Economic growth in Canada will slow as activity in the North American manufacturing sector grinds down in 2003 predicts CIBC. CIBC forecasts the Canadian economy will grow by 2.5% this year, almost a full percentage point off last year’s pace.

Faltering manufacturing shipments and falling exports will hold growth below 2% in the second quarter, with an upturn in the economy not expected until the fourth quarter. Falling energy prices and a systemic lack of pricing power in corporate Canada will see inflation retreat to 2% by year-end.

Jeff Rubin, chief economist at CIBC World Markets, noted that the recent appreciation of the Canadian dollar leaves the Canadian economy more vulnerable to an economic slowdown in the U.S., where growth is likely to be little over 1% over the next two quarters. “At 69¢, Canadian manufacturers have already lost all of their competitive advantage over U.S. producers, and a further rise in the dollar to around 72¢ will put them at a clear disadvantage.” Rubin noted that the manufacturing sector and in particular, manufacturing exports to the U.S. is clearly the Canadian economy’s Achilles heel this year.

A faltering U.S. economy is likely to bring interest rate cuts from the Federal Reserve Board but CIBC does not expect to see any parallel action from the Bank of Canada this year. Canadian short-term interest rates are expected to remain steady over the balance of the year, but the interest rate differential between the two countries is likely to climb to as much as 2.5 percentage points. With the Bank of Canada’s target rate soon to be three times the Federal funds rate, Rubin noted that the Canadian dollar is likely to continue to rise throughout the year, closing at 72.5¢ by year-end.

Rubin noted that the interest rate gap between the two countries would be as wide as at any time since early 1990s, when an overvalued Canadian dollar ultimately resulted in a much deeper downturn in the Canadian economy than in the U.S. economy.