Press Releases

National Bank Economic and Financial Outlook - Summer 2006: Synchronized rate hikes to lead to slowdown in 2007

Montreal, 22 June 2006 -

The National Bank’s team of economists today released the Economic and Financial Outlook – Summer 2006 presenting their projections for the economy.

Given the strong surge from emerging Asian economies, the world economy is expected to experience solid GDP growth in 2006 of 4.5%, which far exceeds its historic trend of about 3.5%.  However, the current synchronized monetary tightening by central banks worldwide should lead to a deceleration in economic activity as of 2007. 

Despite some of the most solid fundamentals in the G7, Canada will not be fully sheltered from headwinds and regional disparities should be further accentuated.  For example, Newfoundland and Labrador is expected to be the leader among the provinces with GDP growth of 6% in 2006, while Quebec will bring up the rear with a modest increase of 2%.

Global economy
The global economy is enjoying its best growth streak in more than 30 years.  But what is different this time is that growth seems to be more evenly distributed than in recent years, when the world economy had to rely on China and the United States to be its engines of growth.  In China, activity is so robust that authorities have been forced to adopt restrictive measures in order to prevent the economy from overheating.  The economic recovery in Japan has picked up steam and now appears sustainable.  With corrosive deflation a thing of the past, the Bank of Japan is expected to put an end to its ultra-expansionist monetary policy by raising its key rate from the current level of 0%.  In the euro zone, the recovery has gained momentum, which will likely mean that the European Central Bank will be pushing real rates back up closer to their historical levels.

In the United States, the sudden upsurge in inflation expectations has the Fed worried and could lead to further tightening, which would make the real estate sector even more fragile.  With house prices likely to drop in the coming months in regions where they had reached speculative heights, U.S. households should start to curb their spending.  In the opinion of the Bank’s economists, this combination of rate hikes and a cooler housing market should pave the way for an extended period of modest U.S. economic growth, albeit below potential GDP levels. 

According to Clément Gignac, Chief Economist at National Bank and its subsidiaries and Chief Strategist at National Bank Financial, Canada’s solid economic fundamentals are the dream of many an industrialized nation and without a doubt the best the country has seen in 50 years, making for an environment that should push the loonie close to parity by the end of 2007, given the currency realignment now under way.  While some exporters have had a hard time remaining competitive with the stronger dollar, most have adapted fairly well to this new reality and are enjoying exceptionally heavy global demand for their products, as evidenced by the 50-year high in Canadian corporate profits.  However, the uneven distribution of natural resources among the regions is contributing to growing regional disparity, making the job of monetary authorities and governments all the more difficult.  With the economy running at full capacity and inflation well over the central bank’s 2% target, the Bank of Canada is expected to ratchet up its target rate again this summer.

Financial markets
After showing a keen interest for the last four years in higher risk financial instruments such as emerging country securities, small caps and commodity funds, investors seem to have been caught off guard by the Fed’s recent change of tune.  In anticipation of a global economic slowdown and lower profits further to synchronized monetary tightening worldwide, capital markets have become significantly more volatile and investors more risk-averse.

With the Canadian market’s strong showing since its low of 2002 and the predominance of the resource sector, “the potential for further market growth is limited in the short term,” explained Clément Gignac, who maintains a target of 10,500 for the S&P/TSX by the end of the year.  “Canadian bonds and large foreign multinationals in non-cyclical sectors offer a better risk/return ratio at this stage of the business cycle.  Diversification in terms of both geographical location and asset class is still the key to long-term success,” concluded Mr. Gignac.

Economic projections for North America

The webcast of the Economic and Financial Outlook – Summer 2006 is accessible from the Bank’s website at

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 $110 billion in assets and, together with its subsidiaries, employs 16,955 people. The Bank’s securities are listed on the Toronto Stock Exchange (NA:TSX). For more information, visit the Bank’s website

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

Josée Lagacé
Public Relations
National Bank of Canada
Tel.: (514) 394-6500

Clément Gignac
Chief Economist of the National Bank and its subsidiaries
Senior Vice-President and Strategist at National Bank Financial
Tel.: (514) 879-5584

Marc Pinsonneault
Senior Economist
National Bank Financial
Tel.: (514) 879-2589