Canada’s economy will improve modestly this year although declines in worker productivity, lower overall returns on investments and a tighter labour market may dampen the positive outlook, according to an annual survey of leading Canadian economists released today by Watson Wyatt.

The Watson Wyatt 22nd Annual Survey of Economic Expectations found that Gross Domestic Product is expected to grow by 3.1%, up from the 1.5% increase predicted last year.

Additionally, the federal government is expected to continue operating in a surplus position with median surplus values estimated at $5 billion for 2003 — significantly larger than the predictions of last year ($2 billion). Over the long term, surpluses are predicted to level out at $2.3 billion.

While economic growth is predicted to be positive, productivity forecasts are not as optimistic. Productivity is expected to decrease in the long term to 1.7% (compared to 2% last year).

A total of 41 of Canada’s top economists and financial market forecasters from major financial institutions, investment firms and other organizations participated in the survey.

“This comprehensive survey shows the experts are confident in the strength of the Canadian economy and the related growth indices bear out this optimism,” said John Gilfoyle, national practice director, investment consulting at Watson Wyatt. “However, this is somewhat negated by the forecast of reduced labour productivity, which may suggest a pessimistic view of future living standards.”

The survey also reveals that economists and analysts are not as positive about equity markets as they have been, now forecasting lower returns for stocks.

Canadian stocks are anticipated to have median returns of 9.5% — a significant drop from the 12% forecast last year, but still significantly better than the average rate of return of -13.9% for Canadian equities in 2002.

Bonds are expected to return around 4% over the next year, 5.5% for the medium term and 5.6% for the long term.

Survey participants also expect the unemployment rate to drop slightly to 7.3% this year (from 7.8% last year). However, predictions of 7.% over the medium term and 6.8% over the long term are identical to those forecast one year ago. Inflation rates are predicted to increase slightly — up to 2.5% for the short, medium and long terms as compared to long term predictions last year of 2.3%.

As a result of lower taxes and the expected employment growth, Personal Disposable Income is expected to grow solidly to 3.4% for 2003 and the medium term, but decrease to 3% over the long term.

The Canadian dollar is expected to strengthen over time relative to the U.S. dollar with median rates of US65¢, US67¢ and US70¢ for the short, medium and long terms respectively.

Similar rates are forecast for the Canadian dollar’s strength relative to the Euro despite the strong recent performance of the Euro relative to the U.S. Dollar.