Canadian economy set to lead G-7 again in 2003 ' National Bank

Montreal, 13 December 2002 - 

The North American economic recovery may be unsteady and lacklustre but it is happening, says National Bank of Canada.

The U.S. GDP growth of about 2.4% in 2002 should accelerate to about 3.2% in 2003. Canada is poised to lead the G-7 for the second straight year in 2003, with projected growth of 3.6%.

"The decline of the stock market for the third consecutive year – a first in 60 years – does not herald another downturn in the economy," said Clément Gignac, National Bank Vice-President and Chief Economist. "The stock market has become less reliable as a leading indicator of the economy in the wake of the U.S. financial scandals of 2002. For the first time since the 1930s, the stock market is a trailing indicator."

The sluggishness of the U.S. recovery compared to past cycles reflects the nature of last year's recession – precipitated by slumps in earnings and investment rather than in consumer spending. The key to earnings recovery is productivity growth, part of the reason hiring has been so slow in the U.S. The resulting trend line resembles the "jobless recovery" of the early 1990s. Businesses are also holding back on inventory rebuilding.

"But with the improvement of profit margins in 2003, capital spending will gradually take over from consumer spending as the economic driver," Mr. Gignac said.

Canada is likely to enjoy remarkable growth in 2003. Its projected expansion of 3.6% would lead the G-7 for the second year in a row, according to the forecaster consensus, and the balanced federal budget is likely to be once again unique in the G-7.

The divergence between the two largest NAFTA economies with regard to their GDP and employment paths is unprecedented, noted the National Bank chief economist. The Canadian labour market, in sharp contrast to the American, has had a record year – 500,000 jobs added since the beginning of 2002. Many manufacturing industries are operating full out, riding on the competitive advantage of a very cheap currency. Canadian consumers remain highly confident, encouraged by strong job growth and a gradual reduction of the tax burden.

National Bank remains optimistic about the real estate market in 2003. The Bank sees the current housing boom as driven by long-pent-up demand and by the relative accessibility of homeownership resulting from continuing very low interest rates. Though a real estate bubble is not a risk to be ignored, the reports of widespread speculation so common in the late 1980s are simply not there, at least not on a Canada-wide scale. According to the National Bank chief economist, "What we are seeing now is that the events of 9/11 and the slide in stock prices have reoriented the priorities of many households. Home is important again."

Mr. Gignac said the U.S. Federal Reserve can be expected to keep its monetary stance highly accommodative, holding interest rates unchanged till early summer to set the recovery firmly on the rails. The Bank of Canada, on the other hand, could do as it did in 2002, raising rates 50 or 75 basis points unilaterally in the first half of the new year to keep inflation within its target range.

At the regional level, Quebec's performance in the first half of 2002 was the strongest in its history. The province accounted for more than 40% of all new Canadian jobs and its participation rate reached a new high. Quebec's growth for 2002 should be in the neighbourhood of 4.0%, returning to a pace closer to the Canadian average in 2003, about 3.5%.

Marc Pinsonneault, National Bank Regional Senior Economist, described the strong showing of the Quebec economy as "in large part a catch-up phenomenon, with assistance from late-arriving tax cuts toward the end of the last expansion."

Ontario's economy, bolstered by the strength of the automotive industry, expanded about 3.5% in 2002. The key to its continued progress in the year ahead will be recovery in business investment.

As for the stock market, the factors undermining investor confidence this year – writedowns of technology assets, financial scandals – should play a smaller role in 2003 as structural reforms take effect. The ongoing recovery in profits and a higher quality and accessibility of corporate financial reporting should catalyse an end to the bear market. This view is of course subject to risks such as that of another oil price crunch linked to the possibility of war with Iraq.

Summary of Forecasts
(Annual % change, unless otherwise indicated)

 

2002

2003

2004

United States

 

 

 

Real gross domestic product

2.4

3.2

3.6

Inflation rate

1.5

2.4

2.5

Unemployment rate (%)

5.8

5.7

5.1

3-month treasury bills (year end)

1.25

2.25

3.50

10-year treasury bonds

4.20

5.00

5.50

 

 

 

 

Canada

 

 

 

Real gross domestic product

3.3

3.6

3.2

Inflation rate

2.2

2.9

2.5

Unemployment rate (%)

7.7

7.6

7.2

3-month treasury bills (year end)

2.72

4.15

4.50

10-year federal bonds

5.20

5.80

6.25

Canadian dollar in U.S. cents

63.69

69.50

71.00

Quebec

 

 

 

Real gross domestic product

3.9

3.5

3.1

Unemployment rate (%)

8.5

7.8

7.6

 

 

 

 

Ontario

 

 

 

Real gross domestic product

3.5

3.4

3.2

Unemployment rate (%)

7.1

6.9

6.5


The National Bank publication "Economic and Financial Outlook, Winter 2002-2003" is available in pdf format from the Bank's website at www.nbc.ca/outlook

About National Bank of Canada

National Bank of Canada is an integrated group which provides 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 retail, corporate and investment banking. 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, employs over 17,000 people. The Bank's securities are listed on the Toronto Stock Exchange (NA:TSX). For more information, visit the Bank's website at www.nbc.ca.

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Denis Dubé
Director of Public Relations
National Bank of Canada
514-394-8644
denis.dube@bnc.ca

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