Country Report Canada September 2008

Outlook for 2008-09

• The next general election, whether early or as scheduled in 2009, is likely to produce another Conservative victory, although again without a majority.
• The Bank of Canada (BOC) will hold interest rates at 3% until the second half of 2009 when the economy and inflationary pressure begin to strengthen. But a more abrupt weakening than we forecast could require more cuts.
• We have lowered our forecast for growth in 2009, to 0.9% (from 1.4%). This revision largely reflects our more cautious view of private consumption prospects in the light of our downgrading of the outlook for the US economy.
• The average annual rate of inflation is forecast at 3% in 2008. This overshoots the mid-point of the BOC's target range, but the rate should slow to 2.3% in 2009 as the world economy slows and commodity prices recede.
• The current-account balance is likely to move into deficit in 2009 for the first time since 1998. This will follow a small surplus in 2008.
• Export volumes will continue to be depressed by the strength of the Canadian dollar. There will be no respite for Canadian exporters while the currency remains near parity with the US dollar.

Monthly review

• Four by-elections will be held in September. In particular, the outcome of these votes will enable the leader of the opposition Liberals, Stephane Dion, to assess public reaction to his environmental “green shift” plan.
• The BOC left its trend-setting overnight lending interest rate unchanged at 3% after its latest policy review on July 15th. The central bank cited concerns about inflation, but was optimistic that core inflation would remain subdued.
• Real GDP shrank in May for the fourth time in six months, by 0.1% in real month-on-month terms. Growth in the 12 months to May was a modest 0.6%. Surprisingly, the energy sector has been one of the weakest spots.
• Residential construction will be subdued, reflecting tighter borrowing conditions. Together with the slowdown in manufacturing, this will partly offset commodity-related investment growth, depressing overall investment growth.
• The sudden decline in commodity prices since late June caused a dramatic slide in the Canadian dollar. The dollar took its biggest one-week dive in three decades in early August, tumbling from 99 US cents to under 94 US cents.
• Housing starts slid unexpectedly sharply in July to an annualised rate of 186,500 units, from 215,000 units in June. Ontario, and especially Toronto, accounted for virtually the entire drop.