National Bank Economic and Financial Outlook – Summer 2007: Emerging Asia drives global economy and fuels surge in the loonie

Montreal, 20 June 2007 - 

National Bank’s team of economists today unveiled their economic and financial outlook for 2007 and 2008.

As a result of rapid industrialization in emerging Asian countries, such as China and India with their 2.3 billion inhabitants, the global economy should post positive GDP growth of around 5% for the fourth straight year, its best run in over 30 years. For once, growth will not be driven by the American economy, which will account for barely 10% of the global increase. National Bank’s economists believe that with mortgage rates rising, home prices falling and gasoline prices at record levels, the purchasing power of American households is currently in decline. This, combined with a glut of unsold houses, should be mirrored in modest U.S. economic growth in 2007 and 2008 of 2% to 2.5%, which is below the economy’s long-term potential.

According to Clément Gignac, Chief Economist of National Bank and Senior Vice-President and Strategist at National Bank Financial, the Canadian economy, benefiting from improved terms of trade and the strongest public finances in the G7, will remain on a solid footing until the end of the decade.  In fact, with GDP set to increase by close to 3% during the coming year, Canada is expected to top the G7 countries in economic growth in 2008.

Reflecting the relative strength of the Canadian economy and its excellent fundamentals, the loonie has continued its ascent since the beginning of 2007 and, in a new development, has gained value against all major western currencies. According to Mr. Gignac, who a year ago was one of the first economists in the country to predict that the Canadian dollar would likely reach parity during 2008, this rise in Canadians’ standard of living should continue as long as emerging Asian countries maintain their demand for our raw materials and agricultural products. At the same time, the country should keep on posting a substantial trade surplus despite the headwinds from the high-flying loonie that will likely continue to dominate the manufacturing sector.

As a result, regional economic disparities will persist. The western provinces, which are well-off in natural resources, will remain the drivers of  economic growth, while Ontario and Quebec will experience yet another year of moderate economic growth, which is not expected to exceed 2%.

With respect to interest rates, the Bank of Canada is soon expected to increase its key rate in response to, among other things, pressures on prices and salaries in the western provinces. Altogether, the rate should climb no more than 50 to 75 basis points in the next 12 months, given the restrictive effects of the rising Canadian dollar. The increase in mortgage rates should be more modest and vary depending on the term, insofar as most lenders have already raised these rates in the last few weeks in reaction to a corresponding rise in bond rates.

As for capital markets, most North American stock market indices reached new highs during the first half of 2007, spurred on by an unprecedented wave of mergers and acquisitions. However, the current synchronized rise in the key rates of several central banks and the fear that savings from emerging Asian countries will dry up are causing real rates to rise in the bond market and could lead to a downward revaluation of the multiples assigned to certain asset classes. Briefly, according to National Bank’s economists and strategists, financial markets will likely become volatile again during the second half of 2007 after the excellent string of high returns posted by several financial instruments over the past 4 years. As usual, discipline and diversification among the different asset classes will remain the key to success for investors with a medium- or long-term investment horizon.

Table – North American Economic Forecasts

  

2006

2007

2008

United States (%)

 

 

 

Real GDP

- Annual average

3.3

2.1

2.4

 

- Q4/Q4

3.1

2.2

2.4

Unemployment rate

4.6

4.6

5.0

Inflation rate

3.1

2.3

1.8

Target Fedfunds rate (end of year)

5.25

5.00

4.75

10-year Treasuries (end of year)

4.71

5.00

5.05

  

 

 

 

Canada (% unless otherwise indicated)

 

 

 

Real GDP

- Annual average

2.8

2.5

2.8

 

- Q4/Q4

1.9

3.0

2.9

Unemployment rate

6.3

6.1

6.1

Inflation rate

2.0

2.3

1.8

Housing starts (000)

227

208

196

Target overnight rate (end of year)

4.25

4.75

4.75

10-year Treasuries (end of year)

4.08

4.84

4.96

Canadian dollar (in U.S. cents, annual average)

88.2

93.0

100.0

 

 

 

 

Real GDP by province (%)

 

 

 

Quebec

1.7

2.0

2.5

Ontario

1.9

1.8

2.3

Newfoundland and Labrador

2.8

6.5

0.9

Prince Edward Island

2.0

2.0

2.0

Nova Scotia

1.1

2.3

1.9

New Brunswick

2.6

2.7

2.3

Manitoba

3.3

3.5

3.1

Saskatchewan

0.4

3.2

2.5

Alberta

6.8

4.5

4.6

British Colombia

3.6

3.2

3.0

The webcast presentation of “Economic and Financial Outlook – Summer 2007” will be available on the National Bank website at www.nbc.ca/economicoutlook until the end of July.

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. 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. National Bank has more than $130 billion in assets and, together with its subsidiaries, employs 16,852 people. The Bank’s securities are listed on the Toronto Stock Exchange (NA). 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):                                                              

Denis Dubé
Director – Public Relations
National Bank of Canada
Tel.: 514-394-8644