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
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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?
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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
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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