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Canadian economic growth will pick up despite crisis in Japan

Canada’s economy will register a strong start to 2011 despite the growing risks from crises in Japan and the Middle East, predicts a major Canadian bank.

The TD Bank’s new forecast has the Canadian economy advancing a robust 3.5 per cent in the first half of this year, before slowing slightly in the second half.
 
For the year, the chartered bank expects the economy will expand by three per cent, half a point more than its previous estimate and 0.6 percentage points higher than the Bank of Canada’s official projection. The 2012 growth estimate remains unchanged at 2.5 per cent.
 
The bank expects the economy will create about 350,000 new jobs this year, more than last year’s total, with the unemployment rate dropping to 7.5 per cent by year’s end.
 
The new forecast is not a big surprise — more and more of Canada’s financial institutions have been upgrading their outlooks. The economist consensus given to the Finance Department on
Friday in preparation for the March 22 budget has moved to 2.9 per cent from 2.4 per cent in
January.
 
But it is the first major revision since last Friday, when a massive earthquake and tsunami rocked the world’s third largest economy, setting off a chain of events that points to a nuclear catastrophe at Japan’s nuclear plants.
 
TD chief economist Craig Alexander said the outlook took events in Japan into consideration, but the bank has determined the impact on the Canadian and global economies will be minor.
 
While there might be supply-chain disruptions in some sectors, particularly the auto sector, it notes that Japan represents on two per cent of Canadian exports.
 
“You don’t want to minimize what’s happening in Japan and if the worst fears come true then Japan’s economy is going to do a whole lot worse,” said Alexander.
 
“But the risks are risks, they aren’t the most likely outcome. It’s still the case that the economic climate in the world is quite good. For Canada, we’re going to have moderate growth, low inflation, solid profit growth, low albeit rising interest rates ... this is actually a pretty benign economic environment.”
 
As devastating as the disaster in Japan is in human terms, the macro-economic impacts are small since global supply chains will find substitute sources for output to replace the affected region, Alexander explained.
 
Longer term, Japan’s need for materials to help in the reconstruction could help the Canadian economy, although the overall impact will also be small.
 
Alexander said the strengths of the Canadian economy going forward are business investment, which he expects to keep growing, exports and consumer spending.
 
Government restraint, higher interest rates from the Bank of Canada moving to a tighter monetary posture, and housing will be key drags.
 
While it predates the Japanese natural disaster, Statistics Canada released fresh data Wednesday showing that Canada’s still depressed manufacturing sector had a banner January, with activity picking up by a massive 5.5 per cent in volume terms.
 
The data adds credence to December’s trade surge, which even after a downward revision showed exports rising about eight per cent.
 
“Without a doubt, the manufacturing data shows that underlying economic growth is improving,” said David Madani of Capital Economics, although he wondered if the momentum can be sustained.
 
TD’s sunnier outlook, as with other major institutions that have revised upwards, stems from the strong 3.3 per cent growth recorded in the fourth quarter, a more optimistic outlook for Canada’s biggest trading partner — the United States — and higher demand for commodities.
 
TD suggested that growth will be particularly prominent in the Prairies and Newfoundland and Labrador, helped by stronger financial positions from the governments in those regions, and strength in commodity prices.
 
But even manufacturing-heavy Ontario saw its growth profile rise from 2.4 per cent to 2.9 per cent in the TD outlook.
 
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