After numerous shocks, the economy improved in September. The Ivey Purchasing Managers’ Index for September rose to a robust 59.4 (a reading above 50 indicates the economy is expanding). Retail sales grew by 0.3% in August despite the blackout, and sales excluding the volatile motor vehicle dealers and gas stations grew by an even stronger 0.4%. The blackout and some lingering negative effects of previous shocks lowered growth below its potential in the third quarter. However, the sharp increase in the leading indicators (up 0.7% in September) points to a strong fourth quarter. Business investment will rise as the general economic climate improves, and healthy consumer spending will steer the economy towards real growth of 3.4% in the second half of 2003 and 3.3% in 2004. Labor market weakness and a strong Canadian dollar present risks to the outlook.
Data from September indicate that the economy is beginning to overcome earlier negative shocks. Though the labor market is weak, employment grew in September. The housing market is still strong, but a slowdown is likely.
The blackout and the strong CAD currency have hurt manufacturing. A strengthening of the Canadian dollar often precedes weakness in manufacturing. The Canadian dollar could rise as high as 0.83 per US dollar before it begins to weaken. Although negative on balance, there are some positive effects of a stronger currency. Although the probability of a rate cut has risen, the Bank of Canada is likely to be on hold well into next year. Long-term interest rates will end the year around their current levels.
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