Leading economists and portfolio managers from more than 50 Canadian financial organizations and research institutions expect another year of healthy growth for the Canadian economy in 2006, and beyond, according to an annual survey released today by Watson Wyatt Worldwide.

Respondents to the survey forecast that Canadian gross domestic product will maintain a solid growth rate of 3% over the short- (2006), medium- (2007- 2010) and long- (2011-2020) terms.

While these projections are similar to those of last year, the drivers of economic prosperity are expected to change somewhat. Business investment growth, which is predicted to continue at a strong pace of 7.1% will help propel GDP growth, while consumer spending, which remains a major source of growth, is forecast to increase by a modest rate of less than 3% in 2006.

“Over the past two years, Canadians have been spending at above-normal levels, while the personal savings rate has fallen below zero,” said Terence Yuen, research economist with Watson Wyatt Worldwide, in a release. “Respondents do not expect this spending rate to be sustainable and therefore anticipate this shopping spree will cool down. On the other hand, participants expect business investment to continue its upward trend in the short-term thanks to continued high energy and commodity prices, strong profit levels and rising capital utilization rates.”

While labour productivity growth has been dismal since 2000 at less than 1.0%, respondents expect it to rebound significantly, with a median 1.6% growth rate forecast for this year and up to 2% over the long-term. This rosy outlook can be attributed to strong business investment growth over the past three years that will finally start to have a positive impact. The labour market is also expected to remain buoyant, as a majority of participants forecast the unemployment rate to remain under 7% both in the short- and long-terms (6.6 % and 6.7 %, respectively).

The Canadian dollar is expected to continue its upward climb compared to the U.S. dollar, with no reversal on the horizon. More than half (61.7 %) of the economists and portfolio managers surveyed predict the loonie will appreciate further against the greenback to the US85¢ to US90¢ range.

Although soaring energy prices have caused the inflation rate to move above 2.5% in recent months, inflation expectations from virtually all survey participants are well anchored at below 3% over the next five years.

Most respondents expect the Bank of Canada to continue raising the target overnight interest rate this year. However, opinion on the pace of the monetary stimulus reduction is equally divided between those who expect an increase of up to 50 basis points, to a 3.75% level, and those who expect the rate to reach 4.0% and beyond.

Despite a wide range of short-term forecasts, the outlook for equity markets remains positive, as Canadian equities are expected to return 8% (median) in 2006 and over the long-term. Respondents also expect three-month T-bills and ten-year Canadian bonds to move up slightly to 3.75% and 4.3% respectively in 2006, keeping the yield curve relatively flat.

“With a single digit equity market return, a flat yield curve and the weak funding status of many pension plans, sponsors should brace themselves for another tough year,” said Ian Markham, director of pension innovation at Watson Wyatt Worldwide.

The long-term gross return on a typical pension fund invested equally (50/50) in equities (domestic and foreign) and bonds is forecasted to return 5.9% (nominal) in 2006, a decrease from the 6.5% predicted last year and the 8% level in previous years.