Economists trimmed their forecasts for Canadian growth for 2003 following the release Friday of GDP figures that showed the first drop in a year and a half.

TD Bank Financial Group, noting “Canada’s streak of good luck has started to run out,” says it is forecasting growth of 2% for the year. Bank of Nova Scotia is also calling for 2% growth, slightly below the U.S. pace for the first time in five years. BMO Nesbitt Burns Inc. says it has “carved” its forecast to 1.8%.

Both estimates are below the most recent forecast by the federal Finance department, which said Wednesday it is calling for growth of 2.2% this year, down from 3.2% predicted in the budget.

Statistics Canada reported Friday that the economy contracted by 0.2% in April as fewer consumers were traveling and the demand for new cars and houses slowed. There was also widespread weakness among the goods producers, as mining plunged 2.3%, utilities output was down 1.5%, and manufacturing was off 0.4%. Overall, industrial production fell 0.8%, the fifth drop in six months.

TD Bank senior vice president and chief economist Don Drummond said in a report that economic growth will probably remain sub-par for the remainder of the year. “Canada’s economic outlook has soured noticeably in recent months” he said. “As a result, for the first time since 1998, the U.S. economy is poised to outpace Canada’s, and will do so both this year and next.”

The Canadian economy will be fighting strong headwinds over the next few quarters as the U.S. economy continues to struggle and Canada copes with the impact of SARS and Mad Cow disease, TD said.

But, the bank said, “the big story” has been the 18% appreciation in the Canadian dollar since the beginning of the year, and its negative impact on Canada’s all-important export sector. “The C$ has finally taken flight, but the currency has gone twice as far and twice as fast than even the most optimistic of forecasters had predicted,” noted Drummond. “The loonie’s rise is certainly good news, but with Canadian exporters already feeling the pinch from weak U.S. conditions, it could have come at a better time. If there is one consolation, it is that the domestic side of Canada’s economy has been quite resilient, and is likely to remain so.”

Drummond said the real problem has been the astounding speed at which the C$ has gained ground. “Canadian exporters spent the better part of the 1990s with a C$ close to or above its current level, and Canadian-bound exports soared to new heights,” he said.

He noted the negative impact of the stronger currency on profit margins will be almost immediate, but the fallout for export volumes is likely to play out during several quarters. “Moreover, by lowering the prices of imported goods, the loonie’s rise puts competitive pressure on the domestic industries that compete directly with those imports. The bulk of the impact of the C$’s appreciation on the Canadian economy has yet to be felt.”

BMO Nesbitt Burns chief economist Sherry Cooper, noted the April GDP numbers were “right on the market’s expectations.” But she the weak performance is fully consistent with no growth for all of Q2, “effectively ending Canada’s growth advantage versus the rest of the G7.”

“There is little real new news here for the Bank of Canada, with their major concern over whether the North American economy is regaining momentum at the end of Q2.”

Drummond said the slower growth outlook should be enough to prompt the Bank of Canada to reverse course and cut interest rates by 25 basis points at each of its next two fixed announcement dates. He said he expects that after this week’s 25 pb rate cut, the U.S. Federal reserve Board will probably hold the line well into 2004.

RBC Financial Group said Friday’s numbers kick off a poor start to the second quarter, but they do not necessarily portend doom and gloom either. “Second quarter growth will be weak, but it is the persistence of this weakness that is at issue, particularly in light of the number of simultaneous and temporary shocks to hit the economy over the first part of this year,” said economist Ivana Rupcic. “In addition, recent positive signals from south of the border have introduced more optimism into the Canadian outlook in the second half of the year.”