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OECD forecasts GDP will rise 3.3% this year, versus 2.7% for the U.S

David Thomas, Economics Reporter, The Financial Post
- with files from Reuters

Financial Post, Weekly edition, Thursday, April 9, 1998

Canada will spend the next two years in top spot in economic growth among Group of Seven economies after sharing that honor last year with the U.S., according to a semi-annual report released yesterday by the Organization for Economic Co-operation and Development.

Domestic demand and business investment -- two major drivers of recent growth -- are expected to remain strong but will moderate this year, resulting in gross domestic product growth of 3.3%, the Paris-based organization said.

Real consumer spending jumped 3.9% last year and capital investment in machinery and equipment was even stronger, rising 12.5%.

"While business investment should remain robust, helped by low long-term interest rates, it is unlikely to keep rising at the high rates achieved over the past two years," the OECD said.

The 3.3% GDP growth estimate was down from the OECD's last forecast, which called in December for an expansion of 3.5%. At 3%, the forecast for 1999 GDP growth is also a downward revision. The previous estimate was for 3.3% growth. A definite slowing trend is in evidence, after both Canada and the U.S. managed 3.8% growth last year. However, Canada is due for a softer landing than some G7 members, the OECD said.

Growth in Britain is expected to fall sharply from 3.3% to 1.7% this year, while Japan, whose economy is already reeling, is expected to experience a contraction of 0.3% after expanding 0.9% last year.

In the U.S., GDP growth is seen slowing to 2.7% this year and 2.1% in 1999. The Asian crisis will cut into U.S. exports, but much of the reduction in growth is coming from a natural cyclical slowdown, it said.

"The OECD secretariat's projection suggests a soft landing for the economy, with growth easing back spontaneously and inflation staying under control." Only two G7 countries are expected to enjoy increased growth this year -- Italy's GDP is forecast to grow 2.4% after expanding 1.5% last year, while Germany is looking at a 2.7% gain this year after 2.2% in 1997.

Germany's economy is forecast to add 2.9% in 1999, making it a close second to Canada's 3%.

While unexpected changes in the U.S. economy pose by far the biggest risk to Canada's outlook, the OECD said the Asian crisis could continue to plague the C$ and possibly prompt the central bank to raise interest rates.

"With Asia, including Japan, making up less than 10% of total Canadian exports, related downside risks would seem comparatively small. Nonetheless, the relative importance of commodities to Canada could complicate macro-economic management, being a major factor behind the recent weakness of the Canadian dollar."

The group forecast that Canada's unemployment rate would fall to 8.5% in 1998 and 8.2% in 1999. The jobless rate fell from 9.7% at the start of last year to 8.6% in December. Statistics for March are due for publication this morning and many economists expect the rate to remain unchanged at 8.6%.




*Rate at Dec. 31

Source: This information is provided by the Financial Post.

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