News Releases

·         Provinces looking stronger

·         Strong dollar to continue into 2005

·         Growth to match U.S. next year

Historically low interest rates, along with strong commodity prices, will result in a doubling of last year’s Canadian GDP growth levels by the end of 2004, according to the new Outlook 2005 report released today by the BMO Financial Group Economics Department.

Most provinces recovered nicely this year, after squeaking by 2003 in the face of much adversity.  The report states that growth should strengthen further in 2005.

“Considering the number and magnitude of shocks that hit the Canadian economy in 2003, such as SARS, BSE, the stronger dollar, massive forest fires in the west, a hurricane in the Maritimes, and a power blackout in Ontario, it is remarkable that overall growth came in as high as it did,” said Tim O’Neill, Executive Vice-President and Chief Economist, BMO Financial Group.  “With most situations returning to normal in 2004, provincial economic performances have improved.”

Nationally, the trend of solid household spending and upward business investment will send GDP up 3.4 per cent on a fourth-quarter-over-fourth-quarter basis by the end of 2004.  This would represent a doubling of growth relative to 2003.  However, it would also be about one-half of a percentage point below the comparable U.S. growth rate.  As suggested a year ago in Outlook 2004, this under-performance is expected to be largely the result of the strong Canadian dollar.

The strong Canadian dollar is expected to continue into 2005, but the negative impact on exports will be tempered by solid growth of the U.S. economy.  Interest rates are expected to rise, creating an attendant weakening of consumption of durables.  “Nonetheless, monetary conditions will remain sufficiently stimulative that overall growth in consumer activity will continue to expand at a solid 3.0 per cent,” predicted Dr. O’Neill.

The coming rise in interest rates will be a restraining factor on business investment, but the effect is expected to be more than offset by other factors.  High commodity prices and strong domestic demand should encourage businesses to undertake even greater capital expenditure in 2005.  “As a result, business investment is expected to continue to trend higher and thus take a greater role in leading the expansion in 2005,” stated Dr. O’Neill.

In 2005, GDP growth in Canada should hover near the 2004 rate, moving to 3.5 per cent on a fourth-quarter-over-fourth-quarter basis.  Significantly, this pace will be virtually identical to the 3.6 per cent rate expected in the U.S.  This is a consequence of diminishing restraint in Canada from the strong currency and the dampening effect in the U.S. of high oil prices.

Projected economic growth in 2004 and 2005 will be slightly above the economy’s long-run potential.  However, firms will increasingly attempt to respond to demand by raising labour productivity growth rather than taking on more workers.  Thus, after lagging the performance in the U.S. since 2000, productivity in Canada is expected to start to match the U.S. performance in 2005.

In employment, the improvement in productivity will come at the expense of slowing job growth.  The growth rate is expected to come in at 1.3 per cent for 2004, compared to an average of near 2.0 per cent since 2001.  “This in turn will minimize the improvement in the unemployment rate projected to be 7.0 per cent at the end of 2005, little changed from the 7.1 per cent forecast for the end of 2004,” stated Dr. O’Neill.

The full Outlook 2005 report is available at www.bmo.com/economic.

Note: a replay of a press briefing on the Outlook 2005 report, featuring Dr. O’Neill and Robert Hogue, Senior Economist, will be available at 1-888-509-0082

Canadian Regional Outlook at-a-Glance
(All numbers are per cent changes, unless otherwise indicated)

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