Dodge revises forecast

Bank of Canada Governor David Dodge (Dec.12,2006) has acknowledged that growth will be slower in the fourth quarter of 2006 than he had anticipated and that the economy is likely to be "softer" in the first quarter of 2007 than originally forecast. This somewhat gloomier assesment suggests that the Bank may now realize that further interest rate rises for the time being are out of the question and that a gradual easing of rates is in order. If they do not ease the rates it is quite likely that growth will be very sluggish and well below the rate needed to keep unemployment from rising.

The next interest rate announcement should therefore indicate this stance. Canada which is heavily dependent for its exports to sell in the US market clearly suffers a slowdown in manufacturing whenever key sectors like automobiles and housing suffer downturns in the US. Also, in recent months Canadian exports to the US are having to compete with very cheap Chinese exports thereby losing some market share to the Chinese. China ,in addition, runs a huge balance of payments surplus with Canada, importing far less from us than it exports to us.

Clearly in addition to rethinking our central bank policy shifting from an anti-inflationary bias toward an employment and growth bias we also need to re-examine our trade strategy. We also should try capture the innovative edge in ecological technology and focus on greening as much as possible   our own oil and gas production.

The softening of the economy will be reflected in increases in the unemployment rate particularly in the regions most dependent upon manufacturing and exports of manufactured goods as   opposed to oil and gas to the US economy.

Mr. Dodge also raised the issue of lagging productivity. Here the problem is partly the lack of sufficient investment in productivity enhancing innovations and adequate labour market training and education but also in running the economy with sufficient aggregate demand to keep the economy closer to its full potential output.If one were to do this one would experience dramatic gains in productivity as plant and machinary and labour would be more fully utilized.

Dodge also called for moving toward a single standard of security regulations, a good idea but one likely to be reisted by Quebec. He also resurfaced the issue of bank mergers, also a controversial idea with the Canadian electorate whose experience as consumers with the existing Canadian banks has not always been a satisfactory one.