Conference Board Projects Uneven Growth
by PJ Wade
In these unsettled times, Canadians search for certainty and a clear vision of the road ahead. Interest rates should stay put for a while, but with the loonie showing little sign of losing ground, the future for all Canadians is not equally bright. According to the not-for-profit, non-partisan Conference Board of Canada [ Conference Board of Canada ] (CBC), "following three years of under-performance -- as a result of the 'tech wreck,' September 11, SARS and other shocks -- the Canadian economy has finally rebounded to growth rates closer to its long-term potential." CBC researchers credit total real growth in business investment with significant contribution to this recovery after investment reached nearly 6 percent in 2004. The Conference Board of Canada, which is funded solely through fee-for-service undertakings, such as conferences and research, attempts to present independent insights on economic trends, public policy and organizational performance. Annual real business investment spending decelerated steadily from 1999 to 2002, and left many Canadian businesses with aging physical capital that required upgrades. In the Conference Board's recent survey of business confidence, 44 percent of respondents indicated that they are operating at full capacity and that business profits have been rising since mid-2002. The composition of Canadian investment is shifting. The pace of residential housing investment will slow appreciably in 2005 in response to the expected rise in short-term interest and mortgage rates, although actual housing starts will remain historically high. Non-residential business investment -- expansion of plants, mine sites and other forms of physical capacity -- grew by only an estimated 1.2 percent in 2004, but an increase of 6 percent is forecast for 2005. This figure conceals uneven growth in Canada's industrial capacity. The energy sector, based principally in Alberta, is leading the way. Meanwhile, investment in business capacity outside the energy sector reportedly declined by 6 percent in 2004 -- with a recovery of only about 2 percent forecast in 2005. CBC predicts that actual growth in business capacity will not occur until the economy's recovery is more deeply entrenched. With the Canadian loonie surpassing the 80-cent mark relative to the US dollar, Canadian businesses outside the energy sector are under pressure to become more efficient and more internationally competitive. This resulting boost in purchasing power and, therefore, more than 25 percent reduction in the cost of imported capital are accelerating efficiency-driven investment in machinery and equipment (M&E). M&E investment rose an estimated 7.6 percent in 2004 and CBC projects acceleration to 8.3 percent in 2005. Imports of M&E were up 13 percent in October 2004 compared to October 2003, a pace that should continue in 2005. CBC's latest view of the future continues to look brightest for western Canada, especially fast-growing Alberta. According to the Conference Board's Provincial Outlook - Winter 2005, "western provinces will continue to reap the benefits of still-high commodity prices and strong demand for most of their primary resources." However, even in the west all is not rosy. Manitoba's economy will cool in 2005 although it may still expand by 2.7 percent. Unlike other provinces, Manitoba will continue to enjoy record-high housing starts, stimulating economic activity. Across Canada, the CBC forecasts varying degrees of prosperity. Ontario and Quebec can expect sluggish growth in 2005 because the trade sector in these provinces is hampered by the strong currency and softening U.S. demand for automobiles and new housing. In both provinces, real gross domestic product (GDP) is expected to grow by only 2.3 percent in 2005, followed by slightly higher gains in 2006. In contrast, Alberta should post real GDP growth of 3.8 percent in 2005, easily topping the other provinces for the second consecutive year. Construction activity will soar, led by several multi-billion dollar oilsands developments and solid drilling intentions. In 2006, economic gains in Alberta should moderate to 3 percent, second only to Newfoundland and Labrador. The net effect for the Canadian real estate industry is a continuation of record highs in some areas and a more moderate markets in others. In other words, location is still the key consideration in 2005. | 
