Economists weigh in on Canadian outlook

(July 11, 2005) Economists say Canadian economic growth could peak in 2006, then pull back to higher but more moderate levels. Summer forecasting season is well underway and the consensus so far puts Canadian GDP growth between 2.9% and 3.4% in the coming year.

The latest reports — one from BMO Financial Group and another from the Conference Board of Canada — highlight the Canadian dollar and the country’s trade balance as two key factors affecting GDP growth in the future.

According to the Bank of Montreal, western provinces led the country’s growth in 2004, with British Columbia, Alberta and Saskatchewan posting the highest rates of GDP growth respectively. The three eastern most provinces, meanwhile, Nova Scotia, Prince Edward Island and Newfoundland & Labrador posted the weakest economic results in 2004.

In 2005, BMO expects growth in the west to continue, although the variance across provinces will moderate. Growth in Manitoba, Ontario and Quebec will increase slightly as exporters adjust to the stronger Canadian dollar. Nova Scotia, Prince Edward Island and Newfoundland activity will also be stronger than in 2004, buoyed up by stronger consumption, residential investment is one of the few domestic areas of weakness expected to emerge in the coming years, and the reduced currency drag on exports.

Newfoundland is also expected to see a spike in GDP growth when the province breaks away from past oil production and labour problems and the Voisey’s Bay nickel and White Rose offshore oil projects move into production.

Many parts of the report back up a similar provincial outlook released last week by RBC Economics. That research suggested that the Canadian dollar’s drag on international trade will likely diminish in the coming year and real GDP growth will likely pick up by 2006 as the strong domestic economy provides a boost and offsets struggling trade sectors. Authors of the RBC report say real growth is expected to reach 2.7% by the end of 2005 and 3.2% in 2006. BMO meanwhile says real GDP will come in at 3.4%. The Conference Board of Canada on the other hand says growth will only reach 2.9% next year.

“Overall, Canada’s economic performance in 2005 will be similar to 2004, with growth forecast at 2.9%,” say BMO economists. “By 2006, as the Canadian economy adjusts to the stronger Canadian dollar, net exports will cease to be a drag on growth.”

Going forward, they say growth in Ontario and Quebec will rise above 3% in 2006, Newfoundland, Alberta and British Columbia will dominate, and the remaining provinces will show relatively strong growth rates between 2% and 3%, but will ultimately trail the other provinces in 2006.

Growth is expected to peak in 2006 then pull back to moderately higher levels. “Over the medium term (2007 to 2009) growth will be steady or down slightly in most provinces relative to 2006,” the report says. Newfoundland is expected to decelerate sharply from its nation leading pace and PEI will bounce back from weakness in 2006, but across the rest of the country, “growth over the 2007-09 period will be approximately at potential, with all provinces operating at or near full employment.”

Both BMO and RBC say the provinces are doing a reasonable job of adjusting to Canada’s fluctuating currency, but the Conference Board of Canada warns that Canada’s declining trade balance is removing billions of dollars from real GDP in the country, likely restraining growth to 2.5% in 2005.

The domestic economy outperformed expectations in the first part of this year, but Pedro Antunes, Conference Board director of economic forecasting, says consumers often paid using credit. As well, he says on the downside, “rising import and falling export growth is eroding overall economic gains.” In a statement, the Conference Board says “strong gains in consumption and business investment are increasing demand for imports, while exporters are still adjusting to the strength of the Canadian dollar. The resulting declining in the real trade balance will remove nearly $16 billion from the economy in 2005.”

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com