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Cablegate: Canadian Economic Update: Northern Tiger Being

This record is a partial extract of the original cable. The full text of the original cable is not available.

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

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