Bank of Canada and BMO Capital both warn of trouble spots ahead
January 15, 2008
The Canadian Press

OTTAWA - Strong domestic demand should buoy the Canadian economy through a storm south of the border but two surveys released yesterday suggest businesses are ever more wary the country's fortunes may capsize in 2008.

The Bank of Canada's quarterly survey showed 60 per cent of businesses would have trouble meeting a surprise jump in demand, particularly in the services sector.

"That's an indication of how close to capacity the economy is operating,'' said Doug Porter, deputy chief economist with BMO Capital Markets.

"I would have thought that things were starting to go the other way given the slowdown in the U.S. economy but this indicates it really hasn't started to bite just yet.''

The tight market for workers was the most commonly reported restraint on growth. Of the firms surveyed, 41 per cent reported that labour shortages are making it difficult to meet demands.

Labour shortages were most pronounced in western Canada, and in particular in British Columbia.

Pressures on production capacity tend to hint at coming inflation, but 86 per cent of Canadian firms expect inflation will continue to float between the Bank of Canada's desired range of one to three per cent.

However, the central bank cautioned of a "shift in expectations from the upper half to the lower half of that range.''

The poll of 100 businesses, conducted between Nov. 15 and Dec. 14, showed corporate leaders overall "remain positive'' about the country's economic outlook.

However, the survey suggests the Canadian dollar's volatility and the struggling U.S. economy have been a cause for concern.
Businesses said they have been hit by the credit crunch spawned by the collapse of the U.S. subprime mortgage sector and big writedowns in related securities, which reached its height last August.

Thirty-two per cent reported they had tightened credit terms and conditions over the past three months.

Yet despite worries about a U.S. economic downturn, 42 per cent of firms expected to hire more workers, as opposed to only 12 per cent expecting to have fewer.

Also yesterday, the Conference Board of Canada reported Canadian domestic demand, which has averaged 4.3 per cent growth annually for four years, is still forecast to expand by more than three per cent in each of the next two years.

The Conference Board said yesterday that federal tax reductions, strong job growth and wage gains will maintain the economy's momentum in 2008.

It also says the strong Canadian dollar coupled with pressure on retailers from cross-border shoppers and a percentage-point cut to the GST will keep consumer price inflation to 1.3 per cent this year.

The board predicts the Bank of Canada will not change its key lending rate until early 2009 when it says the U.S. economy will recover.
Some other analysts have speculated the central bank will trim a quarter point from its policy rate early this year.

The Bank of Canada raised its raised its key interest rate last summer to stave off inflation. However, the bank last month trimmed its interest rate by a quarter point to offset the credit crunch.

The Conference Board predicts the United States will narrowly avoid a recession, although growth in American household spending will be "very weak'' in the first half of 2008.

"It's going to be a very close call for the U.S. economy in the next six months,'' Porte said

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