Bank of Montreal 2004 Annual Report Download - page 26

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BMO Financial Group Annual Report 200422
MD&A
Management’s Discussion and Analysis
Economic Developments
The U.S. economy is projected to grow strongly in 2005,
led by business investment in productivity-enhancing capital
equipment. However, the growth rate will moderate from
the rapid pace of 2004 because of past increases in energy
costs and waning support from monetary and fiscal policies.
Housing market activity should cool down as rising interest
rates reduce affordability, thereby lessening demand for
residential mortgages. Conversely, continued strength in
capital spending should stimulate demand for business loans.
Interest rates will likely continue to increase gradually in
2005 as the Federal Reserve reduces the monetary stimulus
in the economy.
Canadian and U.S. Economic Developments in 2004
After slowing markedly in 2003 in response to a series of
shocks, the Canadian economy strengthened in 2004. Consumer
spending led the way, with declining interest rates fostering
a pickup in personal loans. Demand for housing increased,
boosting mortgage growth and residential construction. Business
investment strengthened as rising commodity prices improved
corporate profitability. Export growth rebounded unexpectedly
in 2004 as strong U.S. demand more than offset the negative
effects of a higher Canadian dollar. The strengthening economy
reduced the unemployment rate in 2004, yet inflation stayed
low. The Bank of Canada began raising overnight rates in
September to forestall potential cost pressures as the excess
capacity in the economy diminished.
After accelerating in 2003, U.S. economic growth remained
strong in 2004. Supported by low interest rates and reductions
in personal income taxes, consumer spending moderated only
slightly in the face of rising energy costs. Home sales remained
brisk, hitting record highs in the spring and spurring strong
demand for residential mortgages. Auto sales downshifted mod-
estly from earlier highs, slowing the pace of personal lending.
Business spending gathered momentum in 2004, with the
export-oriented manufacturing sector benefiting from past
weakness in the U.S. dollar. However, demand for business
loans remained tepid as firms continued to finance spending
from their cash flows and by accessing capital markets.
Growing business confidence in the durability of the expansion
has led to a pickup in employment. Although inflation remained
tame in 2004, in the summer the Federal Reserve began
raising overnight rates from 46-year lows to unwind some
of the excessive monetary stimulus. Equity markets retained
their sharp gains of the previous year, supporting BMO’s
brokerage businesses and underwriting activity.
Economic Outlook for 2005
The Canadian economy is expected to grow at a moderate
pace in 2005. Personal spending will continue to benefit from
historically low, albeit rising, interest rates. Business invest-
ment should gather strength amid strong corporate profitability
and increased confidence in the economic expansion. However,
export growth will slow in response to the higher Canadian
dollar. Interest rates should continue to rise gradually toward
more normal levels, while the Canadian dollar is projected
to strengthen further early in fiscal 2005 but pull back in the
second half of the year when commodity prices are expected to
moderate. The economic expansion should support growth
in residential mortgages, personal loans and business lending.
The improved economic climate should stimulate fee-based
investment banking activity.
Canadian and U.S.
Unemployment Rates (%)
Apr
2003
Oct
2003
Apr
2004
Oct
2004
5.8 6.0 6.2 6.0
7.5 7.6 7.7 7.6 7.4
5.6
7. 3
5.5
7. 2
5.5
7.1
5.6
Canada
United States
Canadian and U.S.
Interest Rates (%)
Apr
2003
Oct
2003
Apr
2004
Oct
2004
1.25 1.25 1.00 1.00
2.75
3.14 3.11 2.75 2.65
2.09 2.00
1.00 1.00 1.25
2.35
1.75
Canadian overnight rate
U.S. federal funds rate
Apr
2003
Oct
2003
Apr
2004
Oct
2004
Average Canadian/U.S. Dollar
Exchange Rates
1.55
1.46
1.37 1.35 1.31 1.34 1.34
1.26
Growth in Gross Domestic
Product (%)
2005*2004*20032002
3.4
1.9 2.0
4.4
3.0 2.9 3.2
3.7
*Estimates
Canada
United States
Canadian and U.S. jobless rates
declined moderately in 2004.
Canadian short-term interest rates
have started to follow their U.S.
counterparts higher.
The U.S. dollar continued to weaken
relative to the Canadian dollar.
The Canadian economy is expected
to underperform the U.S. economy for
the third straight year.