Bank of Montreal 2012 Annual Report Download - page 33

MD&A
MANAGEMENT’S DISCUSSION AND ANALYSIS
Economic Developments
Economic and Financial Services Developments in 2012
After moderating in 2011, economic growth in Canada slowed further to
approximately 2.1% in 2012, with the unemployment rate remaining
above 7%. Weak global demand and a strong currency restrained
exports, while elevated cumulative levels of consumer debt curbed
personal loan growth and spending in 2012. Housing market activity and
residential mortgage growth remained firm in the first half of the year,
before slowing in response to more restrictive mortgage rules. Business
investment stayed strong, with support from robust resource prices and
low interest rates, resulting in a pickup in the growth of short-term
loans and non-residential mortgages. Personal deposit growth
strengthened, in part reflecting nervousness about the European
sovereign debt situation and a slowing global economy. In contrast,
business deposit growth moderated in response to slower earnings and
low interest rates. The Bank of Canada held its overnight rate target at
1% for a second consecutive year, while longer-term rates decreased in
response to easing in monetary policies in other countries.
Economic growth in the United States remained modest at approx-
imately 2.2% in 2012. Business investment stayed healthy and resi-
dential construction improved on firmer home sales. However, job
growth was restrained as a result of unease over the global outlook and
domestic fiscal challenges, which undermined consumer spending.
While demand for consumer credit improved, tighter lending standards
held back residential mortgage growth. The Federal Reserve maintained
its near-zero rate policy and restarted its asset-purchase program to
reduce longer-term interest rates. In the Midwest, where most of our
U.S. operations are located, the economy grew modestly in 2012, with
firm business investment, rising automobile production and the shale-oil
boom in North Dakota in part offsetting weak government spending and
reduced crop production resulting from a severe drought.
Economic and Financial Services Outlook for 2013
Assuming European credit difficulties are contained and U.S. lawmakers
agree to defer most of the tax increases and spending cuts that are
scheduled to take effect in 2013, the Canadian economy should grow at
a modest rate of 2.0% in the coming year. Elevated commodity prices
should support growth in Newfoundland & Labrador and the resource-
producing provinces in Western Canada. Business investment should
remain healthy in these regions, bolstering business loan growth.
However, high levels of household debt and tighter credit rules will
likely continue to inhibit consumer spending and housing market activ-
ity, restraining personal loan and mortgage growth. A strong Canadian
dollar is expected to continue to challenge exporters and manufacturers.
The modest growth environment should keep the unemployment rate
slightly above 7%, encouraging the Bank of Canada to hold interest
rates steady until late in the year.
The U.S. economy is projected to grow at a moderate rate of 2.3%
in 2013, though activity should strengthen through the year. Low
interest rates, improved household finances and pent-up demand should
support consumer spending and the recovery in housing markets,
encouraging a pickup in personal loan and mortgage growth. Lower
vacancy rates for commercial and industrial properties should sustain
growth in non-residential construction, while low interest rates are
expected to continue to support business investment and loan growth.
Tighter fiscal policies, however, will likely restrain the expansion. The
U.S. Midwest economy is expected to grow at a moderate rate in 2013,
supported by rising automobile production.
Note: Data points are averages for the month or year, as appropriate. References to years are
calendar years, except as noted.
The Canadian and U.S. economies
are expected to grow moderately
in 2013, improving as the year
progresses.
Unemployment rates in Canada and
the United States are expected to
decline modestly in 2013.
Real Growth in Gross
Domestic Product
(%)
Canada
United States
*Forecast
Homebuilding should moderate
in Canada but strengthen in the
United States in 2013.
*Forecast
Inflation is expected to remain low
and relatively steady in 2013.
2.6
2.1 2.2 2.0
2.3
1.8
3.2
2.4
Canadian and U.S.
Unemployment Rates
(%)
Canada
United States
*Forecast
100
150
200
250
500
1500
1000
2000
Housing Starts
(in thousands)
Canada (left axis)
United States (right axis)
Consumer Price Index
Inflation
(%)
*Forecast
Canadian and U.S.
Interest Rates
(%)
Canadian overnight rate
U.S. federal funds rate
Canadian/U.S. Dollar
Exchange Rates
Oct
2011
Jan
2011
OctOct
2012
Interest rates should remain very
low in 2013.
The Canadian dollar is expected
to remain at near parity with the
U.S. dollar in 2013.
*Forecast *Forecast
Canada
United States
1.8 1.6
0.99
1.02
0.99 0.98
2013*
2010 2011 2012* 2013*
7.2 7.5
7.7 7.4
8.9
9.1
Oct
2013*
Oct
2012
Oct
2011
Jan
2011
06 07 08 09 10 11 12* 13* 2010 2011 2012* 2013*
2.9 3.1
1.6
2.2
1.8
2.4
Oct
2013*
Oct
2012
Oct
2011
Jan
2011
0.13 0.130.130.13
1.00 1.00 1.00
1.25
7.4
7.9
30 BMO Financial Group 195th Annual Report 2012