The U.S. will be wrestling with deflation risks in 2003 while Canada’s economic growth is likely to moderate, says CIBC in its latest Economic Forecast.

“Leveraging its hopes off President Bush’s latest tax-cut packages, the stock market has rallied approximately 20% since October, while the treasuries market has already paid for at least two tightenings from the Federal Reserve Board this year,” says Chief Economist Jeff Rubin.

A sputtering U.S. economy, in need of another round up of cash infusions from mortgage refinancing, he says, and that will keep Fed chairman, Alan Greenspan cutting interest rates over the first half of the year. “Long before any Americans can spend their cuts, the federal funds rate will fall to a
Japanese-like setting below 1%.”

While the Canadian economy is unlikely to match its performance last year either in job creation or growth, says Rubin, it is still enviably positioned to outperform the American economy, growing close to 3% in 2003. “A much smaller tech sector has spared it the scale of resource misallocation that plagues capital spending south of the border. The creation of over half a million jobs provides a more sustainable basis for consumer spending growth in Canada than in the U.S., where employment continues to shrink.”

Against a much stronger economic backdrop, neither fiscal nor monetary policy is likely to be as actively engaged as they have become in the U.S., Rubin predicts. “With the upcoming budget now slated to be Prime Minister Chretien’s last, it seems a safe bet that Ottawa will choose in favour of more spending and a smaller surplus, providing a modest positive for growth.”