WRAPUP 1-Bank of Canada sees economic thaw, warns of risks

* Thaw is coming, real output to hit pre-crisis peak by Q3

* Calls for exchange rate appreciation in surplus nations

* Sees possible trouble if key steps not taken
(Adds analyst reaction, remarks from news conference)

By Rod Nickel

WINNIPEG, Manitoba, Feb 4 (BestGrowthStock) – The Canadian economy
is looking up and should recover its lost ground this year,
well ahead of Japan and Europe, though possible storms lie
ahead, Bank of Canada Governor Mark Carney said on Thursday.

“My message is relatively straightforward: the thaw is
coming,” he said. “The recovery has begun. After a brutal
economic winter, spring is within sight.”

The optimistic signs in his speech were enough for Scotia
Capital to suggest he was carving an independent exit strategy,
possibly hiking rates before some other advanced economies,
though this was not a unanimous view.

“On net, we read this as a speech that reinforces the
notion that the need for emergency levels of stimulus is over,”
Scotia economists Derek Holt and Karen Cordes wrote, suggesting
hikes by the third quarter and quite possibly earlier.

The comments had limited market impact, with Canadian
stocks and the currency tumbling on fears about debt-laden
European economies.

Carney said Canada’s labor market appeared to have stopped
bleeding, businesses expect to make modest fixed investments
this year, the private sector should be the sole contributor to
Canada’s domestic demand growth next year and real output
should reach pre-crisis levels by the third quarter of 2010.

By contrast, it will be 1-1/2 years before Europe and Japan
reach their pre-crisis levels, he said.

The central bank has promised to keep interest rates at
rock bottom through the middle of this year, assuming inflation
remains tame. In a subsequent news conference Carney said
current monetary policy was still appropriate.

However, while he said he did not think there was a housing
bubble, he also cautioned Canadian households against borrowing
too much since interest rates will at some point have to rise.

He also warned a sustained global recovery could be
jeopardized unless there was major fiscal consolidation in the
United States and elsewhere, higher U.S. household savings,
policy-induced domestic demand in China and other nations, and
higher exchange rates in countries with big surpluses.

“Should these conditions fail to materialize over the
medium term, two equally troubling paths for the global economy
are possible,” Carney said.

There would be a return to unsustainable current account
imbalances, which would build financial imbalances again, he
said, or there would be years of fiscal contraction and
sluggishness that could lead to deficient demand and sharp
global disinflationary pressures.

Speaking before this weekend’s meeting in Canada of the
Group of Seven leading industrialized nations, he said it was
important that all countries lay out credible paths back to
fiscal sustainability in the not-too-distant future.

Though Canada’s economy is in many ways in better shape
than its advanced competitors, he qualified its productivity
performance in the past decade as abysmal, and tepid future
productivity could mean the economy’s rate of potential growth
is closer to 2 percent than the usual 3 percent.

The performance of the labor market and productivity growth
will be important influences on monetary policy, Carney said.

BMO Capital Markets senior economist Michael Gregory read
his comments on the implications of productivity as hawkish but
balanced by dovish comments on the challenges Canada’s
corporate sector is having in making needed adjustments.

Stock Today

(Writing by Randall Palmer; editing by Jeffrey Hodgson)

WRAPUP 1-Bank of Canada sees economic thaw, warns of risks