Jacques Clément Report on the economy

21 April 2004

CANADA

Bank of Canada Monetary Policy Report presented last week, indicates that real G.D.P. growth in the first quarter is likely to be just below 3%, close to 2¾% annual rate in the first half and will accelerate to approximately3 ½% in the second half of the year. For the year 2004, it should average 2¾% and 3¾% next year. Core inflation, presently at 1.3%, should average 1½% for the balance of the year and be on target at 2% at year end next year. The Governor warned about the difficult adjustment period ahead but the risks of the outlook are relatively balanced and he has no interest in cutting interest rates any further. Growth will be generated mainly by internal demand, with strong consumer and business spending, inventory rebuilding, housing and government spending. The economy will be stimulated by the fifth reduction in interest rates since July, 2003, the last part of the quinquennal tax reduction announced in 2000/2001, totalling $31 billion this fiscal year, including over $22 billion for individuals. The economy should be back to full capacity by the third quarter next year.

March leading economic indicators rose sharply for the twelfth consecutive month, led by housing and durable goods. February’s shipments rebounded sharply leading to 7% rise in exports and unfilled orders rose by 3.5% in the first two months of the year. New orders and inventories weakened in February after strong gains in the previous month. The Canadian dollar outlook: 73¢ U.S. to 75¢ U.S. Foreigners sold over $7.5 billion of Canadian securities in February including 4 billion in bonds and 1.2 billion net in stock related to a U.S. takeover of a Canadian company through a stock swap. Two year spread has also narrowed to fifty basis points. Canadians bought 2.5 billion dollars worth of foreign securities, evenly divided between bonds and stocks.

UNITED STATES

The U.S. expansion remains vigorous with 4¾ % -5% growth expected in the first half, the best in twenty years.
Today’s Beige Book (summary of the economic conditions in the twelve Federal Reserve districts) indicated widespread growth, retail sales rising in most regions, hiring increasing moderately, some labour tightening, wages rising moderately, higher health costs and moderate increase in consumer prices despite its first quarter rise at 3.7% annual rate and March core inflation’s largest increase since November 2001.

Greenspan feels that the inflation pressures are well contained with unit labour costs still coming down, with productivity growth of 4½%. Deflation threat is history and the Fed is likely to revise its balance risks on May 4 when they meet. Greenspan reiterated today that interest rates will soon be increasing.

Housing starts following record home sales last year, surged 6½% in March after a 10½% decline in the first two months of the year. Industrial production paused in March after a 1½% gain (January – February). The industrial expansion is solid. New York manufacturing rose for the twelfth consecutive month. Leading economic indicators, particularly building permits, new orders and real money growth, rose again in March. Corporate profits have risen over 20% in the first quarter. The second quarter is expected to rise by close to 16% and the year by close to 15%. The Dow-Jones has lost over 400 points since February 11. The U.S. dollar has reached a five month high against the Euro, which is heading to $1.18 U.S. Gold has slumped below $400.00 U.S. and could ease further with the prospect of higher interest rates. Crude oil should continue to trade between $ 36.00 U.S. and $38.00 U.S. The geopolitical situation and The Fed timing of interest rate rise will continue to weigh heavily on the equity and currency markets.

Is there no one among 230 million people in the United States who can replace Alan Greenspan?
Greenspan is not a one man show. It’s a pretty big organization