National Bank 2006 Economic Outlook: A North American economy on the verge of a slowdown
National Bank’s team of economists today unveiled its conclusions concerning the economic and financial outlook for 2006.
In spite of a less favourable economic climate south of the border, vigorous business investment in the energy sector and the federal government’s highly expansionary budget policy should enable Canada to once again achieve fairly respectable economic growth in 2006 (+2.7%). In such an environment, the Bank of Canada may decide to further raise its key policy rate (50 basis point increase) in order to move federal monetary policy to a less accommodating stance.
Due to Canada’s strong natural resource base and its public finances, which are the envy of the other G-7 countries, the Canadian dollar should remain in the sights of international investors (expected range of US$0.85 to US$0.88). Ontario and Quebec, which are more sensitive to the flight of the loonie because of the size of their manufacturing sectors, should record growth below the national average.
Global economic activity, measured in terms of GDP, increased once again in 2005 (4.3%), a level far higher than the long-term trend (around 3.5 %). Growth was again fuelled primarily by China and the United States. However, insofar as this expansion is being accompanied by a marked deterioration in the trade imbalances between these two countries, there is some question as to its stability. Unless macroeconomic policies are quickly adopted to reduce the high savings rate in Asia, we could see a significant deceleration in global economic activity by 2007, reflecting a slowdown in the pace of activity originating from the U.S. economy.
In the United States, the real estate sector is showing increasing signs of speculative fever: the median house price has rocketed by more than 55% in five years and more than a third of transactions on the secondary market are related to the purchase of a second home or carried out for speculative purposes. In a new development in 2005, first homebuyers are gradually being pushed out of the market and the home ownership rate has started to level off, which means that a major supply-and-demand imbalance in the U.S. real estate sector could be brewing on the horizon. The new construction and resale markets may therefore cool down in the near future, drying up real estate wealth along the way. Given such an environment, American households will likely feel driven to replenish their savings to the detriment of consumer spending, which is expected to increase by less than 2%, the lowest level in 15 years.
Fortunately, as inflationary expectations are still modest, the Fed may, if necessary, initiate a shift in its monetary policy in order to ensure a smooth landing for the U.S. economy. Due to massive public and private investment, the economy should nonetheless be able to achieve growth of 2.5% to 3.0%.
An anticipated further deterioration in the U.S. fiscal position in the presence of a record trade deficit will cause some volatility in the financial markets. After the Fed has completed its monetary tightening campaign, the U.S. greenback should once again be subject to downward pressures.
In light of the Canadian stock market’s exceptional performance in 2005, which was attributable to the soaring price of energy stocks, National Bank Financial’s strategist, Clément Gignac, believes that the potential for appreciation in the Canadian stock market is limited over the short term, and that foreign markets offer a better risk/return ratio at this stage of the economic cycle.
Table – North American Economic Forecasts
The webcast presentation of the “2006 Economic and Financial Outlook” is available on the National Bank website at www.nbc.ca/economicoutlook.
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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 $108 billion in assets and, together with its subsidiaries, employs 16,890 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.
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