Press Releases

National Bank Financial Group Economic and Financial Outlook Summer 2008 : Global growth slows

Montreal, 5 June 2008 -

The National Bank team of economists today released its economic and financial outlook for 2008 and 2009.

In recent years the rapid expansion of China, India and other emerging economies has propelled global growth to the neighbourhood of 5%. But in 2008, according to National Bank Senior Economist Yanick Desnoyers, the vigour of the two Asian giants will not suffice to offset the effect of rising world prices for energy and food and a slowing of growth in the G7 countries. Global growth will cool to 3.6% in 2008, slightly below the long-term trend, and 3.2% in 2009.

The U.S. economy, reeling from the spillover of the housing bubble collapse and a financial crisis, will not avoid recession in 2008. Consumer spending will flag as households wrestle with falling home prices, rising food and gasoline prices and heavy accumulated debt, not to mention the demoralizing effect of recent job losses. However, vigorous countermeasures taken by the U.S. central bank, government and regulators are likely to keep the recession mild and its duration limited to a maximum of 8 or 10 months. Recovery in 2009 will be slowed by tight credit and continuing high mortgage rates. A further decline of home prices will be required before the housing sector revives.

Though the Canadian economy is not immune to a moderate U.S. recession, the stress will be cushioned by favourable fundamentals. Canada will do better economically than the U.S. in 2008 and 2009. Domestic demand remains robust, buoyed by high resource prices and a strong labour market. Healthy public finances leave governments with room to apply fiscal stimulus if needed and the Bank of Canada has been administering preventive rate cuts.

In the view of Marc Pinsonneault, also Senior Economist at National Bank, the uneven distribution of natural resources across the country will mean persistent regional disparities. For Ontario, though the term “recession” seems premature at this point, the coming months will be difficult because of rationalization in the automotive industry. In Quebec, a vigorous aerospace industry, massive infrastructure investments now under way and tax cuts now in effect are likely to give the economy somewhat more lift than Ontario’s.

With regard to interest rates, the National Bank economists now believe that the U.S. Federal Reserve, having lowered its policy rate a cumulative 3.25 percentage points since last summer, will probably stay on the sidelines for some time given the concern now expressed by Fed officials about the inflationary potential of U.S. dollar depreciation. The Bank of Canada, meanwhile, is likely to ease further (about half a point) to counter the effect of U.S. slowdown, especially since core inflation seems considerably tamer on this side of the border.

Over the weeks since the Fed’s successful March bailout of the investment bank Bear Stearns, risk premiums in the credit market have narrowed. Clément Gignac, Senior Vice-President, Chief Economist and Strategist of National Bank Financial, believes that capital markets will remain volatile because expectations for corporate earnings are still somewhat excessive. The NBF strategist advises investors to keep in mind that the stock market tends to rebound well before the end of a recession. This prospect suggests that expected returns from U.S. equities are likely to be significantly more attractive in the coming years than they have been in the last two quarters.

In the Canadian equity market, Mr. Gignac continues to recommend a degree of caution because of its very large weight in energy and materials. He sees current resource prices as boosted in part by speculative activity and the desire of various players to hedge against a slide of the U.S. dollar. In the view of the NBF strategist, the investigation into oil futures trading announced last Friday by the Commodities Futures Trading Commission (the U.S. market regulator), together with the Fed’s suddenly manifest concern for the value of the greenback, are likely to trouble speculators trading in resource markets. With emerging countries now gradually abandoning their fuel subsidies and U.S. motorists changing their habits, the growth rate of world oil demand is likely to soon fall below the growth rate of supply, a development likely to bring the price down to $75 or $80 a barrel. This outlook of National Bank economists contrasts sharply with the spectre of $200 oil that some observers have recently raised. Under these conditions, disciplined investors should not hesitate to take profits on resource holdings and deploy the proceeds to more defensive sectors or to other asset classes that have suffered more in recent months from the return of a form of risk aversion.

As for the Canadian dollar, National Bank’s economists predict a trading range between 93 and 98 cents in the next few months, a slight depreciation explained by the expected slowdown in global growth.

Forecasts for North American economies

 

 

2007

2008

2009

United States (%)

Real GDP

- yearly average

2.2

1.2

1.6

 

- Q4/Q4

2.5

0.2

2.7

Unemployment rate

4.6

5.5

6.1

Inflation rate

2.9

3.2

1.8

Target Fedfunds rate (end of year)

4.25

2.0

2.50

10-year Treasuries (end of year)

4.03

3.78

4.55

 

Canada (% unless otherwise indicated)

Real GDP

- yearly average

2.7

1.4

1.8

 

- Q4/Q4

2.8

0.9

1.2

Unemployment rate

6.0

6.0

6.3

Inflation rate

2.2

2.0

2.5

Housing starts (000)

228

212

194

Target overnight rate (end of year)

4.25

2.50

3.25

10-year Canada bonds (end of year)

3.99

3.70

4.30

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

93.2

96.6

100.0

 

Real provincial GDP (%)

Quebec

2.4

1.2

1.2

Ontario

2.1

0.5

1.2

Newfoundland and Labrador

9.1

-2.0

3.7

Prince Edward Island

2.0

2.0

1.8

Nova Scotia

1.6

2.0

1.8

New Brunswick

1.6

1.8

1.4

Manitoba

3.3

3.7

2.5

Saskatchewan

2.8

4.0

2.9

Alberta

3.3

3.0

3.2

British Columbia

3.1

2.4

2.5

The “Economic and Financial Outlook – Summer 2008”document will be available on National Bank’s website at www.nbc.ca/economicoutlook.

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. The 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 $123 billion in assets and. together with its subsidiaries. employs 17.093 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 provided below is for the exclusive use of journalists and other media representatives.):

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