US embassy cable - 03OTTAWA1746

UNCLAS SECTION 01 OF 02 OTTAWA 001746 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EB/IFD, WHA/CAN AND WHA/EPSC 
STATE PASS CEA FOR Randy Kroszner 
FRB FOR BERTAUT AND GRUBER 
STATE PASS USTR FOR RYCKMAN AND CHANDLER 
TREASURY FOR OASIA/IMI - HARLOW, MATHIEU 
USDOC FOR 4320/MAC/ON/OIA/JBENDER 
PARIS ALSO FOR USOECD 
CALGARY PASS TO WINNIPEG 
 
E.O. 12958:    N/A 
TAGS: EFIN, ECON, ETRD, CA 
SUBJECT: GOC CUT GROWTH EXPECTATIONS FOR CANADIAN 
ECONOMY IN LINE WITH OTHER FORECASTERS 
 
REFS: (A) OTTAWA 1265 (B) OTTAWA 0160 
 
1.  Sensitive but unclassified, please protect 
accordingly.  Not for Internet distribution. 
 
PRIVATE SECTOR AND GOC EXPECT LOWER GROWTH 
------------------------------------------- 
 
2. (U) On June 3, the Bank of Canada downgraded its 
2003 growth outlook for Canada from nearly 4%, in May, 
to 2.5- 3%.  BOC Governor Dodge confirmed the less 
optimistic view in a June 18 speech, saying that the 
BOC now expects continued softness in the Canadian 
economy over the short term.  A number of private 
sector economists have recently announced downward 
revisions to their short-term forecasts as well. 
 
3. (U) On June 17, Federal Finance Minister John Manley 
announced that the GOC is slashing its 2003 economic 
growth forecast by up to a full percentage point, 
possibly to 2.2%.  Manley stressed that federal 
finances will remain in the black, but cited increased 
federal spending to cope with the fallout from SARS and 
mad cow disease, the weak U.S. economy and the sharply 
rising C$ as factors contributing to the GOC's more 
pessimistic view. 
 
WHAT DOES THE DATA SAY? 
----------------------- 
 
4. SBU) First Quarter GDP data released by Statistics 
Canada on May 30 shows that the Canadian economy grew 
at a 2.4 percent annualized rate in the first quarter 
of 2003 - up from a 1.6 percent annualized rate in the 
preceding three months. However, the brisk activity in 
consumer spending, residential construction, and 
government expenditures was overshadowed by a massive 
involuntary build-up in inventories, in particular in 
the auto sector.  In addition, exports of goods and 
services declined for the second consecutive quarter 
and the recent appreciation of the C$ (up 18% against 
the US$ since the beginning of the year) point to 
further weakness.  This will further exacerbate 
conditions in the manufacturing sector which has lost 
66,000 factory jobs over the past six months, nearly 
half of the 141,000 jobs created in that sector in the 
past two years.  These job losses point to short-term 
weakness in consumer spending and government revenues. 
Over the longer term, the cuts in employment plus the 
increase in investment in imported capital goods 
supported by the stronger C$ should boost productivity. 
 
WE LOWER OUR FORECAST 
--------------------- 
 
5. (SBU) Revised data and the change in economic 
conditions lead us to expect economic growth of 2.1% in 
2003, rising to 3.2% in 2004.  On May 30, Statistics 
Canada released actual GDP data for QI 2003, along with 
quarterly revisions for previous years.  Incorporating 
the revisions (which resulted in a higher base for 
previous years) lowered our forecast projection (ref B) 
to 2.4% for 2003 (from 3.5% in January), and 3.9% for 
2004 (from January's 4.3% estimate).  Our April 
economic and fiscal update (ref A) for 2003 revised the 
January forecast numbers to around 3%, and to just 
under 4% in 2004. 
 
6.  (SBU)  The BOC signaled a shift in monetary policy 
on June 3, by leaving interest rates unchanged, 
following two consecutive increases.  Given BOC 
concerns about continued weakness over the next two 
quarters, we assume a degree of monetary stimulus in 
the short term that keeps our growth forecast for 2003 
just above 2%. 
Cellucci