National Bank Economic Outlook for 2005: Sustained Growth in Canada Despite a Strong Dollar

Montreal, 16 December 2004 - 

The Canadian economy will grow at a rate of just over 3% in 2005 against a still quite favourable global economic backdrop. The recent rise in the Canadian dollar will act as a drag on export growth, but business investment will pick up speed and Canadian consumers will continue to benefit from low interest rates, says Clement Gignac, Chief Economist of National Bank and Senior Vice-President and Strategist of National Bank Financial. 

Regionally, the Western provinces will perform above the Canadian average, buoyed by the natural resources sector and a variety of energy infrastructure projects. Conversely, Quebec and Ontario are expected to record growth of less than 3% due to restructuring in the manufacturing sector.   Mr. Gignac says that while the profit margins of many exporters will be adversely affected, the current global economic boom and healthier balance sheets mean that most Canadian businesses are better equipped to deal with the rising Canadian dollar than they were in the early 90s.

In spite of the loonie's retreat from its recent high, National Bank's economists remain unchanged in their view that the dollar will reach 85 cents U.S. in late 2005 (averaging around 83 cents for the year).   While Canada-U.S. spreads have vanished, Canada, as a net exporter of natural resources, will continue to benefit from the rapidly expanding Chinese economy.  What's more, the country boasts a very attractive balance sheet, posting a financial surplus year after year – a singular accomplishment among the G7 nations.

The Bank of Canada should continue to adopt a pragmatic, wait-and-see attitude to monetary policy in 2005, taking the behaviour of the Canadian dollar into account as well as positive factors affecting aggregate demand in Canada.   In light of the continuing high degree of monetary accommodation, the Bank of Canada is expected to hike its key rate by 75 basis points in 2005.

Although housing starts should be below 2004 levels, they are expected to exceed 200,000 units in 2005 for a fourth consecutive year.   According to Marc Pinsonneault, Senior Economist at National Bank Financial, activity is being driven by low interest rates and strong full-time job creation. Also, the home resale market is becoming more balanced and house prices should grow at a less heated pace than in the last four years. 

South of the border, the job market is bouncing back, placing the U.S. economic recovery on a firmer footing and setting the stage for yet another year of economic growth in 2005 (+3.7% versus +4.3% in 2004). Anxious to return to a less accommodating monetary policy, the Fed is expected to raise its trendsetting rate by another 150 basis points in 2005. Meanwhile, barring a major shift in budget policy by the Bush administration, the greenback should continue to fall in value due to the size of the external imbalance.

The financial markets will have to deal with further tightening by the Federal Reserve as well as a decline in Asian central bank purchases.   As a result, the rates on 10-year U.S. Treasury bonds are expected to climb by 75 to 100 basis points and the risk premium on high-yield and emerging market bonds is apt to increase. On the stock market side, current North American stock market valuations are still at very attractive levels but slower profit growth will limit potential gains. “In short,” says Mr. Gignac, “2005 should be a transition year and most investment vehicles will likely provide investors with modest returns.”

Economic Outlook for North America

 

2003

2004

2005

United States (%)

Real GDP

3.0

4.3

3.7

Unemployment

6.0

5.5

5.3

Inflation

2.3

2.7

3.0

T-bills, 3 months (year end)

0.91

2.32

3.82

Treasuries, 10 years (year end)

4.26

4.22

5.27

Canada (%, unless otherwise indicated)

Real GDP

2.0

2.7

3.2

Unemployment

7.6

7.2

7.2

Inflation

2.8

1.8

2.0

Housing starts (000)

220.0

230.0

210.0

T-bills, 3 months (year end)

2.58

2.55

3.20

Treasuries, 10 years (year end)

4.66

4.40

5.27

Canadian dollar (in U.S. cents, year end)

77.13

82.60

85.00

Real GDP by Province (%)

Quebec

1.9

2.5

2.7

Ontario

1.6

2.7

3.0

Newfoundland and Labrador

6.8

2.0

1.7

Prince Edward Island

1.9

1.9

2.1

Nova Scotia

1.2

2.0

2.5

New Brunswick

2.5

2.2

2.9

Manitoba

1.5

3.1

3.1

Saskatchewan

4.5

3.0

3.1

Alberta

2.7

4.0

4.2

British Colombia

2.5

3.3

4.0

The audio webcast on the “Economic and Financial Outlook   2005” will be accessible through the National Bank website at www.nbc.ca/economicoutlook.

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 customers elsewhere in the world. National Bank offers a full array of banking services, including 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. National Bank has close to $89 billion in assets and, together with its subsidiaries, employs nearly 16,500 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 provided below is for the exclusive use of journalists and other media representatives):

Johanne Bissonnette
Public Relations
National Bank of Canada
Tel.: (514) 394-8644