Canada poised to benefit from global upswing

(July 6, 2004) With a global economic upswing in progress, Canada is poised to take benefit from its internal, consumer strength, as well as through trade with the U.S. and China, according to a report out this morning from RBC Economics.

“Canadian growth is on the upswing, domestic and external demand are healthy and the worst fears about the higher exchange rate have failed to materialize,” said Craig Wright, vice-president and chief economist at RBC. “Months of solid U.S. growth have finally hit Canadian trade numbers with a surge in export volumes. While our sharply appreciating dollar brought rough times for Canadian exporters in 2003, the tide has turned in our favour.”

The country’s economic growth rate is predicted to hit 3.2% for 2004 and 3.6% in 2005. The report points to strong employment growth as the key to consumer confidence, with 300,000 jobs created in the 10 months ending May 2004.

The global recovery will drive demand for commodities, with Canada holding a distinct advantage in this field.

“Commodity demand has outstripped supply. Canadian producers have been the beneficiaries of healthy sales and soaring prices,” the report says. “Indirectly, sharp gains posted by natural resource firms on Canadian equity markets had a secondary effect on consumer confidence and business investment activity.”

RBC says the entire world is adopting an “interest rate normalization cycle” and forecasts the Bank of Canada will begin raising interest rates in the fall. The Canadian dollar should end the year around 77 cents US and hit 80 cents US in 2005.

The U.S. dollar will remain under pressure, due to America’s current account deficit. Fiscal and trade imbalances in the U.S. will continue to pose the biggest structural threat to the world economy, with the risk of terrorism remaining an uncertainty.

For the world as a whole, RBC says most regions are on track for recovery, with the U.S., China and Japan leading. American growth is forecast at 4.8% for this year, slowing to 3.5% in 2005.

“Britain, France, Russia, India and Australia are, to varying degrees, all healthy and robust,” the report says. “Growth prospects for Germany and Italy appear to be improving, while emerging European economies are simultaneously enjoying a boost as a result of joining the European Union.”

RBC also points out there is a conspicuous lack of crisis in Latin America. No mention was made of Africa, where there is presumably no improvement.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com