BMO Financial Group

BMO Financial Group
BMO Harris Private Banking

BMO Harris Private Banking

November 20, 2012 06:00 ET

BMO Harris Private Banking Market Outlook: Expected Moderate Economic Growth in Early 2013 Instils Investor Confidence

- U.S. job market improves as economy gains momentum

- Canadian economy should see modest growth over the next 12 months

- Divided Congress will reach bipartisan compromise to avoid a fiscal cliff

- Germany feeling effects of Eurozone debt crisis

TORONTO, ONTARIO--(Marketwire - Nov. 20, 2012) - While President Barack Obama prepares to deal with the looming fiscal cliff, according to BMO Harris Private Banking's latest Market Outlook Commentary Report the U.S. market has continued to strengthen and moderate growth is expected in early 2013. The report also notes that the Canadian economy will likely see moderate economic growth over the next 12 months as well as modest but positive equity market returns that will outpace fixed income investment.

Additional highlights from the report include:

The U.S.

Although North American markets (particularly the energy sector) fell sharply immediately following the recent U.S. election, President Obama's return to office will ensure consistency in U.S. monetary policy and encourage economic growth in 2013:

  • The job market is improving noticeably, suggesting the economy is gathering steam.
  • Corporate earnings, while positive, were not robust in Q3 and are expected to remain relatively flat over the next 12 to 18 months.
  • Equities will remain an attractive asset class compared to bonds.
  • U.S. GDP will likely rise by about two per cent.

"Though events in China and the Eurozone had major impacts on world markets in 2012, the United States will be the dominant force in early 2013," said Richard Mason, Head of Investment Management, BMO Harris Private Banking. "As President Obama focuses his immediate attention on healthcare, creating more jobs, and addressing the fiscal cliff so as to avoid another recession, a growth oriented environment should emerge."

The Fiscal Cliff

As a result of The Budget Control Act, about USD $600 billion in automatic spending cuts and tax increases are set to take effect early in 2013. If not amended, this could have a negative impact on U.S. economic growth and a ripple effect in Canada and around the world.

  • The divided Congress will have to work out a bipartisan compromise to avoid economic upheaval, agreeing on a resolution or temporary solutions to buy more time for negotiations.
  • Necessary tax and entitlement reforms should begin in 2013, in order to drive a sustainable long-term budget.
  • The result would be a decreasing deficit over the next few years, bringing down the U.S. federal debt-to-GDP ratio.

"The first spending cuts and tax increases are set for the first week in January, and with this deadline drawing nearer we believe the Democrats and Republicans are likely to collaborate - given the urgency - to avoid the worsening of the financial situation," said Mr. Mason. "Following his election win, the President has been taking a more conciliatory approach with House Republicans and, if continued, this will increase the chances of a successful outcome."

The Eurozone

Greek protestors recently took to the streets to rally against the government's decision to cut government wages and benefits in order to qualify for European bailout funds. ON the same day, the European Central Bank announced Germany's economy is beginning to suffer under the weight of the European debt crisis.

"Throughout Europe's recent financial troubles Germany has always remained economically robust, yet its economy is starting to slow," said Mr. Mason. "While the equity markets' recent slump is of some concern, we believe it will likely rebound as investors gain more clarity on the Greek austerity vote and as a consensus builds around the U.S.'s bipartisan agreement."

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