BMO Financial Group

BMO Financial Group

August 12, 2011 13:47 ET

BMO Chief Economist Lowers U.S. Growth Forecast, but Confident AAA Rating will be Restored

- No double dip recession in U.S.

- Job growth key to economic rebound

- Valuations in the stock market attractive

TORONTO, ONTARIO and CHICAGO, ILLINOIS--(Marketwire - Aug. 12, 2011) - Dr. Sherry Cooper, Chief Economist, BMO Financial Group, today announced a downward revision in BMO Economics' growth forecast for the United States, but expressed confidence in U.S. prospects in the next two years and predicted that the government's AAA rating would eventually be restored. Dr. Cooper made the comments during a media conference call, which also featured BMO Harris Private Banking Chief Investment Officer Paul Taylor.

"Washington has got the message about the need for fiscal adjustment," Dr. Cooper said, "and the United States has the wherewithal to honor its debt obligations. There will be no default."

While there is a debate on revenue increases versus spending cuts, Dr. Cooper stressed that the key to bringing the budget back into balance is job growth. "Banks have to fulfill their responsibility to support the recovery, and businesses have to invest. Increased consumer spending will trigger rising order books, production and hiring. With corporate earnings at near-record levels and cash balances huge, businesses will boost hiring once confidence improves."

While BMO had been forecasting the U.S. GDP to increase 2.5 per cent this year and 3 per cent next year, taking historical revisions into account and a slower outlook for this year's second half, the forecast now calls for 1.7 per cent growth in 2011 and 2.5 per cent in 2012. Meanwhile, Canada's economy is now expected to grow 2.4 per cent in 2011 and 2.3 per cent in 2012.

Dr. Cooper noted 2.5 per cent growth in the U.S. for next year is relatively healthy given the recent developments and predicted that there would not be a double dip recession.

Paul Taylor noted there has been a change in market tone over the past four weeks. "The direction that equity markets have taken has shifted from a direct focus on the strength of the stimulus-led U.S. economic recovery to a focus on management of the 'global debt supercycle' in the U.S. and Europe."

According to Mr. Taylor, a correction in the stock market has made valuations more attractive. He noted US and Canadian equity markets have price-to-earnings multiples of 12.5 and 13.8 times respectively, which is very cheap when viewed against long-term norms.

Mr. Taylor outlined a strategy for investors going forward. "Based on limited visibility on the intermediate economic implications of the Europe and US debt debates, it is too soon to make a dramatic shift back into equities. A better strategy is to opportunistically add to positions of quality stocks, where value exists regardless of external environment and where valuations due to recent market volatility are compelling."

A recording of the conference call can be accessed for the next 7 days by calling 905-694-9451 (Toronto) or 1-800-408-3053 (North America) and using passcode # 2155288.

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