Canada's economy is facing "considerable external headwinds" in 2012, says Bank of Canada Governor Mark Carney.
The Bank of Canada (BoC) released its quarterly monetary policy report Wednesday, one three financial releases predicting a bumpy road to recovery as Europe struggles with its sovereign debt crisis and a recession expected to be "deeper and longer than previously predicted."
According to BoC figures, the Canadian economy grew by 2.4% in 2011, and is expected to grow 2% in 2012.
"Europe is the biggest external threat to Canada without question," Carney said.
While banks have taken steps towards refunding themselves, Carney remains concerned over the ability for Eurozone governments to take the necessary fiscal and structural reforms to solve the crisis.
"Our forecast is the situation will be contained," Carney said, but "containment and resolution are two different things."
The U.S. is struggling with a still-faltering housing market, the impact of the Eurozone debt crisis and federal austerity measures.
In Canada, the ratio of household debt to income is also expected to rise despite repeated warnings from Carney that some "vulnerable households" may be taking on too much debt.
On Tuesday, the BoC announced it would keep overnight rates at 1% -- near historic lows. Carney acknowledged the low rates made it attractive for consumers to take on more debt.
"People respond to favourable financial conditions," he said. "(But) we have to set monetary policy for the economy as a whole, not for a specific sector."
Moves by the federal government last year to tighten mortgage amortization and financing would likely continue to have a positive impact, he added.
The Conference Board of Canada and the World Bank also released financial forecasts Wednesday that point to slow financial recovery.
The conference board predicted a drop in spending by all levels of government and slower growth in business investment this year.
The World Bank pegged global economic growth at 2.5%, based on the Euro debt crisis and slowing growth in major emerging economies like Brazil and India.