DCN ARCHIVES

March 2, 2005

SPECIAL REPORT

Annual outlook released

Forecasters anticipate growth will continue

This is the first in a series of three articles on an annual economic outlook produced by Reed Construction Data.

Economic growth in Canada and the United States is expected to remain stable for at least the next couple of years, although there are some concerns that higher oil prices could potentially cause problems.

Annual outlooks for the two countries released by Reed Construction Data show that growth in Canada will probably reach 3.4 per cent in both 2005 and 2006 — a slight increase from anticipated growth of 3.1 per cent in 2004.

South of the border, growth is projected to be 3.8 per cent in 2005 and 3.4 per cent in 2006, down slightly from 4.4 per cent in 2004.

The Canadian outlook was prepared by Alex Carrick, chief economist at CanaData, Reed’s Canadian economic forecasting and statistical service, while the American forecast was prepared by Jim Haughey, the director of economics for Reed Business Research Group.

Alex Carrick

Both forecasts note the potential for higher oil prices could cast some uncertainty over growth figures.

The U.S. outlook also cites terrorism as a possible mitigating factor but it says the risk has receded slightly.

In the Canadian report, Carrick says demand for exports provided the single largest contribution to the economy’s strength in 2004, despite the effects of a stronger Canadian dollar that many thought would be a drag on growth.

“As the economy moved into the second half of the year, the effects of low interest rates, strong growth of corporate profits, and rising capacity utilization contributed to an acceleration of business investment, mainly in the form of increased spending on new machinery and equipment.”

Probably the most significant development during 2004, Carrick says, was the strong growth of full-time employment.

Over the 12 months ending September 2004, full-time employment increased by 372,000 jobs, the largest 12-month gain in more than four years.

However, over the course of last year, Carrick says three events cast a lengthening shadow over the economy’s future prospects, namely instability in oil-producing regions and increase in global economic growth, a steady appreciation in the value of the Loonie, and an increase in the Bank of Canada rate.

“From Canada’s perspective, these events lead to concerns about whether or not the effects of higher oil prices will derail the U.S. economy and ultimately lead to a slowdown in Canada’s exports.”

In the report, Carrick says it also appears that housing demand has cooled in most major centres.

“This weakening in housing demand is due in part to softening pent-up demand, something that typically occurs during the maturing stages of an economic expansion.”

He expects housing starts to total about 195,000 units in 2005, down from 220,000 units in 2004.

Looking ahead, Carrick says there is no question that, due to volatile oil prices, the cloud of uncertainty will continue to weigh down consumer and investor confidence across North America, but once the current situation does stabilize, the cloud will dissipate and consumer confidence will rebound.

Carrick says although he expects oil prices will moderate, sustained world demand will likely keep it in the range of $35 to $40 (U.S.) per barrel.

Meanwhile, in the U.S. report, Haughey says residential construction and consumer durable goods were the fastest growing economic sectors from late 2002 until well into 2004.

Haughey says they will be replaced by capital investment and exports as the key growth drivers in 2005.

Regionally, he says the strongest economic growth, taking employment, total income and added demand for new space and other new facilities into account, will be in the American West, followed by the South, the Midwest and the Northeast.

Haughey says the overall economic environment in 2005 will be typical of the mature stage of a business cycle.

He says short-term interest rates, such as loans of two years to finance construction projects, will likely increase much more than the long-term interest rates for such things as mortgages.

However, oil and terrorism remain the principal risks to average economic growth in 2005, Haughey says.

“While both risks have receded slightly recently, they will remain serious considerations throughout the year.”

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