Viewing cable 03OTTAWA1265, CANADIAN ECONOMIC UPDATE: NORTHERN TIGER BEING

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UNCLAS SECTION 01 OF 02 OTTAWA 001265 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EB/IFD, WHA/CAN AND WHA/EPSC 
STATE PASS CEA FOR Randy Kroszner, FRB FOR C. BERTAUT 
STATE PASS USTR FOR RYCKMAN 
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: CANADIAN ECONOMIC UPDATE: NORTHERN TIGER BEING 
TAMED 
 
REFS: (A) OTTAWA 0160 (B) OTTAWA 0500; (C) Toronto 1210, 
1226, 1259 (D) Ottawa 1180 (Winnipeg) 
 
¶1. Sensitive but unclassified, please protect 
accordingly. Not for Internet distribution. 
Summary 
------- 
 
¶2. (SBU) The tiger's roar is beginning to weaken. In 
spite of a strong energy sector, respectable domestic 
demand and sound provincial finances, forecasters, 
including the Bank of Canada, have downgraded their 
growth outlook for the Canadian economy in 2003 from 
nearly 4% just a few months ago, to 2.5- 3%. February's 
GDP data, showing annualized GDP growth of only 2.4% 
compared to a 6% annualized rate just a month earlier, 
lends support to these downward revisions. Short-term 
concerns include continued global economic uncertainties, 
especially a delay in the U.S. economic recovery, a 
stronger than anticipated Canadian currency, and the 
impact of SARS in Toronto, capitol of Canada's largest 
province and source of 20% of national GDP. 
 
¶3. (SBU) There are some glimmering bright spots, most 
notably Canada's energy sector and the relatively strong 
fiscal position of Canada's ten provinces. In fact, all 
but Prince Edward Island and British Columbia project 
balanced books or better, although once the full impact 
of SARS emerges, Ontario's estimated C$524/US$367 million 
surplus could erode into a deficit. The recent sharp 
rebound in U.S. consumer confidence bodes well for Canada 
next year, and the Conference Board of Canada projects 
that the quick victory in Iraq will trigger an economic 
recovery in the United States beginning in the third 
quarter of 2003. A U.S. economic rebound will be 
necessary to keep the Canadian tiger roaring. Our 
January forecast called for Canadian economic growth of 
3.5% this year, increasing to 4.3% in 2004. We are 
modifying our forecast to around 3% this year and just 
under 4% in 2004. End Summary. 
 
Northern Tiger Getting Tamed 
---------------------------- 
 
¶4. (U) The Canadian economy is still chugging along, but 
less energetically than just a few months ago. In 
February, real GDP rose a modest 0.2% from January, an 
annualized rate of 2.4%, representing a sharp moderation 
from the 6% annualized rate recorded just a month 
earlier. In addition, February's gain was narrowly 
based, with the continuing boom in housing construction 
and its spinoffs to industries such as concrete and wood 
products one of the few consistent sources of strength. 
Consumer spending continues to advance based on a rebound 
in auto sales, but weakness in manufacturing was evident 
in two-thirds of the major industry groups. 
 
The Only Thing Certain Is Uncertainty 
------------------------------------- 
 
¶5. (U) Looking ahead, several analysts are projecting 
extended weakness in Canada's export sector (about 38% of 
GDP) because of the sluggish global economy, a delay in 
the U.S. recovery, and stronger than expected 
appreciation of Canada's dollar. Canada's record 
employment growth of last year has begun to ease and the 
SARS outbreak in Toronto has already had an impact on the 
capitol of Canada's largest province and source of over 
20% of Canada's economic output -- ref C. (Note: The 
Conference Board of Canada estimates the loss from SARS 
at C$1 billion in 2003, or about half a percent of real 
GDP growth in a C$2 billion economy. End note.) 
Consequently, several economists have downgraded their 
forecasts of the Canadian economy for 2003 from nearly 4% 
just a few months ago, to 2.5-3%. 
¶6. (U) The Bank of Canada's April 23 Semi-annual 
Monetary Policy Report highlights the still-uncertain 
global environment, a delay in the U.S. economic 
recovery, and the SARS outbreak in Toronto, as factors 
tempering upward pressure on interest rates in the short- 
term. (The BOC raised rates by 25 basis points on March 
4 and April 15 of this year.) The BOC says that while 
rising interest rates and appreciation of the Canadian 
dollar (up 8% since October 2002) have tightened monetary 
conditions in the past year, the BOC continues to believe 
that further reduction in monetary stimulus will be 
necessary to return Canada's inflation rate (4.3% in 
March; down from 4.6% in February) to the 2% target and 
to sustain ouput levels close to capacity. 
 
Provincial Finances for FY2002-03: Lookin' Good (Sort Of) 
--------------------------------------------- ----------- 
 
¶7. (SBU) The tally of provincial budgets shows an 
aggregate deficit of C$1.3/US$0.9 billion. (Due primarily 
to a C$3.8/US$2.7 billion deficit projection for British 
Columbia.) The only other province projecting a deficit 
is Prince Edward Island, but it is a marginal C$8/US$6 
million. Energy-rich Alberta turns in the best fiscal 
performance projecting a C$1.8/US$1.3 billion surplus. 
In fact, Canada's cash-rich oilpatch faces a spending 
dilemma as record quarterly profits of Alberta's oil 
companies pour into the province. The consensus is that 
most firms will increase capital spending, look for 
merger opportunities, and pay down debt. In Ontario, the 
possible C$1 billion cost of responding to SARS could 
erode the C$524/US$367 million surplus projection into a 
deficit. Although the virus is now contained (Toronto 
1259), the economic hit in the city that contributes 20% 
to Canada's national GDP is already clear. As of April 
25, there had been reports of a 50% drop in Toronto hotel 
occupancy rates, and a 70 to 80% loss of business for 
Chinatown restaurants and shops, and an average 
contraction of 30% in downtown retail sales (Toronto 
1226). Quebec, the second-largest provincial economy, 
also projects a balanced budget but recent rumors of 
financial irregularities may cast a shadow there as well. 
The remaining provinces project small budget surpluses. 
 
ALL SIGNS POINT TO RECOVERY IN 2004 
----------------------------------- 
 
¶8. (SBU) Glimmers of hope on the horizon that should 
boost Canadian economic output late this year and in 2004 
include Canada's energy sector and the relatively strong 
fiscal positions of the federal and provincial 
governments. The recent sharp rebound in U.S. consumer 
confidence bodes well for Canadian exports and 
manufacturing in the mid-term. The Conference Board 
predicts that the quick victory in Iraq will trigger 
economic recovery in the United States beginning in the 
second half of 2003, fueling a solid export recovery in 
Canada in 2004. Consequently, the Board forecasts 
Canadian economic growth of 2.7% this year and 3.3% in 
¶2004. The Bank of Montreal shares the Conference Board's 
assumptions, and forecasts 2.4% growth in 2003, rising to 
3.9% in 2004. Our January forecast predicted growth of 
3.5% this year, increasing to 4.3% in 2004. Given the 
change in circumstances, we will scale back our forecast 
to around 3% for this year and to just under 4% in 2004. 
 
Cellucci