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Canadian economy expected to top G7 in 1998

David Thomas, Economics Reporter

Financial Post, Daily edition, Wednesday, March 11, 1998

Canada is set to outperform the rest of the Group of Seven countries in economic growth this year, after tying the U.S. for top spot in 1997, according to a report made public yesterday by the Conference Board of Canada.

The pace of growth in Canada and the U.S. is expected to slow, with gross domestic product forecast to expand by 3.2% and 2.9%, respectively, after each managed a red-hot advance of 3.8% last year.

The slowdown will occur because of a maturing business cycle, Asian market weakness and higher interest rates, said Peter Lok, the board's senior research associate and author of its quarterly outlook on the world's major economies.

The report forecasts GDP growth in Canada will slow further to 2.8% in 1999, but that would still rank it second among G7 nations after Italy with 2.9%.

``This deceleration will result from slower growth in the U.S. economy and the impact of higher interest rates domestically,'' Lok said.

The Bank of Canada has raised the bank rate 175 basis points since the beginning of last June, taking the key overnight lending rate from 3.25% to 5%.

The bank laid out plans last spring to raise rates slowly but was pushed to act more aggressively because of a tumble in the C$, which it said added an ``inappropriate'' amount of stimulus to a strong economy.

The board did not forecast further rate increases in Canada but said the country would feel the effects of an interest rate rise of at least 25 basis points in the U.S., forecast for the third quarter.

``As the U.S. economy slows, exports of Canadian goods and services will be held back.'' Continued weakness in the C$ will offset some of the slack in U.S. demand.

If the Asian crisis eases earlier than expected, the U.S. Federal Reserve may have to raise rates even more aggressively, Lok added.

That outlook has some allies in the Canadian economic community, including Scotia Capital Markets, which forecasts stronger inflationary pressure to occur on 1998 GDP growth of 3.6% in Canada and 3.1% in the U.S.

But others are expecting U.S. growth to slow more rapidly, prompting a rate decrease rather than an increase.

Economists at Nesbitt Burns Inc. in Toronto have joined leading U.S. forecasters at Deutsche Morgan Grenfell Inc. and Merrill Lynch & Co. in expecting a cut in U.S. interest rates in the second half.

While the downturn in Asia would be severe enough to kill inflation on this side of the Pacific Ocean, the outlook remains ``grim,'' with a recession forecast for Japan, Lok said.

``The Asian crisis will act as a brake on Canadian exports to the region through both the stronger C$ and weaker demand.''

Source: This information is provided by the Financial Post.

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