Economists with Canada’s largest bank revised their forecast for the country’s economy Monday, predicting slower growth.
RBC Economics cut its prediction for growth by 0.8 of a percentage point from its June forecast, expecting expansion of 2.4 per cent this year.
Growth of about three per cent is common during good times.
The bank made the change as a result of a "mild contraction" in Canada in the second quarter and slower growth in the U.S. and the economies that form the eurozone.
Volatility in stock markets this summer made business owners and consumers less confident about what lies ahead for the economy, chief economist Craig Wright said.
However, he expected the global economy will avoid another downturn, despite the recent fall in stocks and commodities.
Greek default worries grow
TD Economics chief economist Craig Alexander agreed that Europe has increasingly become a worry.
There's been growing speculation that Greece will default on its debt, something that threatens to create a European banking crisis.
“We’ve seen a very slow-moving train wreck in Europe,” Alexander told CBC News Network in an interview.
“Greece is insolvent. It actually cannot pay its bills.”
The mistake European leaders have made, said Alexander, is to assume that lowering interest rates and cutting government spending will get Greece out of its crisis.
The textbook answer, he said, is for Greece to devalue its currency in order to boost its export earnings.
But as a member of the eurozone, it can’t do that, so there’s a “significant risk” of a default, he said.
And the question is how much Canada could be affected if there is a European banking crisis.
Although our trade with Europe is not great, and Canadian banks are owed little by Greek borrowers, French and German banks are heavily exposed.
“If you ran into a banking crisis in Europe, then it would impact the global financial system, and as we saw in late 2008. Canada can’t insulate itself from what’s going on outside of its borders,” Alexander said.
U.S. growth estimate cut
RBC Economics also cut its prediction for U.S. growth by one percentage point to 1.7 per cent for 2011.
Wright said that RBC is "cautiously optimistic" that Canada's economy will grow by 2.5 per cent next year, matching the bank's forecast for the United States.
RBC expects Saskatchewan will lead provinces in growth, with Alberta and Newfoundland and Labrador close behind.
Manitoba is projected to improve in 2011, while Ontario, British Columbia and Prince Edward Island will dip slightly below the national average, RBC added.
Quebec, along with New Brunswick and Nova Scotia, will trail, RBC predicts.
RBC expects the Bank of Canada will follow the U.S. Federal Reserve's lead and keep interest rates low at one per cent until mid-2012, adding that lower commodity prices should help reduce Canada's inflation rate to within the central bank's target range of two per cent.
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