Press Releases

National Bank Economic Outlook – Summer 2005: Western Provinces at the Top of the Podium

Montreal, 21 June 2005 -

While the world economy is poised for a slowdown, the Canadian economy should still do well, with growth expected to come in at 3% or more in 2005 and 2006. The federal government’s expansionary budget and relatively low interest rates will continue to stimulate domestic demand and offset weakness in the foreign sector. The central provinces, and Quebec in particular, have been smarting from the stronger dollar, but should get some relief in 2006. The Western provinces, however, will post an above-average performance thanks to countless energy and infrastructure projects, says Clément Gignac, National Bank’s Chief Economist and Senior Vice-President and Strategist at National Bank Financial. 

World economy
After three years of strong growth, world economic activity is expected to wind down owing to elevated oil prices and monetary tightening in a number of countries.    According to forecasts, global economic growth will likely fall from 4.3% in 2005 to 3.6% in 2006, the average for the past 30 years.

However, growth on the international stage is unevenly distributed with two countries, the United States and China, accounting for almost half of all growth:   Tumbling long-term interest rates in the United States are hampering the Fed’s monetary policy, which could prompt the central bank to continue raising its key rate into next year in order to prevent the real estate market from overheating and avoid a resurgence in inflation. In China, the impact of the administrative measures implemented to rein in growth in certain sectors of activity will be magnified by the reduction of monetary stimulus in the United States, one of its chief export markets.  

U.S. economic growth, driven by improvements in the labour market and unprecedented wealth attributable to home equity, will move the Fed to raise its key rate from 3% to 4% by year-end, and to 4.5% in 2006. In Canada, lower excess capacity will lead the Bank of Canada to go back to raising interest rates, Mr. Gignac predicts. Although the rate could be ratcheted up 100 basis points in the coming year, the Bank of Canada will be less aggressive than its U.S. counterpart, keeping significant spreads with the United States.

Canadian dollar and housing starts
The slower pace of the Chinese economy and negative interest rate spreads between Canada and the United States, which will widen over the next 12 months, should limit the Canadian dollar’s potential to appreciate and help stabilize the trade surplus. Given these conditions, Mr. Gignac believes that the Canadian dollar could trade around 77-78¢ in 2006, which is close to its long-term equilibrium value.

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 moderating home prices and low interest rates. 

Financial markets
Financial markets, for their part, will have to deal with further tightening by the Federal Reserve and, at the same time, greater volatility for stocks and bonds.   Following the recent upturn in the Canadian stock market and the surge in energy securities, National Bank Financial’s Strategist feels that the Canadian market is running out of room to grow and the U.S. market now offers a better risk-return ratio.

Economic Outlook for North America

 

2004

2005

2006

United States (%)

 

 

 

Real GDP

4.4

3.6

3.4

Unemployment rate

5.5

5.1

5.0

Inflation rate

2.7

3.2

2.7

3-month Treasury bills (end of year)

2.18

4.08

4.33

10-year Treasuries (end of year)

4.22

4.65

4.75

Canada (% unless otherwise indicated)

 

 

 

Real GDP

2.9

3.0

3.2

Unemployment rate

7.2

6.8

6.9

Inflation rate

1.8

2.1

2.2

Housing starts (000)

232

216

198

3-month Treasury bills (end of year)

2.46

3.17

4.37

10-year Canada bonds (end of year)

4.30

4.37

4.69

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

76.83

80.65

77.00

Real provincial GDP (%)

 

 

 

Quebec

2.2

2.3

2.7

Ontario

2.6

2.7

2.9

Newfoundland and Labrador

(0.7)

2.0

5.5

Prince Edward Island

1.7

1.9

1.9

Nova Scotia

1.3

2.0

2.3

New Brunswick

2.6

2.3

2.3

Manitoba

2.3

3.2

3.1

Saskatchewan

3.5

3.5

3.2

Alberta

3.7

4.4

4.1

British Columbia

3.9

3.8

3.7

The webcast on the “Economic and Financial Outlook – Summer 2005” will be accessible through the National Bank website atwww.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 $100 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 atwww.nbc.ca.

Information (The telephone number provided below is for the exclusive use of journalists and other media representatives):

Denis Dubé
Manager, Public Relations
National Bank of Canada
Tel.: (514) 394-8644