National Bank Financial Group

National Bank Financial Group

December 18, 2008 10:27 ET

National Bank Financial Group Economic and Financial Outlook, Winter 2009

World economy pulling back

MONTREAL, QUEBEC--(Marketwire - Dec. 18, 2008) - The National Bank Financial Group (TSX:NA) team of economists today released its economic and financial outlook for 2008 and 2009.

The world economic outlook has grown dimmer in recent months. The financial crisis has undermined the functioning of the world credit markets and provoked a significant tightening of lending conditions for consumers and businesses. According to Stefane Marion, Chief Economist and Strategist, "Even if deleveraging and forced asset sales let up in the months ahead, which is likely, we do not expect the world economy to expand by more than 1.6% in 2009". As it happens, according to the International Monetary Fund, world economic growth below 3% signifies a recession.

In the United States, the housing crisis now its third year pushed the country into a consumer-led recession officially begun in December 2007. The slump in the real estate sector also spawned a worldwide financial crisis, which grew worse in the second half of 2008, dragging the other blocks of industrialized nations into recession as well. The emerging and developing economies have been caught in the wake. According to Yanick Desnoyers, Assistant Chief Economist, "The emerging economies are still overly dependent on the industrialized economies. The economic decoupling theory is slowly but surely fizzling out".

The U.S. recession should last until mid-2009, that is, 18 to 20 months in all, which would make it the second longest in 80 years. This unusual duration is due to the fact that U.S. households must reduce their indebtedness significantly in the face of an employment market that has shed almost two million jobs to date. Though the Federal Reserve has slashed its key rate from 5.25% to nearly 0% since September 2007, the financial crisis has generated an increase in risk premiums and a credit crunch that continues to thwart monetary policy transmission. Luckily, the Federal Reserve and the U.S. Treasury have taken exceptional action in the past few months to assure the solvency of the financial system and to inject liquidity directly into the economy in a bid to revive the credit markets. Moreover, the new administration has announced a recovery plan via budget stimulus measures on an ambitious scale early next year.

Thanks to these measures, plus those taken in concert by the authorities of the leading industrialized countries, we can expect the world economy to recover in 2009.

Canada remains less affected than other countries by the financial crisis owing to relatively conservative financial practices, which earned its banking system top honours in terms of solvency among 134 countries examined by the World Economic Forum. This notwithstanding, as a result of the recession hitting many of our key trade partners and the decline in commodity prices, a technical recession (two consecutive quarters of negative growth) seems inevitable. However, Canada should not suffer a deep downturn, as a very accommodating monetary policy and substantial budget stimulus measures from Ottawa will help sustain domestic demand.

According to Marc Pinsonneault, Senior Economist, all regions will feel the effects of the U.S. slowdown and the drop in commodity prices. Though domestic demand will surely grow at a slower pace in Quebec, GDP will remain afloat in 2009 thanks to a sizeable backlog of orders in the aeronautics sector and the intensification of government investment in infrastructure. In Ontario, the sharp decrease in exports in the auto sector will bring about a contraction in the economy, whereas in Alberta, the decline in energy prices has interrupted the economic boom. Finally, the completion of large-scale construction projects will render the impact of the global slowdown more patent in British Columbia and the Maritime Provinces.

Where interest rates are concerned, the Financial Group's economists are of the opinion that an environment of historically low interest rates will persist in 2009.

As for the financial markets, Market Strategist Pierre Lapointe observed that the current bear market was the most devastating since the 1930s. In addition, market volatility reached new extremes in 2008. It is important to bear in mind, however, that volatility and downside risk are two different notions. According to Mr. Marion, the stock markets have already discounted a great deal of bad news, to the point that downside risks have abated considerably. The substantial injection of liquidity by the monetary and budget authorities of numerous countries should begin to take effect, thus contributing to normalize the credit market over the coming months. Under these circumstances, it should come as no surprise if the world's stock markets set the tone in the first half of the year ahead of the onset of the economic recovery.

Regarding exchange rates, the Financial Group's economists believe that the Canadian dollar should hold between US$0.78 and US$0.82 in 2009, that is, in the vicinity of its balanced level as determined by the OECD.

Forecasts for North American economies

2007 2008 2009

United States (%)
Real GDP 2.0 1.3 -0.3
Unemployment rate 4.6 5.7 8.0
Inflation rate 2.9 3.9 -0.2
Target Fedfunds rate (end of year) 4.25 0.13 0.13
10-year Treasuries (end of year) 4.04 2.22 3.15

Canada (% unless otherwise indicated)
Real GDP 2.7 0.7 0.0
Unemployment rate 6.0 6.1 7.0
Inflation rate 2.2 2.2 0.1
Housing starts (000) 228 213 173
Target overnight rate (end of year) 4.25 1.50 1.50
10-year Canada bonds (end of year) 3.99 2.87 3.57
Canadian dollar (in U.S. cents,
annual average) 93.2 96.2 81.0

Real provincial GDP (%)
Quebec 2.6 0.7 0.2
Ontario 2.3 0.1 (0.8)
Newfoundland and Labrador 9.1 0.6 (1.3)
Prince Edward Island 2.4 0.5 0.4
Nova Scotia 1.7 1.5 0.4
New Brunswick 1.7 1.0 0.2
Manitoba 3.3 2.5 1.4
Saskatchewan 2.5 4.4 2.6
Alberta 3.1 1.0 0.9
British Columbia 3.0 1.0 0.9

The "Economic and Financial Outlook - Winter 2009" document will be available on National 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. 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 $129 billion in assets and, together with its subsidiaries, employs 17,146 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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