2001-2002 Economic Outlook of National Bank of Canada: Canada will not escape the slowdown in the U.S.but the outlook remains encouraging

National Bank of Canada today released its economic outlook for 2001 and 2002. Despite markedly slower economic growth in the U.S., the growth outlook for the next few years remains encouraging, notably for Canada, and Quebec in particular.

The National Bank’s projections call for economic growth of:

• 2.2% this year and 3.3% next year in the U.S.
• 2.8% this year and 3.5% next year in Canada
• 2.7% this year and 3.5% next year in Quebec
• 2.4% this year and 3.7% next year in Ontario

Last fall’s data had not yet revealed the extent of the economic slowdown in the U.S. There was nothing to suggest that the corporate earnings revisions, followed by the implosion of stock prices, would so profoundly shake consumer confidence and so tarnish the exceptionally strong business investment.

Despite everything, consumers will keep the economy afloat. A great deal has been written about the reversal of households’ wealth in the wake of the stock market corrections. In fact, net household wealth declined only 4.1% in 2000. The loss of wealth due to the stock market downturn alone clearly is not enough to completely stunt consumer spending growth.

According to Dominique Vachon, Vice-President and Chief Economist at the National Bank, Canada will not escape the slowdown in the U.S. this year, but the outlook remains encouraging. "The tepid pace of exports to the U.S. and the completion of major investment projects will certainly dampen economic growth in Canada. However, consumer spending will sustain domestic demand, as households benefit from lower taxes and real interest rates hover around their historic lows."

Ms. Vachon went on to state that, at the provincial level, Quebec will post growth similar to the Canadian average in 2001, while Ontario will be harder hit. "Like Canada as a whole, Quebec will benefit from favourable economic conditions and expansionist fiscal policies.

Ontario’s economy, however, will slow significantly after advancing more than 5.5% last year, given the recession that is affecting the automobile sector. Once again, households will be the key driver of growth helped by substantial tax cuts."

Lastly, Ms. Vachon stated that, in his May 17 Economic Update, Finance Minister Paul Martin was reassuring about the impact of the economic slowdown on the health of the government’s finances. "The figures seem to bear him out. Even if the economy were to grow more slowly than projected, say at only 1.8% this year and 2.9% next year, the budget surpluses would remain substantial at $6.2 billion and $5.1 billion respectively. The impact of such surpluses would likely be a continued reduction of the federal debt. This in itself is good news. In fact, $33.7 billion has been allocated to paying down the debt and $22 billion to cutting taxes from the budget surpluses that have been posted for the past four completed financial years. The tax cuts, concentrated over the next few years, have not been affected by the economic slowdown, at least not yet.

However, there is some question about how this room for manoeuvre will be used. Paying down the debt rapidly is an excellent choice, provided that the more than $2 billion a year taken from servicing the debt is used to cut taxes. However, on May 17, Paul Martin indicated that these sums would be used to finance new spending programs. We believe this is a mistake. Program expenditures are projected to grow on average 4.1% over the next few years, more or less equal to inflation plus the population growth rate. There is no reason to further increase these expenses. One can even hope that there will be no more surprise budget surpluses (i.e., more substantial this year than the $7.2 billion expected) for fear that the tenuous budget rigour tilts again in favour of additional expenses."

National Bank of Canada is an integrated group whose mission is to provide comprehensive financial services to consumers, small and medium-sized enterprises and large corporations in its core market, while offering specialized services to its clients elsewhere in the world. The National Bank offers a full array of banking services, including all the investment banking services required by large corporations. It is an active player on international capital markets and, through its subsidiaries, is involved in securities brokerage, insurance and wealth management as well as mutual fund and retirement plan management. The National Bank has assets of over $75 billion and, together with its subsidiaries, it employs over 16,600 people. The Bank’s shares are listed on the Toronto stock exchange.

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