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IMF says weakness more persistent, cuts growth outlook globally and in Canada

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OTTAWA - The International Monetary Fund says Canada's economy will be a little weaker this year than previously projected, although it will continue to lead all nations in the Group of Seven but one.

The downgrade of Canadian and global growth in the latest outlook was expected given the sharp slowdown in the U.S. and China — the world's two largest economies — during the first quarter of the year.

But the report Thursday contained a few surprises, including that the United Kingdom will emerge as the growth leader among the G7 countries for the next two years — and that although forward momentum has resumed, weakness will likely be felt for a while longer.

"Key drivers supporting the recovery identified in the April 2014 (outlook) remain in place, including moderating fiscal consolidation and highly accommodative monetary policy in most advanced economies," the Washington-based financial institution says.

"Nevertheless, some of the demand weakness in the first quarter appears to be more persistent, especially in investment globally, and is expected to result in lower global growth in 2014."

The verdict is similar to the one delivered last week by the Bank of Canada, which also shaved global growth and subsequently Canada's on the assumption that weaker demand for Canadian exports would continue to dampen activity domestically.

"Our serial disappointment with global economic performance for the past several years means that we remain pre-occupied with downside risks," is the way bank governor Stephen Poloz put it.

Both the IMF and the Canadian central bank see the Canadian economy growing at just over two per cent in the next two years — 2.2 in 2014 and 2.4 in 2015.

Both are also on the same page as to what will happen in the U.S. The IMF's forecast is for 1.7 and 3.0 per cent growth in 2014 and 2015 respectively.

As for the global economy, the IMF says the first quarter stall in the two largest economies means a three-tenths of a point downgrade to 3.4 per cent in 2014, picking up to four per cent in 2015. The Bank of Canada sees global activity as even softer at 2.9 per cent growth this year and 3.6 next.

As it has previously, the IMF underscored that although the recovery is proceeding — if disappointingly slow — downside risks prevail, including trouble spots such as in the Ukraine and the Middle East that could lead to a spike in oil prices.

"Global growth could be weaker for longer," it said, "given the lack of robust momentum in advanced economies... In some major emerging market economies, the negative growth effects of supply-side constraints and the tightening financial conditions over the past year could be more protracted."

In a paper for the C.D. Howe Institute this week, McMaster University economics professor William Scarth recommended Ottawa return to stimulus spending to boost job creation, which has largely stalled over the past 18 months or so.

Most analysts, including the bank governor, believe the Canadian economy won't return to robust growth, and job creation, until the rest of the world does.

That's because with Canadian households at near-record high levels of debt, they won't be able to continue to sustain the economy through spending on homes, cars and other items.

On that front, there was some good news Thursday from China.

Beijing reported factory sentiments rose markedly in July as the country's manufacturing index rose to 52, the highest level in 18 months. A strong Chinese economy benefits Canada because it increases demand and prices for natural resources that Canada has in abundance.

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