Country Report Canada August 2008

Outlook for 2008-09

• The opposition Liberals have gained ground in the polls and confidence from the scandals besetting the Conservative government. This could lead to confrontation in parliament's autumn session and an early election.
• Whether later in 2008 or as scheduled in October 2009, the Conservative Party is likely to win the next election, again without a majority.
• Continued bad news from the US economy and a second month of contraction in Canadian output in May will constrain real GDP growth to a forecast 0.9% in 2008 and 1.4% in 2009.
• With persistent pressure from commodity prices driving up inflation in June, we forecast inflation to rise to 2.4% in 2008 and fall back to 2.1% in 2009.
• As the central bank's recent monetary loosening has ended and inflation is resurgent, we expect no change in interest rates until the second half of 2009.
• With no further interest rate cuts in prospect and only a moderate decline in commodity prices, we forecast continuing currency strength, with average exchange rates of C$1.04:US$1 in 2008 and C$1.09:US$1 in 2009.
• As the US slowdown continues and worsens in 2009, export volumes will stagnate and push the current account into a deficit of 1.1% of GDP in 2009.

Monthly review

• Speculation is growing over an early election at the beginning of the next session of parliament, which begins on September 15th. The likelihood of this will depend on three by-elections in Quebec and Ontario on September 8th.
• The Liberals' new "green shift" environmental policy proposals have received a mixed reception, and have been attacked by the Conservatives as a tax-grab and criticised by others for their complexity.
• Inflation accelerated sharply in June, with prices rising by 3.1% on June 2007.
• The Bank of Canada (the central bank) again held interest rates steady at its latest monetary policy review, on July 15th.
• GDP contracted by 0.1% in May, following declines in February and March and a rebound in April.
• A new inter-provincial agreement signed in mid-July will recognise the professional qualifications of most workers from other parts of the country by April 2009.
• The stockmarket has fallen back sharply from record levels in mid-June, triggered by falling oil prices and fears over Canadian banks' exposure to the depressed US retail banking sector.