Canada Economy 2012: Conference Board Says Cautious Businesses, Government Cuts To Hurt Economy

Canada Economy 2012 Conference Board

First Posted: 01/18/12 11:59 AM ET Updated: 01/18/12 11:59 AM ET

OTTAWA - Spending restraint by governments and businesses will contribute to an expected slowing of gross domestic product growth this year, the Conference Board of Canada said Wednesday.

In its outlook for winter 2012, the Ottawa-based think-tank said it expects GDP to decline to 2.1 per cent from 2.3 per cent last year.

Conference Board spokesman Pedro Antunes said weaker spending is expected "stifle domestic demand and curb economic growth this year."

"Adding to uncertainty are the sovereign debt problems in Europe and the tepid U.S. economy, which continues to perform far below its potential," said Antunes, the Conference Board's director, national and provincial forecast.

The board's economic outlook assumes the eurozone will manage to avoid falling even deeper into crisis, but says the risks to the outlook remain unusually high.

"The effort by eurozone leaders to build a stronger fiscal foundation has helped stabilize financial markets for now, but the roller-coaster ride that prevailed through most of last year is sure to continue in 2012," it said.

And that, its says, it likely to shake business confidence, with the growth in private investment forecast to slow in 2012 to about half the pace of the previous two years.

In Canada, total spending by all levels of government is forecast to contract 0.6 per cent in 2012, taking roughly $2 billion out of the economy.

"Even though government program spending will rise modestly this year, the decline in infrastructure investment will more than offset those gains," the Conference Board said.

The federal government has delayed its target for a balanced budget by a year, to 2015-16, but the Conference Board said it believes Ottawa's books could be balanced on time, if not earlier than expected.

"Some provinces, however, are in a much tougher fiscal situation," it said.

"They face the challenge of balancing their books before rising debt levels limit their ability to fund social programs and public health care."

Meanwhile, consumer spending is expected to increase faster than income growth in 2012 as modest job creation and wage gains lead to income growth of 3.5 per cent in 2012.

However, it said households are expected to keep up their level of spending only by going deeper into debt, which is already at record levels.

5 ECONOMIC LANDMINES THAT COULD IMPACT CANADA IN 2012

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  • 1. RISING HOUSEHOLD DEBT

    Canada's household debt burden climbed to yet another record high in the third-quarter, prompting Bank of Canada Governor Mark Carney to call it <a href="http://www.montrealgazette.com/business/Mark+Carney+again+sounds+alarm+rising+Canadian+household+debt/5856418/story.html" target="_hplink">"the greatest risk to the domestic economy</a>." At 150.8, <a href="http://www.reuters.com/article/2011/12/14/us-economy-debt-idUSTRE7BC2DY20111214" target="_hplink">Canada's debt-to-income ratio is now higher than in the U.S. or the U.K</a>. Meanwhile, household net worth fell, which, as many observers have warned, has made Canadians more vulnerable to adverse economic shocks.

  • 2. SLUGGISH CONSUMER DEMAND

    Though BMO's Doug Porter maintains that low interest rates and modest job growth should prevent household debt issue from becoming "a clear and present danger to the outlook in the year ahead," he predicts that the debt burden is likely to increase. Unlike in the U.S., Canada's consumer recession was "very mild," leaving scant room for growth in consumer spending, he says. "At best, we see consumer spending growing in line with income next year," he said. "We've actually pegged it a little bit below income growth next year ... at less than two per cent in 2012." (FREDERIC J. BROWN/AFP/Getty Images)

  • 3. EUROZONE INSTABILITY

    When TD cut its 2012 outlook for the Canadian economy earlier this week to 1.7 per cent, the bank cited a deepening fiscal crisis in the eurozone as one of the primary factors. More bearish than BMO, which on Thursday held its expectation for Canada's GDP growth next year at two per cent, TD is forecasting "a deterioration of financial conditions and a significant European recession in the first half of next year." "<a href="http://www.td.com/document/PDF/economics/qef/qefdec11_can.pdf" target="_hplink">A deepening recession in the region will exert a significant drag on the global economy</a>," the bank maintained. "Canada will be negatively impacted through weaker commodity prices, confidence and export growth. Labour markets will also soften as a result." (ERIC FEFERBERG/AFP/Getty Images)

  • 4. CHINA LOSING STEAM

    The signs are abundant that the world's largest economy is cooling. Mounting local government debt and slowdowns in everything from industrial production to <a href="http://www.cbc.ca/news/business/story/2011/12/09/china-economy-slows.html" target="_hplink">the housing market has led many to predict softer economic growth in 2012</a>. "<a href="http://www.npr.org/2011/12/13/143623874/after-boom-chinas-property-market-heads-lower" target="_hplink">Real estate is a locomotive industry that leads at least 58 other industries</a>," Cai Weimin, who runs a real estate think tank in Shanghai, told NPR. "Doomsday probably won't come true in 2012, but for the Chinese economy, 2012 will be a very tough year. (Aaron tam/AFP/Getty Images)

  • 5. GROWING INCOME GAP

    As Canada's rich-poor divide widens, some experts warn that the concentration of wealth at the top of the income distribution and stagnating wages for everyone else could be a drag on the economy. Though Canada's income gap is not as pronounced as in the U.S., Canadian Centre for Policy Alternatives economist Armine Yalnizyan argues that the growing divide is bad for business all the same. <a href="http://www.huffingtonpost.ca/news/mind-the-gap" target="_hplink"><strong>Mind The Gap: Our examination of Canada's growing income divide</strong></a> "<a href="http://www.canadianbusiness.com/article/39123--inequality-is-bad-for-business" target="_hplink">Real growth in purchasing power has been restricted to a small fraction of Canadian consumers</a> in what is already a small market," she maintained in an op-ed in Canadian Business magazine. "Throttling aggregate demand slows the economy for everyone." Anne Golden, president and CEO of the Conference Board of Canada, echoes this sentiment. "Growing inequality distorts consumer patterns," she told The Huffington Post in a recent interview. "Most businesses, except maybe for Porsche [dealerships], rely on rising purchasing power of the many, not the few, to deliver growth and profits." (ADRIAN DENNIS/AFP/Getty Images)

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Filed by Daniel Tencer  |