Canadian Economic Outlook, September 2003: SwissRe

September was another disappointing month for the economic indicators. Among the most disappointing was the Ivey Purchasing Managers’ Index for August at 51.1 versus an expected 52.3. Although this reading still indicates growth, it was unchanged from a year ago. Retail sales, excluding the volatile motor vehicle dealers and gas stations, fell 0.7% in July versus an expected increase. While the economy grew 0.6% in July, the shocks that the economy has suffered in the second quarter continue to have a lingering effect which has reduced growth in the third quarter. Nonetheless, the leading indicators (up 0.5% in August and July) indicate that the economy will have a strong fourth quarter. Business investment will rise as the general economic climate improves, and exports, boosted by the recent easing of the BSE-related export ban, will steer the economy towards real growth of 3.4% in the second half of 2003 and 3.3% in 2004.

Recent indicators have disappointed, but still point toward moderate growth. Strong imports reduced real GDP growth in the second quarter. Though expected to rebound, the weak labor market represents a risk to the economic recovery.

Domestic demand has remained healthy over the past few quarters. Business investment should support growth over the next few quarters. After cutting rates on September 3rd by 25 basis points, the Bank of Canada will be on hold until mid-2004. Canadian long-term interest rates will rise through year-end. The Canadian dollar will continue to appreciate over the long-run.

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