Economic research firm Global Insight Inc. has slightly upgraded its GDP forecast for Canada, noting that it looks as if the economy is reviving.

“Despite the current hiccups in global financial markets, Global Insight has found sufficient positive news in recent Canadian economic numbers to upgrade its projection for Canadian real GDP growth for 2007 from 2.1% to 2.2%,” it says in a research note.

Notwithstanding the modest increase, Global Insight notes that its March forecast is “still pretty miserable”, adding, “At 2.2%, growth would be well below the economy’s potential of almost 3.0%, and the weakest rate of growth since 2003. As well, it would represent the fifth year in a row of slower growth in Canada than in the United States, which is now forecasted at about 2.4% for 2007.”

The firm says that at 1.4% annualized, Canada’s GDP growth in the fourth quarter of 2006 was just slightly stronger than the 1.3% expected. Growth for 2006 overall, however, was still 2.7%, exactly as expected. “At first glance it may appear the Canadian economy is losing momentum. After starting the year at a healthy 3.8%, growth eased to just 2.0% in the two middle quarters, then fell still further to only 1.4% in the final quarter of 2006. Closer inspection of the fourth-quarter data, however, reveals that the economy has probably bottomed out, and momentum is now on the upswing,” it says.

Also, it found that the fourth-quarter National Accounts contained heartening news in the slight upward revision to growth in the third quarter. “As well, the momentum within the fourth quarter was encouraging, with much of the growth in December. Also, demand was considerably stronger than would be indicated by the output data, reflected in a significant run-down of inventories in the fourth quarter,”’ it says. “These optimistic indicators of momentum in the economy have led Global Insight to revise the forecast for growth in the first quarter of 2007 up from 2.1% to 2.5%, leading to the revision to the year overall from 2.1% to 2.2%.”

The fourth-quarter 2006 strength came mostly from personal expenditures and exports, offset by a drawdown of non-farm inventories, Global Insight observed. “The strength in personal expenditures reflects, in part, strong employment growth. The strength in exports reflects the weakening of the Canadian dollar since mid-2006, as well as industry-specific factors. Business investment in nonresidential structures, particularly in the oil sands, also drove the modest growth of the final quarter. The inventory draw-down, as well as export growth, was concentrated in autos, which bodes very well for growth in auto production in 2007,” it adds.

“These developments, particularly incorporating the impacts of the National Accounts release, the updated Canadian dollar forecast, and recent developments in the United States, result in a forecast for a slight pickup in growth in the second half of 2007 relative to the first half of the year,” it says. “Global Insight’s March 2007 forecast expects the pace of growth to have reached the 3% range by the final quarter of the year, and to continue moving forward over 2008 at almost a 3% pace. This represents the economy moving at about potential and also at about full capacity.”

Employment growth was robust in the fourth quarter, at 2.4%, and will be even stronger this quarter, it predicts, before moving down to a more sustainable pace, just above the 1% level, for the remainder of 2007 and 2008.

Overall CPI inflation came in at 2.0% in 2006 and is forecasted to be 1.6% for 2007. It expects CPI inflation to remain well below 2% until the latter part of 2007. “However, in late 2007, when the impact of the GST reduction of July 2006 has run its course, CPI inflation will move toward the midpoint of the inflation target range (2%), where we expect to find it over the medium term,” it says.

Global Insight also forecasts the Canadian dollar will, on net, be subject to slight upward pressure, moving up from its current 85¢ to the 88¢ level over the next several years. The Canadian dollar is expected to average 85.6¢ over 2007 relative to last year’s 88.2¢. “If realized, 2007 will represent the first time since 2002 that there will be a decline in the value of the dollar on a year-over-year basis,” it reports. “There is clearly the potential for upside risk to this Canadian dollar forecast if commodity prices surprise us again on the upside. Our medium-term Canadian dollar forecast does assume slightly more weakening of the U.S. dollar relative to most major currencies, as international financial markets continue to respond to the unsustainably large fiscal and current-account deficits in the United States.”

@page_break@Also, in Global Insight’s view, the Bank of Canada will remain on hold well into 2007.

As for the upcoming federal budget, it forecasts that slightly more fiscal room is now available than was forecasted in the November 2006 Economic and Fiscal Update. Much of this room will be used to “address the fiscal balance” and to deliver tax cuts on the personal side, it says.