National Bank of Canada Economic outlook for 2001 and 2002: Sustained growth and cautious optimism

Montreal, 7 December 2000 - 

National Bank of Canada today released its economic outlook for 2001 and 2002. Its comments are cautiously optimistic about the international, U.S., Canadian and regional (Quebec and Ontario) economic outlook.

Among the highlights, the National Bank notes that, at the international level:

• The price of oil will move back to $28 a barrel in the medium term;
• Economic activity is picking up in Asia, except in Japan, where the recovery is more timid;
• Europe's economy is rebounding, despite inflationary pressures which prompted the Central European Bank to tighten its monetary policy.

The National Bank's projections for 2001 call for economic growth of:

• 3.8% in the U.S.
• 2% in Japan
• 3.8% in Canada
• 4% in Ontario
• 3.6% in Quebec

The North American economy posted major productivity gains. Despite the stock market corrections, household wealth in the U.S. is rising. The U.S. employment outlook remains sound and interest rates are in a comfortable zone. All these factors suggest that consumer spending could remain impressive in the U.S. over the next two years.

Moreover, machinery and equipment investment in Canada picked up, following a period of stagnant corporate earnings from 1996 to 1998. This paves the way for a return to higher productivity, although Canada lags behind the U.S. However, Canada's high-tech sector will probably help to reduce the lagtime significantly.

Dominique Vachon, Vice-President and Chief Economist at the National Bank, points out that economic conditions in Canada resemble those in the U.S: "Exports are no longer the only drivers of growth. In Ontario, the growth in high-tech industries and the major tax cuts could help to offset the slowdown in the automobile sector.

As for Quebec, its economy, which has diversified considerably, is driven by strong growth in leading-edge industries. But its heavier tax burden is still a major factor. While Ontario and other regions of Canada have reduced this burden, Quebec households cannot expect to receive comparable tax cuts."

Ms Vachon went on to note that governments can help solve the problem of productivity in Canada. "Forcing governments to be more efficient means they would have to undertake to limit the growth in their program expenditures to a rate equivalent to inflation – 2.7% in Canada in 2000 in Canada, plus the population rate of increase – 0.8% in 2000. Governments would thus no longer be tempted to generate surpluses through a cautious approach and, subsequently, be eager to get their hands on them. This undertaking to set a rate of growth for program expenditures should be a priority for the federal government, whose economic role is foremost one of redistribution. As for the provinces, where the situation is more complex given their role as producers of services, their efficiency would be greatly improved if, for example, they were to make a serious attempt at streamlining their top-heavy administrative machinery.

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