Economic growth accelerated in the fourth quarter of last year, but not as quickly as most observers had hoped. It is now clear from recent data, the first unclouded in many months by short-term events such as SARS, that the rising Canadian dollar (CAD) is having more of a negative effect than previously thought. Healthy growth in the leading indicators, up
0.8% in December and 0.9% in November, indicate continuing improvement in the prospects for the economy. Deteriorating external trade, hurt by the strong currency, and government spending cutbacks, however, will restrain growth in the first half of this year.
Later, recovering corporate balance sheets and rising profitability will support business investment, while job growth spurs consumer spending growth. These areas will steer the
economy towards real growth of 2.9% in 2004 and 3.3% in 2005.
Though growth has been disappointing, it is expected to improve in 2004. The rising Canadian dollar has caused more damage than expected to the economy.
The labor market continues to improve. An improving labor market and consumer confidence will keep growth in consumer spending strong.
Rising currency values have reduced exports and increased imports. The Federal government will have to cut spending by CAD 2-3 bn to honor its commitments. Inflation will trend lower over the next year. The Bank of Canada will cut rates again at its March 2nd meeting.
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