Canada 2004: High-flying loonie holds back economic recovery

Montreal, 10 December 2003 - 

Global economic growth is expected to exceed 4% in 2004, the best performance in four years. The main regions of the world will all experience synchronized—albeit uneven—expansion. Spurred by industrial production, Asian economies will benefit from and even contribute to this international expansion. After recording GDP growth of 3% in 2003, the U.S. economy should grow by 4.5 % in 2004. U.S companies have a renewed sense of confidence, coming on the heels of earnings from productivity gains, which provide new reinvestment possibilities. Employment has finally fallen in step, which should ensure a self-sustaining recovery.

The Canadian economy will grow more modestly–in the neighbourhood of 3.0%–in 2004. The growth gap between Canada and the United States stems from the impact of the rising Canadian dollar, which poses a challenge to the manufacturing sector. However, according to Clément Gignac, Chief Economist of National Bank and Senior Vice-President and Strategist at National Bank Financial, "Canadian manufacturers are in better shape to face the music than they were 10 years ago. They are in a much stronger financial position today, and the world economic environment is definitely more favourable." Conversely, businesses will have to invest more to boost output if they want to maintain their competitive standing and improve their profitability.

The outlook for the Canadian dollar is that it will soar even higher – to a target of US $0.80 by the end of 2004. Aside from the depreciation of the U.S. dollar, compounded by the United States' twin deficits, with both its budget and current account reaching record levels, Mr. Gignac sees two more reasons for the Canadian dollar to continue its upward trajectory. First, Canada has a glowing balance sheet: It is the only G7 country to record budget and current account surpluses as well as declining net foreign debt. Second, because it is endowed with natural resources, Canada benefits from the higher commodity prices resulting from the simultaneous recovery occurring around the world.

The loonie's surging value will force the manufacturing sector to rationalize jobs. This is why overall employment gains are expected to be modest, particularly in Quebec and Ontario, which have the lion's share of manufacturing jobs in the country. According to Marc Pinsonneault, economist responsible for provincial projections, economic growth in both these provinces will fall below the national average. The industrial restructuring driven by the higher dollar will make it more difficult for Ontario's and Quebec's finance ministers to balance their respective budgets.

In terms of interest rates, there is such an abundance of unused resources in the United States that the Federal Reserve, which wants to ensure a certain level of reflation, has no reason to raise its trendsetting rate before the fall of 2004. In Canada, the appreciation in the dollar means that the price of imports will drop significantly, which will enable monetary authorities to maintain the benchmark inflation rate at barely 1% to 1.5% in 2004. Consequently, the Bank of Canada should keep interest rates quite low next year, and possibly even trim its bellwether rate again early in the new year to rein in the loonie.

Lastly, stock markets should continue to climb, though without any fanfare. Rising profits and low interest rates have set the stage for favourable conditions. However, indexes can be expected to rise more modestly than in 2003. Mr. Gignac says that "While you could earn good returns in 2003 just by being in the market, things will be different in 2004. Picking the right sectors will be key to earning good returns."

Summary of main projections:
(Annual variance as a %, unless indicated otherwise)

About the 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 $82 billion and, together with its subsidiaries, employs close to 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.

Information : (the telephone number and e-mail address provided below are for the exclusive use of journalists and other media representatives):

Denis Dubé
Manager, Public Relations Department
National Bank of Canada
Tel.: (514) 394-8644
E-mail: denis.dube@nbc.ca