Survey sees reasonable economic growth for Canada in 2004

(February 6, 2004) The Canadian economy can look forward to a year of moderate growth with low inflation and a stabilized exchange rate, according to a survey by Watson Wyatt, consultants in human capital and financial management.

“The survey results reaffirm that the Canadian economy is on course for prosperity, as experts anticipate an improvement in economic indicators almost all across the board,” said John Gilfoyle, national practice director of investment consulting at Watson Wyatt. “Unlike last year when the optimistic stance was somewhat offset by expectations of declining productivity and living standards, the picture this year is extremely positive.”

The survey asked 55 of Canada’s leading business economists to evaluate the outlook for Canada on 24 separate indicators, ranging from inflation and GDP growth to productivity and unemployment rates.

The average estimate for economic growth sees Canada’s GDP increasing by 3.0%, a slight drop from last year’s estimate of 3.1%. South of the border, the U.S. is expected to grow by 4.1%, although the survey predicts long-term growth for both countries to average 3.1%.

“Our Canadian outlook for 2004 really doesn’t differ too much from what’s coming out of the consensus numbers — median growth of 3% is only slightly higher than our current forecast of 2.9%,” says Paul Ferley, assistant chief economist at BMO Financial Group. “Growth this year will be tempered by the earlier appreciation of the Canadian dollar.”

The median prediction for inflation is 1.8% for 2004, rising to 2.1% in the long-term. That’s good news for those looking for continued low interest rates.

“The central bank is likely not in any rush to start moving interest rates higher. We’re not assuming the overnight rate will start to move up until December,” says Paul Ferley, assistant chief economist at BMO Financial Group. “This is in contrast with the view late last year that Canadian rates will generally hold steady before starting to move up in mid-year.”

The Canadian dollar is expected to remain strong, but will stabilize at the 78 cent US mark for the next five years. In the longer term, though, the survey says it will rise to 80 cents, which might not be such a bad thing, according to Ferley.

“We’ve been of the view that the strength of U.S. growth will act as an important offset to the recent appreciation of the Canadian dollar,” he says. “This reflects our view that income, i.e., growth in the U.S. economy, matters more than price, which in this context is the value of the Canadian dollar.”

One of the persistent problems in Canada over the past few years has been the productivity gap between our economy and the U.S. This gap is expected to close as the business practices which allowed America to advance migrate north. This should allow fatter profit margins for corporations in Canada.

“The survey numbers show productivity picking up 2%. That might not be as strong as what people would like to see, but it’s important to keep in mind that in earlier decades we’ve been looking at productivity growth of 1.5%,” says Ferley. “And a half of a percentage point higher in that growth rate is a move in the right direction.”

As corporate profits rise, the survey predicts good returns on the equity markets of 8% in Canada for 2004 and 9% in the U.S. and abroad.

“There is an advantage if that productivity doesn’t get bargained away right away by labour, it could result in inflation coming under downward pressure,” says Ferley. “The productivity growth allows firms to finance wage increases that don’t rise in proportion to gains in productivity.”

The survey predicts widespread labour shortages in 2010, with Canada’s unemployment rate dropping from 7.4% in 2004 to 6.8% in the long-term.

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