Canada`s economy is expected to grow at a much slower rate in 1986 than last year while the United States` gradually regains steam, Bank of Montreal officials predict.
As a result, the current negative sentiment against the Canadian dollar in world money markets ”will not go away easily,” Jeffrey S. Chisholm, senior vice president and deputy treasurer, said at a North American economic outlook conference held here recently. Bank of Montreal is the parent of Chicago`s Harris Bankcorp Inc.
Chisholm predicted that the Canadian dollar, which recently fell to a historic low exchange rate of less than 69 U.S. cents and is currently trading at about 71 cents, is likely to ”move back down to the 70 cents range, plus or minus a bit,” over the rest of the year.
He said the currency was being hurt by projections for a weakening Canadian economy this year, a deteriorating trade and current-account balance, falling oil prices and a federal budget deficit that will grow despite new tax increases.
The Bank of Canada will probably be forced to allow domestic interest rates to increase this year as it attempts to bolster the currency, he said.
Lloyd C. Atkinson, senior vice president and chief economist of Bank of Montreal, said he expects Canada`s economic growth to ”slow abruptly” to about 2.5 percent this year from the 5.3 percent gain posted in 1985. The slowdown will be ”more pronounced” in the second half of the year, he added. Atkinson predicted that the U.S. economy, meanwhile, will accelerate to a 3 to 3.5 percent pace in the second half of 1986 from 2 percent in the first six months.
”In 1986, fiscal policy in Canada will be more restrictive,” Atkinson said. ”Federal personal income taxes will rise by $1 billion while sales and excise taxes will take a further $1.4 billion out of the hands of consumers.” The tax increases will cause consumers to restrain their spending, he said, predicting that real outlays will rise by only 1 percent this year against 5.1 percent in 1985.
”And to manage this very modest advance,” he said, ”consumers will have to dip into their savings, forcing down the personal savings rate.”
The economist also forecast that housing starts in Canada will fall to an annual pace of 165,000 units by the end of 1986 from a peak of 184,000 units in the fourth quarter of last year.
The major source of strength will come from fixed investments from businesses, which are expected to rise about 9 percent this year after a 1985 increase of 11 percent, Atkinson said.
But he predicted that several oil and gas producers might shelve their capital investment plans if the recent drop in oil prices is sustained.
The Canadian government, whose budget message is due Feb. 26, is unlikely to endorse major new measures to reduce the deficit, he added. ”Bluntly put, our sense is that Ottawa`s commitment to deficit reduction has diminished markedly,” he said.
