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July 2008
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Fears of U.S. recession fading; Canada's terms of trade boost continues
- U.S. economy to remain weak, but market forecasters see reduced odds of a recession despite higher-than-expected energy prices.
- Economy continued to expand in the first quarter, but posted the weakest six-month growth rate since 2003.
- Consumer and business spending slowed as credit conditions tightened, but the cost of credit is starting to ease as greater stability is emerging in financial markets.
- Risks of a second-quarter contraction are lessening as the early wave of fiscal stimulus cheques may give consumer spending a boost and keep the economic growth numbers positive.
- The elevated inflation rate as a result of high energy and food prices threatens to boost inflation expectations.
- Oil prices are expected to trend lower through the forecast period.
- The Fed is likely the hold the policy rate steady for the remainder of this year.
- Canada's economy contracted in first quarter as special factors and inventories dragged the growth rate down, but domestic demand is holding up and will more than offset the significant drag from net exports this year.
- Import growth will remain robust, but flagging U.S. demand will weigh on export volumes.
- High commodity prices and the attendant rise in terms of trade will support real income growth and jobs.
- Consumer spending has slowed from its robust 2007 fourth-quarter pace but will still remain a key support for the economy in 2008.
- Business investment will continue to be a strong support to the economy as the high Canadian dollar lowers prices of imported machinery and equipment, and high commodity prices will warrant an increase in capacity.
- Canada's housing market is losing steam but is not headed for U.S.-style crash.
- The Bank of Canada is refocusing on the inflation outlook after easing 150 basis points since December 2007.
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