National Bank Financial Group

National Bank Financial Group

June 11, 2009 10:04 ET

National Bank Financial Group: Economic and Financial Outlook-Summer 2009

The global economy on the road to recovery

MONTREAL, QUEBEC--(Marketwire - June 11, 2009) - (TSX:NA) - "After the worst downturn in more than 60 years, the global economy is on the mend. Central banks and governments around the world have pulled out all the stops to get global credit markets working again. The unprecedented scope of their programs is bearing fruit," said Stefane Marion, Chief Economist and Strategist of National Bank Financial Group.

"Forceful government action has persuaded markets that the difficulties of the financial system are on the way to being resolved," Mr. Marion said. "The resulting relief-fuelled revival of financial markets has resuscitated business and consumer confidence. Conditions are now in place for a return of global economic growth."

The U.S.: Nearing a turnaround

The second-longest U.S. recession since the 1930s has been marked by a sharp decline of domestic demand and by massive job losses. The severity of the contraction is due in part to the financial crisis and a very severe freeze-up of credit. The Federal Reserve, in its rescue operation, has shown ingenuity and leadership in extending credit and easing quantitatively. The federal government, meanwhile, has opened wide the budget gates with an array of recovery measures. Their impact is now being felt. Recent reports from the economy are considerably less negative and suggest an approaching turnaround. Even the housing sector shows signs of stabilizing. However, although skies are beginning to clear, the next expansion of the U.S. economy will have to navigate a reversal of the leverage effect of the last 10 years, a reversal necessary to restore the health of the financial system and of shaky household finances. In the view of Yanick Desnoyers, Assistant Chief Economist: "Better to be cautious about the coming U.S. recovery and keep one's expectations sober. It will take time to make up the ground lost in GDP and employment." Mr. Marion and his economic and strategy team forecast that the U.S. economy will contract about 2.3% in 2009 and expand 2.4% in 2010.

Canada: Accommodative monetary and fiscal policy

Canada has not escaped the worldwide financial crisis and recession. Its GDP has contracted more than at any time since the early 1990s. Yet despite the recent rise of the unemployment rate, Canada's economy has suffered considerably less than in the last two recessions, those of 1981-82 and 1990-91, thanks to a prompt shift to highly accommodative monetary and fiscal policies. In addition, the enviable solvency of Canadian banks has allowed them to pass on the bulk of monetary policy easing. The state of Canadian household finances is such that our economy will be able to benefit from the U.S. revival that can be expected in the second half of the year. After a probable real contraction of 1.4% this year, National Bank Financial Group economists foresee a Canadian expansion on the order of 2.5% in 2010.

Within this countrywide picture there will be considerable regional variation. In the opinion of Senior Economist Marc Pinsonneault: "Some provinces and some industries have been more sensitive than others to the financial crisis and to shocks from the U.S." In Quebec, substantial government infrastructure investment, combined with resilient domestic demand and diversified export production, will hold the contraction this year to 1.2% . Ontario, home of Canadian automaking, will suffer more because of the unprecedented ordeal of that industry. Its GDP is likely to contract approximately 2%. In Western Canada, the 2009 downturn reflects the effect on investment of the commodity price slide. Firming commodity prices and a stabilizing global economy herald a pickup in 2010. The fastest-growing provincial economy this year will be Manitoba's. The economies of the Atlantic provinces will also sidestep a contraction.

Interest rates: On the rise in 2010

With regard to interest rates, National Bank Financial Group economists expect that global recovery will lead the Bank of Canada to start raising its policy rate in early 2010. The Bank is likely to continue removing accommodation through the year, bringing the policy rate up to the neighbourhood of 2% from the current 0.25% . Even at 2%, monetary policy will remain accommodative. As Mr. Marion put it, "our central bank will take its foot off the accelerator but won't stomp on the brakes." In the bond market, an excessive rise of long-term rates appears improbable. First, because inflationary pressures are likely to be restrained by fairly high excess capacity. Second, because incipient normalization of monetary policy, combined with the well-established credibility of our central bank in matters of inflation control, will check any rise in inflation expectations in a context of healthy Canadian public finances.

Equity indexes worldwide have rallied spectacularly since mid-March, delivering the best three-month return in more than four decades. The run-up has been driven by hopes of economic recovery and of renewed corporate earnings growth as credit markets begin to function more normally. Even with the rise of the stock indexes, price/earnings ratios remain attractive. In the opinion of Financial Markets Strategist Pierre Lapointe: "The market rally is not inconsistent with our outlook for the global economy. We see equity markets as likely to continue trending up in the medium term as investors begin to anticipate the next economic expansion and a return of employment growth.

As for the exchange rate, National Bank Financial Group economists see the Canadian dollar trading between 85 and 90 cents US over the next year. In Mr. Marion's view, "the Canadian dollar remains supported in part by portfolio flows, reflecting fear of a deterioration of U.S. public finances."

Forecasts for the North American Economy

2008 2009 2010
United States (%)
Real GDP 1.1 -2.3 2.4
Unemployment rate 5.8 8.9 9.3
Inflation rate 3.8 -0.1 1.8
Target Fedfunds rate (end of year) 0.13 0.50 2.50
10-year Treasuries (end of year) 2.25 3.91 4.90
Canada (% unless otherwise indicated)
Real GDP 0.4 -1.4 2.5
Unemployment rate 6.2 8.0 8.0
Inflation rate 2.4 0.0 1.8
Housing starts (000) 211 134 155
Target overnight rate (end of year) 1.50 0.25 2.25
10-year Canada bonds (end of year) 2.69 3.62 4.52
Canadian dollar (in U.S. cents, annual average) 93.8 85.0 90.0
Real provincial GDP (%)
Quebec 1.0 -1.2 2.5
Ontario -0.4 -2.0 2.5
Newfoundland and Labrador -0.1 -2.5 1.7
Prince Edward Island 0.9 0.0 2.0
Nova Scotia 2.0 0.2 2.0
New Brunswick 0.0 0.5 2.0
Manitoba 2.4 1.0 2.5
Saskatchewan 4.4 0.6 3.0
Alberta -0.2 -2.0 2.5
British Columbia -0.3 -1.5 3.0

National Bank Financial Group's Economic and Financial Outlook - Summer 2009 is available on its website at

About National Bank of Canada

National Bank of Canada, which is celebrating its 150th anniversary in 2009, 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 close to $138 billion in assets and, together with its subsidiaries, employs 17,343 people. The Bank's securities are listed on the Toronto Stock Exchange (TSX:NA). For more information, visit the Bank's website at

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