Results dampen calls for rate hike

OTTAWA – With the Canadian economy slowing to a snail’s pace — and U.S. job creation badly off the rails — analysts here are turning down the volume on calls for higher borrowing costs.

Some are even raising the possibility of interest rates going the other way before the end of the year.

Signs of slowing economies in North America as well as Asia are being compounded by the prolonged euro debt crisis.

“A lot of this is ultimately rooted in Europe. We are beginning to see a rippling effect. And it’s a little bit unsettling,” said Michael Gregory, senior economist at BMO Capital Markets.

A German official offered a note of caution Friday about the possible ramifications of the Greek debt crisis, in particular.

If unresolved, there could be “a domino effect or contagion ... and possible bank runs,” Birgit Reinemund, chairwoman of Germany’s parliamentary finance committee, told reporters in Ottawa.

Reinemund was meeting with Bank of Canada governor Mark Carney and Finance Department officials.

Canada hasn’t been without its own problems. The economy is not recovering as quickly as many, including the Bank of Canada, expected.

Statistics Canada reported Friday that gross domestic product edged up just 0.5 per cent in the first quarter of 2012, as consumer spending slowed to a three-year low — offsetting an increase in business investment.

That meagre quarterly gain matched the pace of growth in the previous three months.

On an annualized basis, the economy grew 1.9 per cent. The monthly number was also disappointing, with GDP up just 0.1 per cent in March from February.

The Bank of Canada had pegged growth in the first three months of 2012 at 2.5 per cent. Economists were forecasting GDP to increase by 1.9 per cent.

Still, Canada has managed employment gains in March and April that wildly exceeded forecasts while the U.S. labour market has lost much of the lustre seen at the start of the year.

On Friday, the U.S. again reported dismal employment gains. Just 69,000 jobs were added in May — half the number that had been expected — and the unemployment rate grew to 8.25 per cent.

That followed data a day earlier that showed the U.S. also posted weaker-than-expected growth in the first quarter.

Sherry Cooper, chief economist at BMO Capital Markets, said the “triple whammy of a rotten U.S. jobs report, slowing growth in China and India, and the escalating European debt crisis has hit Canada’s economy and financial markets everywhere.”

The Bank of Canada has kept its trendsetting lending rate at a near-historic low of one per cent since September 2010, stuck between encouraging growth and still keeping a lid on inflation.

The central bank will announce its next rate decision on Tuesday.