Economic growth will slow in Canada to 2.6% in 2005 largely in response to the impact of a rising exchange rate on the export sector, say economists at CIBC World Markets.

“Not only is the Bank of Canada unlikely to match further interest rate hikes by the Federal Reserve Board, but it will soon be pushed into a rate cut this year in order to prevent an already overvalued Canadian dollar from moving higher and deep-sixing the country’s manufacturing and export sectors,” said Jeffrey Rubin, chief economist at CIBC World Markets, in a release.

The January CIBC World Markets Economic Forecast notes that a further weakening of the U.S. dollar against the euro and other overseas currencies could potentially take the Canadian dollar close to its 1991 peak. According to the forecast, such a level would threaten the Canadian economy with a major recession.

However, another three rate hikes in the U.S., coupled with a rate cut in Canada, should weaken the loonie as Canadian interest rates fall below U.S. levels within the next couple of months. Lower Canadian interest rates should delink the loonie from a rising euro, and send it lower, ending the year at just under 77¢.

Rubin noted that with exports to the U.S. accounting for almost a third of the country’s GDP, Canada’s trade exposure to a sinking U.S. dollar is about 10 times that of Euroland.

CIBC World Markets expects that sub 3% real GDP growth will result in a modest back up in the jobless rate to 7.2% while consumer price index inflation is expected to remain well behaved at just under 2%, despite a further rise in energy prices.

Energy markets are expected to get progressively tighter over the next two years as depletion limits supply growth while Asian economies increase oil demand.

Oil prices are expected to average US$50 per barrel this year and move up to US$55 in 2006 as increasing depletion limits supply growth.

http://www.newswire.ca/en/releases/archive/January2005/19/c4515.html