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North American Economic Developments in 1999
The U.S. economy’s strong momentum remained intact in 1999. Buoyed by solid growth
in jobs, incomes and stock prices, consumer spending remained high. Home sales
climbed to record levels, while auto sales accelerated. Business spending, especially
on computer equipment, remained strong. The rising demand was met by higher
imports, which contributed to a record trade deficit. The expansion —now in its ninth
year —allowed the unemployment rate to drop to a 29-year low. In addition, inflation
remains surprisingly low despite widespread worker shortages and rising energy
prices. Nonetheless, interest rates have drifted higher in response to the recent tight-
ening by the Federal Reserve.
Benefiting from strong U.S. demand, a low-valued currency and rising resource
prices, the Canadian economy gathered momentum in 1999. Strengthening domestic
demand complemented record-high exports. Home sales and construction trended up
during the year. The expansion allowed the unemployment rate to fall to a nine-year
low. Supported by rising commodity prices and better trade figures, the Canadian
dollar has bounced back from last year’s record lows against the U.S. dollar. The firmer
currency helped to hold down interest rates in the face of rising U.S. rates. In addition,
the Bank of Canada was reluctant to raise interest rates in an environment of tame
price pressures.
Mexico’s sound fundamentals allowed its economy to escape the turmoil that clouded
Brazil’s economic outlook early in the year. Exports were supported by robust U.S.
demand. After depreciating earlier in the year, the peso has stabilized.
Economic Expectations for 2000
We expect U.S. economic growth to slow to 3.3% in 2000 in response to rising interest rates and
slowing stock market gains. Inflation is expected to turn upwards due to emerging wage pressures.
As a result, the Federal Reserve will likely lift interest rates further in 2000.
The Canadian economy is expected to slow to a moderate pace of 3.4% in 2000 in response to
softer U.S. demand and modestly higher interest rates. The still solid pace of activity should allow the
unemployment rate to drift towards 7%. Despite rising energy prices, Canadian inflation will likely
remain subdued in 2000 as a result of spare capacity in the economy. Higher U.S. interest rates will
likely weigh on the Canadian dollar and spur the Bank of Canada to lift interest rates modestly in
the first half of the year.
We expect Mexico’s economic momentum to carry into next year, though growth will be tempered
by slower U.S. demand and political uncertainties. Inflation should continue to trend down, though
remainingindoubledigits.Mexicanfinancialmarketswilllikelyfacegreatervariabilitydue toan
election in 2000. The peso is expected to depreciate given continued high inflation.
Annual Growth in Gross
Domestic Product (%)
(estimates for the
year ending Dec. 31) 1999 2000
Canada 3.8 3.4
United States 3.8 3.3
Mexico 3.2 4.0
Annual Average Exchange Rates
(estimates for the
year ending Dec. 31) 1999 2000
Cdn$/US$ 1.490 1.488
Peso/US$ 9.63 10.71
Economic Outlook
58 Bank of Montreal Group of Companies 1999 Annual Report
($)
0.670.67
0.66
0.65
0.67
0.700.70
0.68
U.S./Canadian Dollar
Exchange Rate
Oct
99
Jul
99
Apr
99
Jan
99
Oct
98
Jul
98
Apr
98
Jan
98
(%)
1.8
1.7
0.6
1.0
Bank of Canada’s
Target Band
1.0
0.8
1.1
2.3
Canadian Inflation Rate
Oct
99
Jul
99
Apr
99
Jan
99
Oct
98
Jul
98
Apr
98
Jan
98
(%)
4.34.34.3
4.6
4.5
4.74.7
4.1
2.2
2.3
1.7
1.5
1.6
1.4
1.7
2.6
U.S. Unemployment
Rate and Consumer
Price Index (CPI)
Oct
99
Jul
99
Apr
99
Jan
99
Oct
98
Jul
98
Apr
98
Jan
98
Unemployment rate
CPI year-over-year % change