Economy to rebound next year following

(October 30, 2003) A series of unexpected jolts to the Canadian economy combined with the soaring loonie will dampen growth in 2003, say economists at the Bank of Montreal. However, a stronger U.S. economy, low interest rates and rising equity prices are brightening the picture for 2004.

In its annual economic outlook report, BMO predicts “anemic” 2% annualized growth for 2003, “reflecting the unanticipated effects of the [severe acute respiratory syndrome (SARS)] crisis, the mad-cow scare and the Canadian dollar’s rocket ride.” That’s well short of the 4.2% pace BMO predicted in last year’s report.

Still, the worst seems to be over this year, BMO says, stating that growth will strengthen to 4.5% in the fourth quarter of this year, up from just 2% in Q3.

The U.S. economy surged in the third quarter, expanding at an annual rate of 7.2%, the Commerce Department reported today. That’s the fastest pace of growth since 1984.

Looking ahead, BMO forecasts Canadian growth to average 3.3% in 2004. “The key factor behind the brightening outlook is the strengthening of the U.S. economy,” BMO says.

“[U.S.] growth in 2004 should continue to benefit from recent tax cuts… and will be dependent on rising business confidence,” BMO says, adding that the weaker U.S. dollar will help boost American exports.

BMO predicts U.S. growth to average 4.4% next year, meaning the U.S. economy will likely outpace Canada for the first time since 1998.

BMO says the economic recovery tempers the need for further interest rate cuts in both Canada and the U.S. At the same time, the slack in the economy means there’s also no need to raise rates. “As a result we believe overnight rates will remain stable for a considerable period.”

The loonie will likely hover around the 75 cent US mark for most of 2004 and 2005, BMO predicts, estimating that the dollar’s rise since the start of this year could cut more than one percentage point from Canada’s GDP growth.

BMO also expects Canadian inflation to remain below 2% in 2004 and the unemployment rate to stay above 7%.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca