The Reminder is making its archives back to 2003 available on our website. Please note that, due to technical limitations, archive articles are presented without the usual formatting.
Canada's economy is expected to grow by 3.1 per cent in 2004 and 3.6 per cent in 2005, according to the latest economic forecast from RBC Financial Group. According to the RBC report, real GDP growth rates have peaked in several major economic regions around the world, and over the remainder of 2004 and into 2005, rising interest rates will dampen growth levels across the G7. RBC notes Canadian consumers will outspend Americans as household net worth and incomes continue to rise in 2005, a situation that will offset weakness on the trade front. However, a strong Canadian dollar ? which is expected to rise to approximately 80 cents U.S. by the end of this year ? combined with sub-par consumption growth in the U.S., will squeeze net exports. The trade sector is expected to be a drag on growth until the end of 2005. "Household debt levels have been growing quickly but have yet to put a dent into spending because assets have been rising faster and the debt-service-burden has been falling," said Craig Wright, vice-president and chief economist, RBC. "Business profit growth is expected to slow, but it will remain strong enough to foster double-digit gains in machinery and equipment investment in 2005." RBC notes core inflation is expected to remain better contained than in the United States. This is because the pressures driving up consumer price index inflation in the U.S. do not exist here. "We expect the gap between Canadian and U.S. rates to close as U.S. rates move higher in response to a more threatening inflation environment," added Wright. The report notes the Bank of Canada is expected to continue with a series of rate hikes culminating with a 4 per cent overnight rate by the end of 2005 as it brings monetary policy towards a neutral setting. As steady expansion takes over from recovery, RBC forecasts U.S. growth to converge to Canadian levels in a range three per cent to 3.5 per cent for the remainder of 2004 and 2005. The slower growth in the U.S. this summer was partly the result of higher oil prices and traditional volatility as the economy transitioned from recovery to expansion mode. The recent rise of oil prices and international tensions suggests that risks to the world outlook will remain elevated. Nevertheless, with inflation and inflation expectations expected to rise alongside steady growth, the Federal Reserve is expected to keep hiking rates at a modest pace until the second half of 2005 when the funds rate is expected to stabilize at 3.5 per cent. According to the RBC report, the mild U.S. slowdown was felt most by countries that depend greatly on external demand and where domestic conditions have been the most fragile. For instance, Japan's economy experienced the most dramatic reaction to the U.S. slowdown with growth slowing from 6.4 per cent to 1.3 per cent in the second quarter. Since then, domestic demand has improved and growth is expected at three per cent in 2005. Other G7 countries, particularly, the United Kingdom, France, Italy and Germany are expected to experience slower growth due to the rising global interest rates for the remainder of 2004 and into 2005.
