The recovery gained some traction in October. The Ivey Purchasing Managers’ Index for September came in at a robust 56.5, indicating that the economy is expanding. The blackout hit the economy hard causing August output to fall 0.7% compared to the previous month. As a result, third quarter growth will be below its potential. However, almost this entire decline was likely made up in September, setting the stage for a strong fourth quarter. Rising business investment and continued consumer spending growth will steer the economy towards real growth of 3.4% in the second half of 2003 and 3.3% in 2004.
The economy accelerated in October. Improvement in the labor market will continue in the near term. The housing market remains robust, but next year could be slower. Manufacturing appears to be turning around in the fourth quarter.
Over the next few years, Federal fiscal surpluses will continue, but will be smaller. Recent economic shocks and potential increased health care spending will sharply reduce the Federal surplus for this year. The reduced surplus leaves little flexibility for the incoming Prime Minister. Although the possibility of a rate cut remains, the Bank of Canada is expected to be on hold well into next year. Long-term interest rates will end the year at around 5%.
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