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The Oil and Gas Services sector will be the economic growth leader over the next two years, while a traditional engine of the economy, the auto sector, will trail the pack, says a new study released by BMO Financial Group.  The Sectoral Outlook Report forecasts the growth rates of 46 industry sectors for the period 2003 to 2007 and outlines the reasons why some sectors are expected to expand by over 11 per cent over the next few years while others will likely tumble.

“While we believe that the economy will continue to move in a positive growth curve through 2003 and 2004, many of the traditional high-performing sectors such as auto parts and vehicle manufacturing will start to falter,” said Tim O’Neill, Executive Vice-President and Chief Economist, BMO Financial Group.  “New vehicle sales have clearly been stretched beyond their normal demand levels in recent years as factory incentives and low interest rates helped pull future sales into the market.  As a result, we anticipate that auto sales in North America will fall approximately six per cent this year and will not return to trend levels until mid decade.”

Although the BMO Sectoral Report is generally positive about the future trends, it  also warns of the downside risks for some sectors emanating from a near-term military intervention in Iraq.  “Military intervention with the United States playing a lead role would raise fears of terrorist retaliation and other security risks, undermining confidence of both businesses and consumers in Canada’s biggest foreign market,” said O’Neill.  “Air travel, civilian aerospace manufacturers and, more broadly, tourism would be the most vulnerable industrial sectors to such a development.”

The near-term outlook for energy sector output growth is expected to vary greatly depending on the industry’s sub-sector.  According to the BMO report, the highest growth sector through 2004 will be Oil and Gas Services, which is slated to expand at an annual pace of 11.4 per cent.   Drilling and exploration activity has slowly begun to rise in Canada in response to higher energy prices and the expectation of strong prices going forward, particularly for natural gas.  Furthermore, Alberta oil sands exploration and development is growing at a quick pace, requiring substantial participation from independent servicing companies.

The growth rate of Oil and Gas Services will be in sharp contrast to that of Oil and Gas Extraction operations, which should witness a more modest rise of 1.8 per cent over the next two years.

“Recently, producers have displayed caution in anticipation that higher OPEC production and rising crude oil output from Russia would cause prices to fall,” said O’Neill.  “In addition, Alberta is experiencing falling production of conventional light oil as a result of declining resources in the Western Canada Sedimentary Basin.  Producers of natural gas will also be hard pressed to raise output during the next couple of years due to a sluggish drilling response to high prices and rapid declines in production at existing wells.”

The Professional and Technical Services Sector, which includes legal, accounting, engineering, management consulting and computer and software networking, is also poised for major growth.  “The collective output for these services slowed to a estimated 2.5 per cent growth in 2002, but we anticipate growth will accelerate to a robust 6.6 per cent average during the next two years,” said O’Neill.  While that level of growth is still down from the glory days of 1998-2001 when annual growth averaged 10 per cent, this sector’s impact is increasingly prominent because its level of real GDP has grown to more than 50 per cent larger than the combined transportation equipment sectors (which include motor vehicles and parts, aerospace, rail transport, and shipbuilding).

The report projects that the construction industry, which has grown at an annualized pace of close to 4.3 per cent over the past four years, will slow to a growth rate of 3.1 per cent over the next two years.  On the residential side – which accounts for 28 per cent of construction - housing starts are projected to fall from an exceptionally strong 204,000 units in 2002, to 190,000 in 2003 and 175,000 in 2004.  However, the renovation market, accounting for 15 per cent of the sector, should continue to see strong results as the homes built during the late 1980’s boom reach their repair and upgrade years.

Another sector that is expected to experience only moderate growth in output is retail services.  BMO economists expect that real output in this sector will slow to 3.2 per cent this year from a robust 4.9 per cent in 2002.

“The slowing momentum in retail markets will largely reflect the drop in auto sales, which account for more than a quarter of the sector,” said O’Neill. “Slightly higher anticipated growth in personal disposable income should at least maintain momentum in segments such as general merchandise, department stores, clothing stores and supermarket retailing.”   Housing-related items such as furniture and electrical appliances should also do well, stimulated by the sharp jump in home construction and resales in 2002 and continued, if slightly tempered, strength in residential markets in 2003 and 2004.

The full BMO Financial Group Economic Sectoral Outlook report may be found on the website at www.bmo.com/economic.

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