BANK OF CANADA GOVERNOR DEFENDS OPTIMISTIC GROWTH FORECAST

UNCLAS OTTAWA 000116

STATE FOR E, EB/DCT, WHA/EX, WHA/CAN

STATE PASS USTR (SULLIVAN)

COMMERCE FOR ITA/MAC (WORD)

TREASURY FOR IA (NEPHEW)

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD EINV EIND PREL PGOV CA
SUBJECT: BANK OF CANADA GOVERNOR DEFENDS OPTIMISTIC GROWTH FORECAST
FOR 2010

Ref: Ottawa 0080



1. (U) Summary: The Governor of the Bank of Canada predicts the
Canadian economy will recover from the global financial crisis in
late 2009, with growth approaching 4 percent in 2010. However,
Canadian economic recovery is dependent on a range of domestic and
international factors, including the success of US economic stimulus
measures.


2. (U) In statements to the House of Commons Standing Committee on
Finance on February 10, 2009, Bank of Canada Governor Mark Carney
forecast a 1.2 percent contraction of the Canadian economy in 2009,
followed by a 3.8 percent rebound in 2010.


3. (U) Canadian recovery is conditional upon a number of existing
and proximate conditions. At the domestic level Governor Carney
identifies significant and timely monetary policy responses; a
well-functioning financial system; fiscal stimulus measures; the
past depreciation of the Canadian dollar; and rising levels of
domestic investment, consumption and demand. At the external level,
Carney links Canada's recovery to improved stability in
international financial and housing markets and rebounding demand
and prices for commodities. Approximately one third of Canadian
growth potential is domestically sourced so Canada's recovery
prospects are highly dependent on external factors.


4. (U) The Governor underscored stabilization in the global
financial system as the major pre-condition for Canadian recovery.
In Carney's view, this stability relies on successful execution of
the US and EU stimulus and stabilization plans; improved
multilateral financial regulation; and adequate resources for the
IMF. Carney is optimistic that Canada can contribute strongly to a
"macro-prudential" framework for multilateral financial regulation,
which will be discussed at the upcoming G-20 meeting in London.
Carney sees Canada as a leader in these efforts because "we're the
ones with credibility; we're the ones who have taken the right
steps."


5. (U) Canada's quick monetary response to the financial crisis
seems to be paying off. The benchmark lending rate stands at one
percent after the Bank of Canada cut rates by 350 basis points since
December 2007. Canada now claims negative real interest rates
(interest rates lower than core inflation) which, Carney predicts,
will boost borrowing and exert powerful stimulus on economic
activity.


6. (SBU) The Bank of Canada has been criticized recently for overly
optimistic predictions for economic recovery. However, Carney argues
that Bank of Canada forecasts are realistic, and are based on a
composite of 21 models. "We don't do optimism, we don't do
pessimism. We do realism at the Bank of Canada." University of
Toronto economists issued a forecast on Monday that parallels the
Bank's predictions, calling for marginal growth beginning in the
third quarter of 2009, building toward output of 3.7 percent in

2010. However, authoritative observers suggest that the Bank of
Canada is maintaining a "glass-is-half-full" view to boost business
and consumer confidence.