Press Releases

National Bank 2004-2005 Economic Outlook: A highly favourable economic context for Canada

Montreal, 22 June 2004 -

The Canadian economy is expected to grow significantly in the coming quarters, generating interest rate hikes this year that could go as high as 1.5% over the next 18 months, according to Clément Gignac, Chief Economist of National Bank and Senior Vice-President and Strategist at National Bank Financial.

Mr. Gignac said the Canadian economy should continue to gain steam in 2004-2005, eventually posting GDP growth of more than 3%.   The Western provinces will lead economic growth as a result of their industrial structure tied to natural resources.  However, the Bank of Canada will likely take its foot off the accelerator soon.

On the global horizon, worldwide economic growth should turn in its best performance in more than 25 years and reach a 2004-2005 average of 4.5%, thanks to more than two years of expansionist monetary policies in Western countries.  In addition to the synchronization of growth among G7 countries, including Japan, the rapid industrialization of countries such as China and India will exert upward pressure on commodity prices.

For Canada, where exports account for more than one third of GDP, this international economic environment should prove quite beneficial. The Canadian trade balance will therefore bolster economic growth in 2004-2005.  In addition to this contribution from the external sector, domestic demand is vigorous.  As a result, the real estate sector should remain strong, with housing starts exceeding 200,000 units in 2004-2005.  According to Marc Pinsonneault, Senior Economist at National Bank Financial, the factors that underlie residential construction in Canada are strong job creation and low mortgage rates.

As for interest rates, we expect the Canadian and U.S. central banks to adopt a more neutral monetary policy, given the strong recovery in the job market.  According to Clément Gignac, over the next 18 months, the trendsetting rates could be raised by 1.5% in Canada and as much as 2.5% in the United States.  As for mortgage rates, the projected increase should be lower and range between 0.5% and 1%, depending on the term.

For its part, the loonie is expected to rise to as high as US $0.78 by the end of 2005, despite the drop recorded since the beginning of the year.  In fact, for the first time in 20 years, Canada has a higher labour force participation rate and a lower national debt than the United States.  Consequently, the Canadian dollar should regain its upward momentum once the Bank of Canada falls in step with the Federal Reserve.

As for financial markets, the projected upturn in inflation and the tightening of monetary policy by central banks could boost the risk premium demanded by investors, which will have an effect on the bond market. At 6% to 9%, stock market returns in 2004-2005 are expected to be less spectacular than last year and more in line with historical trends.  “In the medium term, investors would be well served to adopt a strategy of portfolio diversification.  This is especially true since current developments in the Middle East constitute an important risk factor hanging over oil prices and the world economic outlook,” said Mr. Gignac.

Economic Outlook for North America

 

2003

2004

2005

 

United States (%)

Real GDP

3.1

4.6

3.5

Unemployment

6.0

5.6

5.5

Inflation

2.3

2.7

2.6

T-bills, 3 months (year end)

0.88

2.35

3.45

Treasuries, 10 years (year end)

4.21

5.13

5.63

 

Canada (%, except where indicated)

Real GDP

2.0

3.0

3.5

Unemployment

7.6

7.2

7.0

Inflation

2.8

2.0

2.3

Housing starts (000s)

220.0

230.0

205.0

T-bills, 3 months (year end)

2.57

2.80

3.50

Treasuries, 10 years (year end)

4.66

5.23

5.63

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

77.13

75.00

78.00

 

Actual GDP by province

Quebec

1.6

3.0

3.2

Ontario

1.3

3.0

3.3

Newfoundland and Labrador

6.5

2.5

2.3

Prince Edward Island

1.9

2.5

2.5

Nova Scotia

0.9

2.3

2.3

New Brunswick

2.6

2.4

2.7

Manitoba

1.4

3.0

3.0

Saskatchewan

4.5

2.7

3.1

Alberta

2.2

3.4

3.8

British Columbia

2.2

3.2

3.8

The audio webcast of the “Economic and Financial Outlook – Summer 2004” will be accessible through the National Bank website at www.nbc.ca/economicoutlook.

About National Bank

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 $84 billion in assets and, together with its subsidiaries, employs nearly 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
Director – Public Relations
National Bank of Canada
Tel.: (514) 394-8644