Economic News/Trends and Analysis — March 22, 2010

The economies are improving, but that does not quell all concerns, according to Desjardins Group economists

Financial markets are getting into position for the upcoming rate hikes

LÉVIS, QC, March 22 /CNW Telbec/ - According to the Desjardins Group Economic Studies, the recent economic performances by a number of countries, especially Canada and the United States, are good news. Although the trend is still for a timid recovery, the economic and financial scenarios are showing a little more optimism. "The financial markets have done well in absorbing the recent debt crisis in some countries and are now focusing on the upcoming interest rate increases," stated François Dupuis, Desjardins Group Vice-President and Chief Economist.

North America showing surprising growth

"Unlike the United States, where the inventory change has played a big role in economic growth at the end of 2009, Canada is benefiting from fairly robust domestic demand," emphasizes Yves St-Maurice, Director and Deputy Chief Economist at Desjardins Group. He reminds us that employment is back up, fostering consumption, and that public investments are benefiting from the ongoing recovery plans. Only foreign trade will be a drag on the pace, hurt by imports that continue to rise more quickly than exports, he believes. According to him, Canada did suffer in the last recession but, unlike many countries, its foundations were not shaken too much, allowing it to get back on its feet quickly. "Canada's strong financial institutions, a real estate market that is not too far out of balance, and governments that made the right decisions at the right time are now encouraging the Canadian economy to get back to a more normal situation," says Mr. St-Maurice. In these conditions, Desjardins economists forecast that Canada should see real GDP growth of 3.0% in 2010 and 2.9% in 2011.

As far as Québec is concerned, they believe that a tight fiscal and budgetary policy from the government is expected, which will temper the upswing by consumption and the real estate market. In this context, Québec's real GDP should grow by 2.4% in 2010 and 2.6% in 2011. On the other hand, Ontario and British Columbia will be the Canadian champions for growth in 2010, with real GDP increases of 3.3%. The real estate market's strong recovery will stimulate housing construction in Ontario, while the automobile sector will gain strength. Bolstered by holding the Olympic Games, British Columbia will also see its real estate market make a strong comeback. Alberta and Newfoundland and Labrador will benefit from rising oil prices and renewed investment in this industry, posting respective increases of 2.8% and 3.0% in 2010. However, together, the Atlantic Provinces will post the worst performance in Canada, with growth of 2.2% in 2010. The situation will be quite different in 2011, when all the Canadian provinces, except for British Columbia and Ontario, will record stronger growth.

Although the world's economic performance will be uneven across the regions, the global real GDP will go from a contraction of 1.4% in 2009 to an increase of 3.7% in 2010 and 3.8% in 2011. In this context, Desjardins Group economists believe that commodity prices will stay firm, even if the supply is big enough to meet the increased demand. According to them, oil prices should end 2010 at around US$90, then cross the US$100 mark during the following year.

The recovery continues in the United States, but it is still not creating jobs. The real estate market should show some tepid improvement in the next few months while consumers, whose sentiment has been leaning toward savings and paying off debt, will still be a little more inclined to untie their purse strings. "Overall, the recovery will be tempered by the ongoing structural adjustments; real GDP should grow by 2.7% in 2010. The gradual withdrawal of government recovery measures should take growth to 2.4% in 2011," added Mr. St-Maurice.

Canadian rate increases as of this summer

The Bank of Canada repeated its commitment to keeping its key rate where it is until June. The Bank of Canada's credibility depends on respecting this commitment. However, it should shift into action as of its July meeting, ordering a probable rate hike of 25 basis points, which will be repeated for several subsequent meetings. Consequently, Desjardins Group economists believe that the key rate should crest at 2.50% in the second half of 2011. According to them, the solid performance by Canadian domestic demand will make this action necessary to ensure that inflation targets are met in the following years.

Like Europe and the United Kingdom, the United States will not be strong enough to cope with rate hikes in 2010. This also means that, for a while, short-term rate spreads between Canada and the United States will increase, putting pressure on the exchange rate. Moreover, the loonie should hit parity very shortly, slowly rising to US$1.04 in the fall of 2011. "The exchange rate's volatility and potential impact on foreign trade could, however, become a concern for the Bank of Canada, prompting it to rethink the sequence of forecast key interest rate increases," estimates Mr. St-Maurice, who points out that the phrase "Dutch disease", which describes the negative impacts of rapid currency appreciation on a country's manufacturing sector, could regain popularity.

As for the stock markets, Desjardins Group economists predict that they will keep up their momentum in 2011, encouraged by improving economic conditions and corporate profits. However, they will not be able to repeat 2009's outstanding performance. The S&P500 should post growth of 13.4% in 2010 and 7.9% in 2011. The S&P/TSX's growth will be slightly slower, at 11.5% and 9.4% respectively. "All in all, over the next 24 months, the planet will be going through a period of intense rebalancing, to get closer to the fundamental principles that govern a sound economy. This will be the best guarantee of lasting prosperity," they concluded.

For more information, consult the most recent study at the following address: (www.desjardins.com/en/a_propos/etudes_economiques/previsions/financieres_trimestrielles/).

About Desjardins Group

Desjardins Group is the largest cooperative financial group in Canada and the sixth largest in the world, with assets of $157 billion. Drawing on the strength of its caisse network in Québec and Ontario, and its subsidiaries across Canada, it offers a full range of financial products and services to its 5.8 million members and clients. Desjardins specializes in Wealth Management and Life and Health Insurance, in Property and Casualty insurance, in Personal Services, in Business and Institutional Services. As one of the largest employers in the country, Desjardins is supported by the skills of its 42,200 employees and the commitment of over 6,200 elected officers. For more information, visit www.desjardins.com.

For further information: (for journalists only): Francine BlackBurn, Advisor, Media Relations, (514) 281-7275, 1-866-866-7000, ext. 7275; François Dupuis, Vice-president and Chief Economist, (514) 281-7000, 1-866-866-7000, ext. 7322; Yves St-Maurice, Director and Deputy Chief Economist, (514) 281-7000, 1-866-866-7000, ext. 7009

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