TORONTO - A high dollar and inventory surplus will lead to a sluggish economy in the next few quarters, says the latest forecast issued by RBC Financial Group. The report also stated that the situation would improve by 2004 as the U.S. economy picks up and the effects of SARS and mad cow disease fade.

Canada’s export market is expected to shrink for the second consecutive quarter as the weak U.S. demand has led to an inventory increase. The negative impact of SARS and mad cow disease have contributed to bring Canada’s growth forecast from 3.4 per cent to 2.3 per cent in 2003.

"The biggest challenge for Canada's economy and in particular, its export sector, is the lightning speed of the Canadian dollar's appreciation," said Craig Wright, vice-president and chief economist of RBC Financial Group. "While foreign exchange markets will remain volatile as the U.S. dollar correction runs its course, the Canadian dollar will retain its rising trend."

RBC predicts that the Canadian dollar will rise to 75.2 U.S. cents by the end of 2003 and increase further to 77.5 U.S. cents by the end of 2004. The Bank of Canada is expected to leave interest rates unchanged until the second half of 2004.

Since the war in Iraq ended the U.S. economy has begun to rebound. Decreasing risk premiums, rising consumer and investor confidence, and tax cuts are expected to cause the country’s GDP to grow by 2.2 per cent in 2003 and 3.4 per cent in 2004.

Each of the provinces are expected to feel the effects of the economy in various ways:

British Columbia: A weakened demand for manufactured goods and a drop in tourism will likely cause the region to join Ontario for a last place finish this year. The benefits of the recent Olympic win are expected to emerge in 2005-2011, with growth increasing by an average of one per cent each year.

Alberta: Despite the ban on beef products the province is expected to experience strong growth. This has been attributed to the energy sector performing above expectations. If the beef ban is lifted soon the province will see a greater increase in economic activity.

Saskatchewan: A conservative estimate of 3.8 per cent in growth has been set as lack of precipitation and dry spells could have a negative impact on crop production.

Manitoba: Normal precipitation readings and a more diversified economy that is less dependent on a fluctuating dollar have lead to cautious optimism for the province. Growth has been forecasted at 2.9 per cent in 2003 and 3.6 per cent in 2004

Ontario: A weak U.S. economy, challenges in the auto sector, and SARS have all been named as factors that have led to the province seeing a sharp decline to 1.9 per cent in growth for this year.

Quebec: The reliance on the U.S. for the aerospace and telecommunications industries exports will cause the province to slump as the dollar rises and demand slows. The province, along with Ontario can expect to see its economy improving by 2004 as the U.S. rebounds.

Newfoundland and Labrador: With the help of a strong energy sector the province is poised to experience the healthiest growth in the country, with an estimated 4.5 per cent in 2003 and five per cent in 2004.

New Brunswick: Weak prospects for the manufacturing sector, but consumer spending and a variety of large investment projects should cause the economy to grow by 2.6 per cent this year.

Nova Scotia: Consumer sector and non-energy investment projects expected to push growth to 2.5 per cent for the year.

PEI: Weaker tourist season is expected to be offset by normal potato crop conditions to lead to a growth of 2.5 per cent in 2003.

A full copy of the forecast is available at http://www.rbc.com/economics/market/pdf/fcst.pdf.

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