July 16, 2008 / 4:33 PM / in 9 years

Sagging auto exports to hit Canadian growth: report

TORONTO (Reuters) - The Conference Board of Canada lowered its forecasts for Canadian economic growth in 2008 and 2009 on Wednesday, citing declining exports to the struggling U.S. market, especially in the auto sector.

In its summer outlook, the Conference Board forecast gross domestic product would advance 1.7 percent this year, down from 2.2 percent in its spring forecast. Canada’s GDP growth in 2007 was 2.7 percent.

While the board said it expects a rebound in 2009, helped by an improving trade performance and still-healthy domestic demand, it lowered its growth target to 2.7 percent from 3 percent.

Canadian manufacturers have been struggling for months with a softening U.S. economy, which takes in over three-quarters of the country’s exports, and have also had to adapt to a Canadian dollar that rose 60 percent against the greenback between 2002 and 2008. The currency is currently sitting around parity with the U.S. dollar after last year’s 17.5 percent surge.

Auto exports have been hit especially hard by flagging demand in the United States as the price of crude oil -- and gasoline -- soared to record levels. Auto exports are expected to fall by 16.5 percent this year, taking nearly C$17 billion ($17 billion) out of export growth.

However, the board said new investment in the sector, mainly by offshore companies, should generate some momentum and fuel a 3.5 percent recovery in auto and parts exports in 2009.

While the board said it expects the recovery in U.S. demand to be “slow and arduous,” it said manufacturers will get a break from a more stable domestic currency.

It expects the Canadian dollar to remain close to parity with the greenback, averaging 99.6 U.S. cents this year and 99 U.S. cents in 2009, supported by high prices for the energy, food and other raw materials Canada produces.

The board said high energy prices are mainly responsible for the substantial increase in its headline inflation outlook to 2.3 percent in 2008 from a previous 1.3 percent.

Core inflation, which strips out volatile items like food and energy, is expected to remain within the Bank of Canada’s 1 percent to 3 percent target range, averaging 1.6 percent in 2008 before drifting up to 2 percent in 2009.

Canada’s domestic economy is seen slowing somewhat, with after-tax disposable income set to ease and employment gains to slow. The board forecasts real consumer spending to post still-healthy gains of 4.2 percent in 2008, before dipping to 2.9 percent in 2009.

($1=$1.00 Canadian)

Reporting by John McCrank; editing by Rob Wilson

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