cent of GDP in 2009, although the fund didn't specifically have details of the stimulus spending in Tuesday's budget. Ottawa's stimulus does amount to about 1.5 per cent of GDP.

But Ottawa's forecast for U.S. growth is based on the view by Finance officials that all the government measures will successfully gain traction fast. The massive fiscal stimulus, huge interest-rate cuts and measures to stabilize financial markets will help the American economy strengthen fairly rapidly, as soon as the housing market bottoms out and people start to spend and invest again.

That scenario is not widely accepted. The U.S. Fed issued a grim assessment of the economy yesterday, committing to near-zero interest rates for "some time" and warning that the recovery will be "gradual" and the "downside risks to that outlook are significant."

The statement noted that several key economic indicators have worsened since its last meeting in December, including global demand, unemployment, housing starts and factory output.

Ottawa's view of Canada's outlook assumes that the world economy will be benefiting handsomely from all the stimulus measures recently announced, and will begin paying more for Canada's commodities. It's a similar argument to that made by Bank of Canada Governor Mark Carney last week, when the central bank forecast average annual growth of 3.8 per cent in 2010. Mr. Carney suggested that when commodity prices start to climb, Canada will benefit more than other countries, because the increased income for Canada will give the country an immediate boost.

Tuesday's budget assumed that as a result of this recovery, the federal government's income-tax revenues will rebound more quickly than the economy itself, followed soon after by a recovery in corporate tax revenue - leading the government to claim it will balance the budget by 2013.

But the belief that a recovery in commodity prices will give Canada's economy a quick and powerful boost is controversial. The conventional wisdom is that it takes several years for the benefits of higher commodity prices to trickle through to the broader economy. The timing of a commodity-price rebound is also uncertain. Whether commodity prices rebound, of course, will depend on the performance of the global economy and key nations such as China which drive demand for oil, copper and aluminum.

Commodities account for about 15 per cent of Canada's GDP, and prices for oil, metals and fertilizer, which have been decimated in recent months, will need to pick up markedly for Ottawa's budget assumptions to hold up.

Some economists doubt whether the rebound will come soon enough. Former Bank of Canada governor David Dodge warned in a speech last week that commodity prices will stay flat for years and global economic growth will weaken for some time.

Ottawa's expectations of a commodity-price recovery over the medium term are generally in line with private-sector forecasts.

With reports from Shawn McCarthy in Ottawa, Andy Hoffman in Toronto and Barrie McKenna in Washington

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WHAT DODGE WOULD DO

If David Dodge were still in charge of the Bank of Canada or the Department of Finance, he likely wouldn't be expecting the strong recovery on which policy makers are basing their key decisions.

In a presentation last week, Mr. Dodge - the previous governor of the Bank of Canada, and a former deputy minister of finance - warned that global economic growth will weaken for some time to come and commodity prices will stay flat for years.

In a well-attended speech to the Calgary CFA Society's annual forecast dinner, Mr. Dodge argued that the world needs to work off its excess debts before the credit crisis can be resolved. Since this is expected to drag on, recovery in the global economy will not be as fast as in previous downturns.

As a result, global growth will be close to non-existent in 2009, he said. And "commodity prices [are expected to be] roughly flat at current levels through 2009-2010, and beyond," according to the slides he used in the Calgary presentation.

Media were not allowed into the event, and Mr. Dodge was not available for an interview, but the slides have been made public. Put together with reports from people who were in the audience, it is clear that the former central banker and éminence grise of Canadian economics does not see the world unfolding in the same way as his former employers do.

"Global growth in 2011 and 2012 [is] likely to be only moderately strong," Mr. Dodge argued, warning that the slack in Canada's economy will likely build up for a couple of years.

Heather Scoffield

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