GDP growth in Canada will drop slightly in 2003 to 2.8% from 3.3% in 2002, says Merrill Lynch. Further more, the Bank of Canada is unlikely to resume its tightening program in the near future. The firm issued these forecasts today.

“We anticipate a choppy and sloppy year in 2003, with equity markets remaining flat, punctuated by spasms of euphoria,” says David Rosenberg, chief economist for North America at Merrill Lynch & Co. His firm predicts the fair value for the S&P/TSX composite at 7000.

Merrill is underweighting equities, holding 55% in stocks. It calls for a market weight in bonds at 30%. And, it is overweighting cash at 15%. From an asset
allocation point of view, it is focusing on energy stocks, consumer staples and dividend-paying stocks.

The study is part of Merrill Lynch’s 2003 Year Ahead recommendations, which also include regional strategies and investment ideas for North America, Pacific Rim and Global Emerging Markets, as well as global sector outlooks.

“There are signs the pace of growth in Canada has moderated – leading indicators have flattened out, retail/sales department stores have stalled and auto exports appear to have peaked,” said Robert Spector, senior economist and strategist for Canada at Merrill Lynch. “We are looking for growth in the first half to come between 2-3% with some downside risk, and this should pave the way for H2 growth of just below 3 percent.”

Developments outside Canada, namely exports to the U.S., will be key to the Canadian economy, according to Spector. U.S. auto sales have slowed and OEMs are responding to building inventories by announcing reductions to production schedules. In net terms, domestic job losses could begin to mount in early 2003 in the auto sector, which would filter into other areas of manufacturing, says Spector. This will lead to a more temperate housing and consumer-spending climate as demand growth slows.