BMO Financial Group

BMO Financial Group

September 07, 2012 11:58 ET

North American Economy to Pick Up Modestly in 2013-BMO Economics

- Two per cent growth rate in 2012 should improve through next year

- Canadian growth to reach 2.4 per cent by end of 2013, U.S. growth to hit 2.8 per cent

- Federal Reserve likely to act to reduce longer-term interest rates; Bank of Canada to hold the line until late 2013

- Canadian dollar benefiting from higher commodity prices and steady capital inflows

CHICAGO, ILLINOIS and TORONTO, ONTARIO--(Marketwire - Sept. 7, 2012) - The North American economy should grow two per cent this year and improve through 2013, with a strong performance from commercial construction in Canada and residential building in the U.S., according to the North American Outlook released by BMO Economics.


According to the report, Canada's economy is on track to grow two per cent this year and should improve modestly through 2013 - reaching 2.4 per cent by the end of the year. "On the positive side, business investment, though moderating, continues to lead the expansion," said Sal Guatieri, Senior Economist, BMO Capital Markets. "Commercial construction is supported by low vacancy rates, and companies are taking advantage of the strong loonie to buy productivity-enhancing equipment."

Other factors include:

  • Elevated commodity prices will continue to drive investment in Alberta, Saskatchewan, and Newfoundland & Labrador.
  • Central Canada and the other Atlantic Provinces will face challenges with the strong currency and weak global demand.
  • With the exception of autos, consumer spending has moderated in the face of high household debt, tepid job growth and rising cross-border shopping.
  • Personal loan growth has slowed the most in two decades, and the trade deficit continues to widen due to a strong dollar and weak external demand.

The Canadian dollar is expected to trade close to parity against the greenback in the year ahead, benefiting from elevated commodity prices and steady capital inflows. "For those businesses looking to upgrade their processes, technology, and equipment to boost their productivity, the high value of the Canadian dollar can provide them with additional purchasing power when importing this equipment and purchasing supplies and inventory from the global market," said Cathy Pin, Vice President, BMO Commercial Banking. "We encourage businesses to take advantage of the additional $10 billion in credit available from BMO."

Mr. Guatieri noted that recent mortgage and credit rule changes will restrain household debt growth, leading to a further moderation in consumer spending and housing market activity and stabilizing home prices in most regions. The notable exceptions will be British Columbia and Toronto, where high valuations point to weaker prices ahead.

The outlook for interest rates indicates that modest growth, low inflation, a strong currency, and tighter credit rules add extra incentive for the Bank of Canada to maintain the current low-rate policy. "Further Fed easing should encourage the Bank of Canada to hold overnight rates steady at one per cent for somewhat longer than we previously thought, likely until autumn 2013," added Mr. Guatieri.

United States

The modest growth of two per cent for 2012 in the U.S. will pick up through 2013 amid improved household finances and a strengthening housing recovery. Growth is expected to reach 2.8 per cent by the end of 2013.

"Home sales and starts have picked up from depressed levels, supported by record-low mortgage rates, pent-up demand and investor interest," noted Mr. Guatieri. "House prices are rising, lifting household wealth and encouraging first-time buyers to take the plunge. Rising house and equity values should allow households to soon recover the rest of the $16 trillion in wealth that was lost during the Great Recession."

Other factors include:

  • Residential construction is now leading the expansion.
  • Housing starts are still about 40 per cent below demographic needs, suggesting plenty of running room for residential construction to lead the expansion.

Because of elevated unemployment, "we now expect the U.S. Fed will delay any rate hikes until mid 2015," said Mr. Guatieri.

Mr. Guatieri noted that several risks to the North American economy remain, including a possible Eurozone breakup, pending spending cuts and tax increases in the U.S., a sharp correction in the Vancouver and Toronto housing markets and the potential for a hard landing in China.

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