The Canadian economy suffered its toughest quarter since the recession, the Bank of Canada said in its latest monetary policy report on Wednesday, adding that further interest rate cuts have not been ruled out but would need to be weighed.
"At this time of transition in the global recovery, with a weaker U.S. outlook, constraints beginning to moderate growth in emerging-market economies, and domestic considerations that are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered," the bank said Wednesday in its October monetary policy report.
The bank's latest outlook had the economy growing at a miniscule 1.6 per cent during the third quarter, after a two per cent gain in the second quarter and a robust 5.6 per cent in the first quarter.
Canada's third quarter growth is expected to be even less than in the United States, where growth of 2.3 per cent was projected over the July-September months.
Bank of Canada governor Mark Carney told reporters Wednesday he "wouldn't obsess about the third quarter," saying Canada's employment has returned to pre-recession levels.
But the central bank governor said there are still risks to the economy.
"There are three downside risks relating to Canada's international competitiveness, global growth prospects and the possibility of a more-pronounced correction in the Canadian housing market," Carney said at a news conference Wednesday.
He added that persistent weakness in the U.S. economy continues to hamper Canadian exports.
The latest monetary review is notably more downbeat than previous reviews, as the Bank of Canada downgraded its projections on how well the Canadian economy is performing.
Domestic growth this year has been projected at 3 per cent, mostly because of a hot start, and only 2.3 per cent next year.
The outlook also noted growing friction between advanced economies and several important emerging economies, particularly China, as a risk to the global recovery.
"Sustaining the global recovery will require a greater rotation of demand, supported by increased flexibility in exchange rates," the bank said in its outlook. "At present, these adjustments are coming through divergent inflation pressures rather than currency movements, which could result in a more protracted and difficult recovery."
The bank is warning that to keep the global recovery going, China and other growing Asian economies will need to allow their currencies to appreciate.
The issue is expected to be brought up at this week's G20 meetings in South Korea.
