Bank of Montreal 2013 Annual Report Download - page 21

MANAGEMENT’S DISCUSSION AND ANALYSIS
Economic Developments and Outlook
MD&A
Economic and Financial Services Developments in 2013
After slowing in 2012, the rate of economic growth in Canada remained
modest at approximately 1.7% in 2013, keeping the unemployment rate
around 7%. Sluggish global demand and a strong currency restrained
exports, while lower commodity prices dampened investment in the
resource sector. Elevated debt levels curbed personal loan growth,
despite record numbers of motor vehicle sales. Housing market activity
and residential mortgage growth moderated, but show signs of
stabilizing as most housing markets across the country are well bal-
anced. Despite a decline in business investment, loan demand remained
strong in response to low interest rates and attractive financing con-
ditions. Demand for non-residential mortgages has been supported by
low commercial real estate vacancy rates. Personal deposit growth
moderated, in part reflecting depositors’ preference for higher-yielding
assets. Despite a decline in corporate profits, business deposit growth
strengthened in response to increased economic uncertainty. The Bank
of Canada held its overnight interest rate target at 1% for a third
consecutive year, while longer-term interest rates rose in anticipation of
less expansionary monetary policies in the United States.
The rate of economic growth in the United States slowed to approx-
imately 1.7% in 2013 from 2.8% in 2012, largely in response to restrictive
fiscal policies. Business investment and exports also moderated, while
growth in consumer spending remained modest despite a slight uptick in
consumer loans. Residential construction improved on firmer home sales,
supporting mortgage growth. The Federal Reserve maintained its near-zero
interest rate policy, but expectations that it will reduce the rate of its asset
purchases have put upward pressure on longer-term interest rates. In the
Midwest, where most of our U.S. operations are located, the economy grew
in line with the modest average national growth in 2013, as continued
expansion in the automobile sector and a recovery in housing activity offset
restrictive fiscal policies and slower global demand. While the Eurozone
appears to have emerged from recession, rates of growth remain weak.
China’s economy is stabilizing at a rate of growth that is still strong, but
lowerthaninthe past.
Economic and Financial Services Outlook for 2014
Economic growth in Canada is expected to strengthen to 2.3% in the
coming year, led by growth in exports in response to an improving
U.S. economy and a weaker Canadian dollar. Firmer commodity prices
should support growth in business investment and loans, while bolstering
activity in the resource-producing provinces in Western Canada. However,
high levels of household debt will likely continue to dampen consumer
spending and housing market activity, restraining personal loan and
mortgage growth. Growth in the economy should reduce the unemploy-
ment rate to 6.6% by year end, while encouraging the Bank of Canada to
raise interest rates in early 2015. Higher interest rates should eventually
support the Canadian dollar, although a sizeable trade deficit will likely
keep the currency below parity with the U.S. dollar in 2014.
Economic growth in the United States is projected to strengthen to
2.7% in 2014, as fiscal restraint subsides, reducing the unemployment
rate to below 7%. Low interest rates, improved household finances and
pent-up demand, especially for automobiles, should lift consumer
spending and encourage a pickup in personal loans. Residential mort-
gage growth should continue to be supported by the ongoing housing
market recovery, which is benefiting from still-healthy levels of afford-
ability despite the recent upturn in mortgage rates. Lower vacancy rates
for commercial and industrial properties should encourage growth in
non-residential construction. Continued low interest rates and easier
credit conditions will likely continue to support growth in business
investment and loans. While the Federal Reserve is expected to keep
overnight interest rates unchanged for a sixth consecutive year in
response to low rates of inflation, it will likely stop purchasing assets in
the second half of the year, resulting in further moderate upward pres-
sure on long-term rates. The U.S. Midwest economy is expected to grow
in line with the national economy, supported by increasing automobile
production and firmer global demand.
Real Growth in Gross
Domestic Product (%)
2.8 2.7
2.5
2.3
1.8 1.7 1.7 1.7
2011 2012 2013* 2014*
Canada
United States
*Forecast
The Canadian and U.S. economies
are expected to strengthen in 2014.
Housing Starts
(in thousands)
250 1500
1000
200
500
150
100 0
07 08 09 10 11 12 13* 14*
Canada
United States
*Forecast
Housing market activity should
moderate in Canada but strengthen
in the United States in 2014.
Canadian and U.S.
Interest Rates (%)
1.00 1.00 1.00 1.00
0.13 0.130.130.13
Jan Oct Oct Oct
2012 2012 2013 2014*
Canadian overnight rate
U.S. federal funds rate
*Forecast
Central banks are expected to keep
interest rates very low in 2014.
Canadian and U.S.
Unemployment Rates (%)
8.3 7.9
7.5 7.4 7.3
6.9 6.6 6.6
Jan Oct Oct Oct
2012 2012 2013 2014*
Canada
United States
*Forecast
Unemployment rates in Canada and
the United States are expected to
decline in 2014.
Consumer Price Index
Inflation (%)
3.1
2.9
2.1
1.5 1.5
1.4 1.3
0.9
2011 2012 2013* 2014*
Canada
United States
*Forecast
Inflation is expected to rise but still
remain low in 2014.
Canadian/U.S. Dollar
Exchange Rates
1.08
1.04
1.01
0.99
Jan Oct Oct Oct
2012 2012 2013 2014*
*Forecast
The Canadian dollar is expected
to remain below parity with the
U.S. dollar in 2014.
Note: Data points are averages for the month or year, as appropriate. References to years are
calendar years.
32 BMO Financial Group 196th Annual Report 2013