Canada economy has more to fear than SARS, mad cow

By Luke McCann

TORONTO, June 22 (Reuters) - It's hard to think of Canada these days and not think of the problems caused by SARS or mad cow disease -- the health crises that have sideswiped the country's tourism and beef industry.

But the real threat that faces Canadian businesses and economic growth this year, likely the best performing of the Group of Seven industrialized countries, has little to do with health issues and more to do with weak U.S. demand and the fast rise of the Canadian dollar, according to analysts.

Toronto, Canada's center of business, was hit hard by sever acute respiratory syndrome in late March, and remains the only place outside Asia where people have died from the virus.

The Greater Toronto Hotel Association, which consists of 150 hotels in the downtown area, estimates its members have lost a total of C$50 million ($36.8 million) a month since the end of March because of SARS. And hotel occupancy has slumped 21 percent this year compared with a year ago.

Then, near the end of May, Canada reported a case of bovine spongiform encephalopathy, or mad cow disease, in Alberta and within hours a U.S. ban was slapped on Canadian beef.

But the damage from SARS and mad cow will be relatively small, analysts say.

"SARS and mad cow make big headlines. They're both clearly negative. But I don't think they'll quite have the lasting impact... they're not going to change the landscape," said Doug Porter, an economist at BMO Nesbitt Burns in Toronto. Porter has lowered his growth forecast for Canada this year from 3.1 percent to 2.2 percent.


One of the biggest threats to the economy and business, as cited recently by Finance Minister John Manley, is the slowdown in U.S. demand. Americans consume some 85 percent of Canadian exports.

Beef exports amounted to C$4 billion or 1 percent of all exports last year. But they are not nearly as important as automotive exports.

Beef exports equal only two weeks' worth of car, truck and parts shipments, according to Robert Spector, head economist and chief strategist at Merrill Lynch Canada.

And weaker U.S. demand has hurt Canada's auto sector, according to Carlos Gomes, an analyst at Bank of Nova Scotia in Toronto.

Investment in Canada's automotive industry is well below the C$3.1 billion average of a decade ago, and is expected to drop about 12 percent in 2003 from levels seem in 2002. Also, Gomes has scaled back his estimates for car and truck sales in 2003 to 1.65 million from 1.7 million.

Compounding the issue, according to Gomes, is a soaring Canadian dollar.

The currency has jumped as much as 15 percent against the U.S. dollar since the beginning of the year partly because of weakness in the greenback and partly because of Canada's higher interest rates vis-a-vis the U.S. The Canadian dollar closed on Friday at C$1.36 to the U.S. dollar.

This "earthquake" in the currency market, which is the biggest move ever seen by the Canadian dollar in such a short period of time, will cause the biggest structural change, according to Porter.

"Arguably (the Canadian dollar) has had as much impact on next year's forecast as this year's. It takes about six to eight quarters for a change in the exchange rate to fully make it's way through, so really it's going to be affecting the middle part of next year as much as anything," Porter said.

David Dodge, the governor of the Bank of Canada, agrees. He said in a speech earlier this week that the rising dollar will have a "dampening influence on aggregate demand later this year and next."

But already many companies across all industries that sell their products to the U.S. are reporting weaker profits because of the higher Canadian dollar.

And, last week, Statistics Canada blamed a 3.4 percent slide in factory sales in April on both the rising Canadian dollar and the soft U.S. economy.