[size=9:b5509f2bd9][color=darkblue:b5509f2bd9]REPORT ON THE ECONOMY Canada Bank of Canada held its interest rates steady at an overnight rate of 2½% and bank rate of 2¾%. It expressed concern about the rise in the Canadian dollar and its negative impact on exports, manufacturing, employment and profits, generally on the weakening economy. The fourth quarter G.D.P. will be lower than expected (perhaps 2%). Possibility of interest rate cuts if the economy continues to under-perform. The 2005 G.D.P. outlook is now probably closer to 2½. There is no inflation problem ahead with the C.P.I. now at 2.1%, with core at 1.7%, given the $6.00 decline in crude oil since the fall, and the rise in the Canadian dollar. November manufacturing new orders and unfilled orders declined, shipments rose very moderately, and inventories were flat for the second consecutive month. Wholesale sales were strong, particularly household articles, computers and electronics. The auto sector continued to be a drag on the economy. Retail sales declined somewhat after a record October. The fiscal surplus continues to rise ($10.7 billion), because of taxes. Indebtedness equivalent to 120% of their after-tax income, with mortgage debt rising by 10%, with almost $91 billion in personal lines of credit when disposable income has only risen by 2%. The savings rate is presently zero, the lowest in twenty-two years. Near term outlook: Canadian dollar 80¢ U.S. - 82¢ U.S. (close - 81.04¢) T.S.X (9,162) heading for 9,500 by year-end (+338) U.S. The fourth quarter G.D.P. could exceed 3½%. Corporate profits are likely to rise over 15%. Housing starts surged in December and 2004 was a record year, rising by 9½ %. In regard to consumer sentiment, although the Michigan survey showed a weaker outlook, the Conference Board mid-January Index was somewhat higher. Leading economic indicators rose for the second consecutive month as more evidence that the sustained expansion will lead to continuing employment gains. Jobless claims have declined already by 40,000 so far this month and January might show an increase of 200,000 new jobs with unemployment declining to 5.3%. Average weekly earnings were negative for the second consecutive year, with productivity rising by close to 3%. The New York and Philadelphia Fed surveys are indicating that manufacturing might be growing at a slower pace than expected. The Beige Book confirmed that “inflation is not a problem” with the core at 2.2% and December P.P.I. and C.P.I. declined. The budget deficit is expected to rise to a record $427 billion U.S. in fiscal 2005, with a $300 billion U.S. military budget, an increase of $80 billion U.S. Although foreigners have bought over $80 billion U.S. Treasuries in November, including $28 billion U.S. by Asian central banks, future foreign purchases are estimate to average $50 billion U.S. monthly, while $65 to $70B U.S. is needed monthly to finance the current account deficit. This should lead to a further 10% weakness in the U.S. dollar until China moves to a flexible exchange rate. The Dow Jones could reach 11,000 by year-end. The Fed will increase its Fed Funds and discount rate on February 2 for the sixth consecutive time by ¼% to 2½% Fed funds. Near Term Outlook: Euro: $1.32 U.S. - $1.35 U.S. Gold: $424 U.S. - $428 U.S. Crude $48.00 U.S. - $50.00 U.S.[/color] [/size:b5509f2bd9]