Updated: Thu Dec. 15 2011 17:33:50
CTVNews.ca Staff

One of Canada's leading bank economists is predicting a year of slow economic growth, low interest rates and continued uncertainty due to the financial crisis underway in Europe.

BMO Capital Market deputy chief economist Douglas Porter says the key question facing Canada's economy in 2012 is how much of an effect the European debt crisis will have on North America.

"We are assuming one per cent GDP decline in Europe in 2012, as opposed to 1.5 per cent growth this year," Porter told reporters in a telephone panel Thursday.

He said while that marks a serious downturn, the recent "decoupling" of the U.S. and European economies means that North America may not be broadly affected by the turmoil underway in Europe.

"Can North America withstand that? Our answer is a qualified yes," he said.

Porter says "a witches' brew" of events killed hopes for big growth in 2011: the Mideast uprisings pushed up oil prices, the Japan nuclear disaster spooked markets, as did the U.S. debt debate and of course, the European debt crisis.

"All of these factors combined to rob the recovery of any serious momentum and in fact it managed to trigger an outright decline in 2nd quarter GDP in Canada," he said.

Even though 2011 started with surprisingly strong outlook, prompting many to boost their outlook for Canada's GDP to three per cent growth, the conomy managed only 2.3 per cent.

For 2012, Porter's team says they're expecting 2.25 per cent growth in the U.S. and 2 per cent on the nose in Canada -compared to long-run average of 2.5 per cent.

As for interest rates, Porter and his team expects the Bank of Canada to "stay on the sidelines for another full year," keeping rates low, perhaps even into 2013.

"The heavy anchor on Canadian interest rates is that the Federal Reserve in the U.S. is sitting at zero since 2008 and the Bank of Canada can't deviate from the Reserve."

Those low interest rates were good for Canada's housing market though, Porter noted. The market held up much better than expected, actually adding to growth, against most economists' expectations.

The dollar, too, is at the mercy of the U.S. economy and the global economy as a whole, Porter said.

"No matter how wonderful our domestic fundamentals are, if commodity prices are weakening, so too will the Canadian dollar," he said.

He added that his team doesn't expected markets to calm down fully until the second half of next year.

"So we expect the dollar to dip below 95 cents in the first half before beginning to firm in the second half of next year. We see it ending 2012 just shy of parity," he said.