Resources remain in the driver's seat

The bank is predicting Canada will maintain its steady 3% average GDP growth rate throughout 2006 and into 2007, extending a trend established over the past two decades.

The rising dollar remains a concern, as Canada’s share of the U.S. import market has fallen from 17% to 12.5%, but so far, domestic demand has picked up much of the slack.

This domestic demand has been largely consumer-led, as individuals took advantage of low interest rates. But Scotia’s chief economist Warren Jestin says business spending should increase next year, supplanting the consumer as the primary demand driver.

“In Canada, energy-related and productivity-enhancing expenditures will dominate business capital projects,” he says. “In the U.S., the emphasis will be on hurricane reconstruction and equipment-related investments that add to labour productivity.”

Both countries will also need to address crumbling public infrastructure, which should result in increased spending in health, education and urban renewal, Jestin says.

Global demand for resources will continue to play a major role in the Canadian success story, despite a recent dip in prices in November. The BMO commodity price index declined 8.2% last month — the first drop since the spring. Oil and gas prices fell more than 16% in November, wiping out the modest gains in agriculture and forestry products, as well as the 4% gain in mineral prices.

Still, energy prices are up more than 37% from November 2004, while mineral prices are up 14%. Forest products are up 6.5%, while agricultural prices have dropped 2.6% over the past 12 months.

While Scotia predicts resources will “remain the cornerstone” of growth, BMO economists differ.

“Higher prices are expected to slow demand growth and encourage increases in production of several commodities, relieving market tightness,” says Earl Sweet, assistant chief economist, BMO Financial Group. “However, performance amongst commodities is likely to be mixed.”

Sweet is slightly more positive in his outlook on the metals sector, saying solid demand and limited production growth should keep mineral prices at elevated levels, although they are expected to retreat from recent highs.

Much of the demand for resources is expected to come from Asia, which will enjoy rapid growth, according to the Scotia report. China will again lead India, with growth of between 8.5% and 9%, versus India’s 7% to 7.5% trend. Cheap export goods will remain China’s edge.

“Asia, particularly China, will become an increasingly important driver of global activity over the balance of this decade,” says Jestin. “Even with a moderation in U.S. growth and a lacklustre European performance, Chinese exports will be underpinned by market share gains in these developed regions.”

The world’s other emerging market, Latin America, is expected to thrive as well, at least among the more developed industrial economies. Scotia predicts Mexico will lead the NAFTA states in GDP growth as it races to catch up with its northern neighbours.

In the U.S., the Federal Reserve is expected to continue raising interest rates by 50 basis points early in 2006 to combat inflation. The much-talked-about twin deficits remain a concern, as the American appetite for imported goods, low taxes and high government spending show no sign of being sated.

The U.S. dollar is expected to take a hit on these issues — at least against the Canadian dollar — despite increases to the Fed rate. The Bank of Canada is also expected to keep pace with interest rate hikes as it struggles to rein in inflation in a country with the lowest unemployment rate in a generation. Scotia predicts the dollar could climb as high as 90 cents US, based on the combined effects of higher interest rates and commodity demand.

Provincial Breakdown

As in 2005, the coming year will be especially kind to provinces with strong resource bases, while more densely populated resource-demanding economies will struggle.

Ontario falls into the latter category, of course, and Scotia predicts its growth rate will trail the national average for the fourth year in a row in 2006. The province has long enjoyed a boom in its manufacturing bases, with employment especially dependant on the automotive sector.

With auto sales expected to remain weak and cutbacks being announced this year at GM and Ford plants, a higher Canadian dollar will only compound the province’s woes. Ontario’s growth rate is seen at 2% and 2.2% for 2006 and 2007, respectively.

Quebec will also suffer from the export-dampening effects of a 90 cent dollar, as the province also struggles with overcapacity in its forestry sector. North America’s unquenchable thirst for energy should help the province however, as several hydroelectric projects are in the works. The province can expect growth of 2.2% and 2.3% over the next two years.

The winners of 2005 can expect the good times to roll, as Alberta and to a lesser Saskatchewan and Manitoba will outperform central Canada thanks to their fossil fuels industries. The construction industry should also thrive, as housing demand is driven by an influx of oilfield workers and growth in the service sector to support them.

Over the coming two years, Alberta can expect growth rates of 4.8% and 3.8%; Saskatchewan, 3.2% and 3.0%; and Manitoba 2.9% and 2.8%.

British Columbia will hit the trifecta, with energy, mining and construction all expected to boom in 2006 and 2007, as infrastructure for the 2010 Winter Olympics ramps up. Growth rates are predicted to hit 3.8% and 3.5% in 2006 and 2007.

Canada’s newest “have” province, Newfoundland should rank first among the Atlantic Provinces, as mining at Voisey’s Bay and exports from the White Rose offshore oilfield boost growth to 4.6% in 2006, and 2.2% in 2007.

Offshore drilling should propel Nova Scotia’s growth to 2.2% and 2.3% over the next two years, while capital projects in New Brunswick — again, in the energy sector with the construction of a liquefied natural gas terminal — should boost growth to 2.5% and 2.2%.

Prince Edward Islanders can expect their economic growth rate to lag at 1.8% in 2006 and 1.9% in 2007, as high gasoline prices take a toll on tourism, while its other top industry, agriculture, struggles to recover from recent poor prices.

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

(12/21/05)

Steven Lamb

Share

Continued strength in the resource sector and increasing capital expenditures could help boost the Canadian economy back into the top spot among G7 members, according to Scotia Economics’ Global Outlook for 2006, entitled Keeping Canada Competitive.

