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By Frank Pingue
HALIFAX, Nova Scotia, Jan 27 (Reuters) - Canada will emerge from recession on a stronger footing than other major economies that are burdened with weaker financial systems, Bank of Canada Governor Mark Carney said on Tuesday.
While Canada's recovery in part will depend on the progress of other major economies, domestic growth will outpace growth in other countries reeling from the global economic slowdown, Carney said after a speech in Halifax, Nova Scotia.
"In terms of growth in 2010, we expect, subject to the stabilization of the global financial system ... that most of the major economies are going to grow," Carney said.
"We expect Canadian growth to be stronger than those other economies in part because we don't have those overhangs of imbalances and lagged effects of a recovery in our financial system than those other economies have."
Carney, speaking a week after the central bank lowered its key overnight rate to a 50-year low of 1 percent, said the domestic economy will begin recovering later this year as a series of interest rate cuts begin to take hold.
His comments mirrored projections released by the bank last week when it unveiled its quarterly economic update. The bank said Canada's economy would contract by 4.8 percent annualized in the first quarter, 1 percent in the second and then return to growth.
Carney also said additional measures to shore up financial systems in a number of other jurisdictions are still necessary, but added that Canada does not have the same fundamental problems.
He said the speed with which the global financial system stabilizes is important because it will stop the knock-on effect to the global economy, which is important to Canada's export-oriented economy.
In response to a question from the audience, Carney said stabilizing the global financial system remains a top priority in the coming year and that he is encouraged by the new U.S. administration as well as moves by European governments.
"This is an issue that has to be grappled with, that has to be wrestled to the ground," Carney said. "It's got to be done in the course of the next couple of months."
DEFLATION NOT A WORRY
During his speech to the Halifax Chamber of Commerce, Carney said the bank can safely ignore a period of falling prices this year because there is little risk of sustained deflation.
Carney tried to lay to rest fears that Canada may be headed into a deflationary spiral after the bank projected falling prices in the second and third quarters of this year.
"I want to emphasize that this projected brief period of falling prices does not signal the onset of deflation for four reasons," Carney told the audience.
Most prices that comprise the consumer price index will not be falling, he said. Secondly, core inflation, which excludes volatile items, is still within the central bank's target range of 1-3 percent.
In addition, past central bank rate cuts should nudge the inflation rate toward 2 percent by mid-2011. And finally, Carney said, Canadians' confidence that inflation will stabilize will play a role in keeping the rate on track to meet the target.
Fears of deflation in the United States are on the rise among economists and industry leaders as prices on everything from consumer goods to stocks and real estate plummet.
Unlike the U.S. Federal Reserve, the Bank of Canada has room to continue cutting rates, and Carney signaled he will use it if necessary. The Bank of Canada has already cut rates by 350 basis points since December 2007.
Central bank rate cuts are still effective in Canada, he said, countering arguments that banks are not passing along the lower borrowing costs to their clients.
"It bears repeating that the Canadian banking system does not face the same challenges as those in other major economies," he said.
Credit continues to grow and lower rates have been passed through to markets for shorter maturities and, to a lesser extent, longer maturities.
Still, he said the central bank, when setting rates, had taken into account the higher risk premiums in markets and the expectation of softer inflation in the future. (Additional reporting by Louise Egan in Ottawa; Editing by Frank McGurty)