GOC CUT GROWTH EXPECTATIONS FOR CANADIAN

UNCLAS SECTION 01 OF 02 OTTAWA 001746 SIPDIS SENSITIVE DEPT FOR EB/IFD, WHA/CAN AND WHA/EPSC STATE PASS CEA FOR Randy Kroszner FRB FOR BERTAUT AND GRUBER STATE PASS USTR FOR RYCKMAN AND CHANDLER TREASURY FOR OASIA/IMI - HARLOW, MATHIEU USDOC FOR 4320/MAC/ON/OIA/JBENDER PARIS ALSO FOR USOECD CALGARY PASS TO WINNIPEG E.O. 12958: N/A TAGS: EFIN ECON ETRD CA SUBJECT: GOC CUT GROWTH EXPECTATIONS FOR CANADIAN ECONOMY IN LINE WITH OTHER FORECASTERS REFS: (A) OTTAWA 1265 (B) OTTAWA 0160 ¶1. Sensitive but unclassified, please protect accordingly. Not for Internet distribution. PRIVATE SECTOR AND GOC EXPECT LOWER GROWTH -------------- ¶2. (U) On June 3, the Bank of Canada downgraded its 2003 growth outlook for Canada from nearly 4%, in May, to 2.5- 3%. BOC Governor Dodge confirmed the less optimistic view in a June 18 speech, saying that the BOC now expects continued softness in the Canadian economy over the short term. A number of private sector economists have recently announced downward revisions to their short-term forecasts as well. ¶3. (U) On June 17, Federal Finance Minister John Manley announced that the GOC is slashing its 2003 economic growth forecast by up to a full percentage point, possibly to 2.2%. Manley stressed that federal finances will remain in the black, but cited increased federal spending to cope with the fallout from SARS and mad cow disease, the weak U.S. economy and the sharply rising C$ as factors contributing to the GOC's more pessimistic view. WHAT DOES THE DATA SAY? -------------- ¶4. SBU) First Quarter GDP data released by Statistics Canada on May 30 shows that the Canadian economy grew at a 2.4 percent annualized rate in the first quarter of 2003 - up from a 1.6 percent annualized rate in the preceding three months. However, the brisk activity in consumer spending, residential construction, and government expenditures was overshadowed by a massive involuntary build-up in inventories, in particular in the auto sector. In addition, exports of goods and services declined for the second consecutive quarter and the recent appreciation of the C$ (up 18% against the US$ since the beginning of the year) point to further weakness. This will further exacerbate conditions in the manufacturing sector which has lost 66,000 factory jobs over the past six months, nearly half of the 141,000 jobs created in that sector in the past two years. These job losses point to short-term weakness in consumer spending and government revenues. Over the longer term, the cuts in employment plus the increase in investment in imported capital goods supported by the stronger C$ should boost productivity. WE LOWER OUR FORECAST -------------- ¶5. (SBU) Revised data and the change in economic conditions lead us to expect economic growth of 2.1% in 2003, rising to 3.2% in 2004. On May 30, Statistics Canada released actual GDP data for QI 2003, along with quarterly revisions for previous years. Incorporating the revisions (which resulted in a higher base for previous years) lowered our forecast projection (ref B) to 2.4% for 2003 (from 3.5% in January),and 3.9% for 2004 (from January's 4.3% estimate). Our April economic and fiscal update (ref A) for 2003 revised the January forecast numbers to around 3%, and to just under 4% in 2004. ¶6. (SBU) The BOC signaled a shift in monetary policy on June 3, by leaving interest rates unchanged, following two consecutive increases. Given BOC concerns about continued weakness over the next two quarters, we assume a degree of monetary stimulus in the short term that keeps our growth forecast for 2003 just above 2%. Cellucci