Dollar remains a concern for 2004

(January 6, 2004) Economic forecasts for 2004 have been virtually unanimous in their tempered optimism, but another caveat is repeated as well — the soaring dollar.

The loonie is expected to remain at historically high levels versus the U.S. dollar, as the American cousin languishes against virtually all currencies in the developed world, but the rest of the world doesn’t rely as heavily as Canada does on trade with the U.S.

“There are significant risks to our outlook, most notably an appreciating currency and its negative impact on exports and economic growth,” says Nancy Hughes Anthony, president and CEO of the Canadian Chamber of Commerce. “The effect of the sharp rise in the Canadian dollar is a major uncertainty at this time.”

But the worst may already have passed.

Mercer Investment Consulting surveyed 49 investment managers, responsible for about $1 trillion in assets, for its 2004 Canadian Fearless Forecast. This survey predicts only “modest appreciation” of the dollar over the course of 2004.

Real GDP growth forecasts for 2004
CIBC	2.7%
Scotiabank	2.8%
TD Bank	2.8%
Bank of Montreal	3%
Royal Bank	3.5%
Mercer Forecast	3%
Chamber of Commerce	3%

The survey, which was conducted in December, predicts the loonie will end 2004 at around 78 cents US. That would actually leave the dollar flat, given the fact that it hit that mark in the first week of January. The Mercer survey also predicted GDP growth of 3% and inflation of 2%.

The Chamber of Commerce thinks the dollar is likely to hit 79 cents, but agrees the Canadian economy should grow at a rate of about 3% — not bad compared to the 1.7% anticipated for the final 2003 figure.

At the beginning of 2003, Canada was expected to maintain its position at the top of the G-7, but severe acute respiratory syndrome (SARS), bovine spongiform encephalopathy (mad cow disease), forest fires in the west and the blackout in Ontario all conspired to knock the nation for a loop.

But in 2004, the Chamber predicts domestic demand for consumer goods will force manufacturers to rebuild inventories. On top of this, the Bank of Canada is not expected to raise interest rates until the fourth quarter, encouraging continued consumer spending.

In a year-end economic forecast, economists at the Royal Bank pointed out the importance of this trend, in light of current exchange rates.

“The composition of growth will keep shifting from a reliance on trade to a greater reliance on the domestic economy as a source of growth in the next two years,” the report says. “Were it not for the rebounding U.S. economy, the impact of the dollar’s rise would be more troubling.”

The average prediction among the five biggest banks is GDP growth of 2.96%, with forecasts ranging from 2.7% to 3.5%.

Sherry Cooper, chief economist at BMO Nesbitt Burns, admits the dollar does pose a stumbling block for the economy, but says the improving global economy will send commodity prices higher, benefiting Canada and offsetting the damage done by the high dollar.

“As China’s demand for foodstuffs and industrial materials continues to surge, commodity prices will outpace the decline in the U.S. dollar,” she said in an economic commentary published in November.

The Mercer forecast concurs, naming materials and energy as the best sectors to invest in this year. While the dollar has soared against the greenback, it has remained relatively stable against other world currencies. Countries like China and India, which are expected to lead global growth, are seen as important markets for Canadian raw materials and energy.

Fortunately, economists at Scotia have predicted a synchronized global expansion which will continue into 2005, which should give the economy time to adjust to the low values U.S. dollar, or allow the dollar to rebound.

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

(01/06/04)

Steven Lamb