Thank you very much, Chair.
Good afternoon, members. Tiff and I are very pleased to be with you today to discuss our April monetary policy report, which the bank published last week. In it we note that the profile for global growth has improved since the bank released its January MPR. Europe is expected to emerge slowly from recession in the second half of this year, although the risks around this outlook remain high.
The profile for U.S. growth is slightly stronger. This reflects the balance of somewhat improved labour markets, financial conditions and confidence on the one hand, and emerging fiscal consolidation and ongoing household deleveraging on the other. Economic activity in emerging market economies is expected to moderate to a still-robust pace over the projection horizon, supported by an easing of macroeconomic policies.
Commodity prices remain elevated owing to improved global economic prospects, supply disruptions, and geopolitical risk. In particular, the international price of oil has risen further and is now considerably higher than that received by Canadian producers. If sustained, these oil price developments could dampen the improvement in economic momentum.
Overall, economic momentum in Canada is slightly firmer than the bank had anticipated in January. The external headwinds facing Canada have abated somewhat, with the U.S. recovery more resilient and financial conditions more supportive than previously anticipated. As a result, business confidence and household confidence are improving faster than forecast. The bank projects that private domestic demand will account for almost all of Canada's economic growth over the projection horizon.
In particular, household spending is expected to remain high relative to GDP as households add to their debt burden, which remains the single biggest domestic risk. Business investment is projected to remain robust, reflecting solid balance sheets, very favourable credit conditions, continuing strong terms of trade, and heightened competitive pressures.
The contribution of government spending to growth is expected to be quite modest over the projection horizon, in line with recent federal and provincial budgets. The recovery in net exports is likely to remain weak in light of modest external demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.
The bank projects that the economy will grow by 2.4% in both 2012 and 2013 before moderating to 2.2% in 2014. The degree of economic slack has been somewhat smaller than anticipated, and the economy is now expected to return to full capacity in the first half of 2013.
As a result of this reduced slack and higher gasoline prices, the profile for inflation is expected to be somewhat firmer. After moderating this quarter, both total and core inflation are expected to be around 2% over the balance of the projection horizon as the economy reaches its production potential, the growth of labour compensation remains moderate, and inflation expectations stay well anchored.
Despite recent improvements to the outlook for the global and Canadian economies, risks remain elevated. The three main upside risks to inflation in Canada relate to the possibility of higher-than-expected oil prices, stronger-than-expected growth in the U.S. economy and stronger momentum in Canadian household spending.
The two main downside risks to inflation in Canada relate to the reintensification of sovereign debt and banking concerns in Europe, and the possibility that growth in Canadian household spending could be weaker than projected.
Overall, the bank judges that the risks to the inflation outlook in Canada are roughly balanced over the projection period.
Reflecting all of these factors, on the April 17 the bank maintained the target for the overnight rate at 1%. In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2% inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.
With that, Mr. Chair, Tiff and I will be pleased to take members' questions.