The Bank of Canada held its overnight rate steady Tuesday, pointing to the probability of recession in Europe and other global drags on an economy still in need of stimulus.

“The weaker economic outlook implies greater and more persistent economic slack than previously anticipated, with the Canadian economy now expected to return to full capacity by the end of 2013,” said the Bank in a statement accompanying the interest rate announcement. “The global economy has slowed markedly as several downside risks to the projection outlined in the Bank's July Monetary Policy Report (MPR) have been realized.”

Key among the threats to economic growth is the generalized retrenchment from risk-taking across global markets as businesses and consumers claw back spending. The Bank now expects that the euro area will experience a brief recession.

“In the United States, diminished household confidence, tighter financial conditions and increased fiscal drag are expected to result in weak real GDP growth through the first half of 2012, before growth strengthens gradually thereafter,” says the statement. “In Japan, reconstruction activity is projected to boost growth over 2012-13, although Japan's economy will be constrained by reduced global activity and the sharp appreciation of the yen.”

Those factors will likely constrain economic growth in Canada, reducing consumer demand, including for housing, suggested the Bank. The forecast also hints at the continuation of today’s slower real estate market, something likely to limit originations growth for brokers through to the second half of 2012.

“Overall, the Bank expects that growth in Canada will be slow through mid-2012 before picking up as the global economic environment improves, uncertainty dissipates and confidence increases,” said the Bank Tuesday. “The Bank projects that the economy will expand by 2.1 per cent in 2011, 1.9 per cent in 2012, and 2.9 per cent in 2013.”

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