Economy will slow further: CIBC

Canada's gross domestic product could fall well below government forecasts next year as a combination of negative factors puts a pinch oneconomic recovery, according to the chief economist at CIBC.

A report from Avery Shenfeld says a softer Canadian housing market, the end of federal stimulus packages and guarded spending by U.S. consumers will be a drag on Canada's economy.

The CIBC projects the real Canadian gross domestic product, an inflation-adjusted measure of the economy, will grow by 1.9 per cent in 2011, compared with the3.2 per cent pace assumed in the 2010 federal budget last March.

Ontario will take the brunt of the expected blow falling an estimated 1.6 per cent below the forecast for next year because about 80 per cent of its exports are shipped to the United States.

Meanwhile, other provinces heavily weighted in export industries will suffer notable declines. Quebec is expected to see provincial GDP fall 1.1 per cent, while Manitoba is projected to fall one per cent short of forecasts, CIBC said.

Resource-heavy provinces like B.C., Alberta, Saskatchewan and Newfoundland and Labrador will lead growth but are expected to also face challenges meeting their budget forecasts.

Western Canada could face a tougher challenge in its housing market, where prices have overshot fair market value by the largest margin. That's expected to have a slowdown effect on residential construction, the report said.

Shenfeld said the softer overall outlook shouldn't lead to any drastic changes in thinking on the government's part.

Instead, he said, the Bank of Canada could back off from plans for higher interest rates, to adjust for a more challenging economic environment.

"We have started the process of raising interest rates, presumably to prevent growth from being so brisk that inflation breaks out. If policy needs to adjust to a more challenging climate abroad, it should be done by backing away from plans for tightening through even higher interest rates," he said.

"Only if the Bank of Canada were forced to take rates back to zero would it be appropriate to postpone a much-needed, if gradual, path back to fiscal rectitude."

Shenfeld estimates that Ottawa will have about $8 billion more revenue than the federal government forecast in the current 2010-11 financial year, which ends March 31.