The bank is predicting Canada will maintain its steady 3% average GDP growth rate throughout 2006 and into 2007, extending a trend established over the past two decades.

The rising dollar remains a concern, as Canada’s share of the U.S. import market has fallen from 17% to 12.5%, but so far, domestic demand has picked up much of the slack.

This domestic demand has been largely consumer-led, as individuals took advantage of low interest rates. But Scotia’s chief economist Warren Jestin says business spending should increase next year, supplanting the consumer as the primary demand driver.

“In Canada, energy-related and productivity-enhancing expenditures will dominate business capital projects,” he says. “In the U.S., the emphasis will be on hurricane reconstruction and equipment-related investments that add to labour productivity.”

Both countries will also need to address crumbling public infrastructure, which should result in increased spending in health, education and urban renewal, Jestin says.

Global demand for resources will continue to play a major role in the Canadian success story, despite a recent dip in prices in November. The BMO commodity price index declined 8.2% last month — the first drop since the spring. Oil and gas prices fell more than 16% in November, wiping out the modest gains in agriculture and forestry products, as well as the 4% gain in mineral prices.

Still, energy prices are up more than 37% from November 2004, while mineral prices are up 14%. Forest products are up 6.5%, while agricultural prices have dropped 2.6% over the past 12 months.

While Scotia predicts resources will “remain the cornerstone” of growth, BMO economists differ.

“Higher prices are expected to slow demand growth and encourage increases in production of several commodities, relieving market tightness,” says Earl Sweet, assistant chief economist, BMO Financial Group. “However, performance amongst commodities is likely to be mixed.”

Sweet is slightly more positive in his outlook on the metals sector, saying solid demand and limited production growth should keep mineral prices at elevated levels, although they are expected to retreat from recent highs.

Much of the demand for resources is expected to come from Asia, which will enjoy rapid growth, according to the Scotia report. China will again lead India, with growth of between 8.5% and 9%, versus India’s 7% to 7.5% trend. Cheap export goods will remain China’s edge.

“Asia, particularly China, will become an increasingly important driver of global activity over the balance of this decade,” says Jestin. “Even with a moderation in U.S. growth and a lacklustre European performance, Chinese exports will be underpinned by market share gains in these developed regions.”

The world’s other emerging market, Latin America, is expected to thrive as well, at least among the more developed industrial economies. Scotia predicts Mexico will lead the NAFTA states in GDP growth as it races to catch up with its northern neighbours.

In the U.S., the Federal Reserve is expected to continue raising interest rates by 50 basis points early in 2006 to combat inflation. The much-talked-about twin deficits remain a concern, as the American appetite for imported goods, low taxes and high government spending show no sign of being sated.

The U.S. dollar is expected to take a hit on these issues — at least against the Canadian dollar — despite increases to the Fed rate. The Bank of Canada is also expected to keep pace with interest rate hikes as it struggles to rein in inflation in a country with the lowest unemployment rate in a generation. Scotia predicts the dollar could climb as high as 90 cents US, based on the combined effects of higher interest rates and commodity demand.

Provincial Breakdown

As in 2005, the coming year will be especially kind to provinces with strong resource bases, while more densely populated resource-demanding economies will struggle.

Ontario falls into the latter category, of course, and Scotia predicts its growth rate will trail the national average for the fourth year in a row in 2006. The province has long enjoyed a boom in its manufacturing bases, with employment especially dependant on the automotive sector.

With auto sales expected to remain weak and cutbacks being announced this year at GM and Ford plants, a higher Canadian dollar will only compound the province’s woes. Ontario’s growth rate is seen at 2% and 2.2% for 2006 and 2007, respectively.

Quebec will also suffer from the export-dampening effects of a 90 cent dollar, as the province also struggles with overcapacity in its forestry sector. North America’s unquenchable thirst for energy should help the province however, as several hydroelectric projects are in the works. The province can expect growth of 2.2% and 2.3% over the next two years.

The winners of 2005 can expect the good times to roll, as Alberta and to a lesser Saskatchewan and Manitoba will outperform central Canada thanks to their fossil fuels industries. The construction industry should also thrive, as housing demand is driven by an influx of oilfield workers and growth in the service sector to support them.

Over the coming two years, Alberta can expect growth rates of 4.8% and 3.8%; Saskatchewan, 3.2% and 3.0%; and Manitoba 2.9% and 2.8%.

British Columbia will hit the trifecta, with energy, mining and construction all expected to boom in 2006 and 2007, as infrastructure for the 2010 Winter Olympics ramps up. Growth rates are predicted to hit 3.8% and 3.5% in 2006 and 2007.

Canada’s newest “have” province, Newfoundland should rank first among the Atlantic Provinces, as mining at Voisey’s Bay and exports from the White Rose offshore oilfield boost growth to 4.6% in 2006, and 2.2% in 2007.

Offshore drilling should propel Nova Scotia’s growth to 2.2% and 2.3% over the next two years, while capital projects in New Brunswick — again, in the energy sector with the construction of a liquefied natural gas terminal — should boost growth to 2.5% and 2.2%.

Prince Edward Islanders can expect their economic growth rate to lag at 1.8% in 2006 and 1.9% in 2007, as high gasoline prices take a toll on tourism, while its other top industry, agriculture, struggles to recover from recent poor prices.

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

(12/21/05)

Steven Lamb

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