Bank of Montreal 1998 Annual Report Download - page 59

51
BANK OF MONTREAL GROUP OF COMPANIES
ECONOMIC OUTLOOK AND GLOBAL DEVELOPMENTS
On previous pages of this Management Analysis of Operations we discussed our financial
per formance and condition for 1998 and 1997. We presented our 1999 outlook in respect of
key financial performance and condition measures throughout these pages (specifically
Revenue Growth on page 28; Productivity on page 30; Asset Quality on page 46; Liquidity
Risk Management on page 48 and Capital Management on page 49). In this section we dis-
cuss major external factors that could impact our financial performance and condition
going forward. These external factors include: the North American economy; the global
economy; the impending European Monetary Union; and the year 2000 issue.
NORTH AMERICAN ECONOMIC DEVELOPMENTS IN 1998
Following a solid performance in 1997, the U.S. economy slowed modestly in 1998 amid
weakening exports to East Asia and turbulence in global financial markets. However, the
Asian crisis also kept U.S. inflation and interest rates low, which in turn supported consumer
and business spending. As a result, growth in the U.S. economy remained sufficiently strong
to hold the unemployment rate near 4.5% – its lowest level in three decades.
However, given its greater reliance on natural resources, the Canadian economy was more
adversely affected by the Asian crisis than the U.S. economy. Increases in short-term interest
rates between June 1997 and August 1998 dampened consumer and business spending in
Canada. As a result, the Canadian unemployment rate, though down slightly from late 1997,
remained above 8%. Low commodity prices also pushed the Canadian dollar to a record low
of 63.1 U.S. cents in late August. However, the currency has stabilized at a slightly higher level
r ecently amid firmer natural resource prices.
We also saw Mexico’s economy slow sharply in 1998 owing to the weaker external
envi ronment and tighter fiscal policy. Interest rates soared as the Bank of Mexico tried to
stem an outflow of capital. The peso fell against the U.S. dollar amid weak oil prices and
concern about a recession in Latin America.
ECONOMIC EXPECTATIONS FOR 1999
We expect the U.S. economy to slow further in 1999, though only to its long-run average
growth rate of 2.25%. Domestic demand continues to be supported by solid growth in
employment and income, and we consider that the risk of recession appears small. In fact,
we believe that recent and prospective rate cuts by the Federal Reserve (Fed) should encour-
age a pickup in activity by late 1999. This, together with an expected jump in inflation in
response to worker shortages and rising wages, will likely spur the Fed to raise interest rates
in the second half of 1999, which in turn could lead to an increase in long-term rates.
It is our belief that the slowdown in U.S. demand and the global economy will temper
Canada’s exports and slow the economy further in 1999, resulting in a modest upturn in the
jobless rate. Business investment will moderate amid soft earnings growth. Although we
anticipate that the economy will slow, it should avoid recession as long as the U.S. economy
remains healthy. Inflation will likely remain within the lower half of the Bank of Canada’s
1% to 3% target range. We expect the Canadian dollar will remain within the US$0.64 –
0.68 range in the face of soft commodity prices, Fed tightening in late 1999 and political
uncertainty relating to the prospect of a referendum on Quebec independence. However,
improved fiscal balances and low inflation should provide some support to the currency.
Long-term interest rates are expected to climb alongside their American counterparts in
1999. However, we expect the Bank of Canada to hold short-term rates steady in the context
of modest growth and low inflation.
We expect Mexican interest rates to remain lofty in 1999 amid high inflation and further
weakness in the peso. This, together with soft demand in Latin America and waning business
confidence, should slow the economy further in 1999.
U.S./CANADIAN DOLLAR
EXCHANGE RATE ($)
0.70 0.70
0.67
0.65
0.72
0.73
0.72
0.74
Jul
98
Oct
98
Apr
98
Jan
98
Oct
97
Jul
97
Apr
97
Jan
97
CANADIAN INFLATION
RATE (%)
0.8
1.1 1.0 1.0
1.5
1.7
1.7
2.1 Bank of Canada’s
Target Band
Jul
98
Apr
98
Oct
98
Jan
98
Oct
97
Jul
97
Apr
97
Jan
97
U.S. UNEMPLOYMENT
RATE AND CONSUMER
PRICE INDEX (CPI) (%)
4.7 4.7 4.5 4.6
4.9
5.0
5.2
5.3
1.7 1.4 1.6 1.5
2.2
2.3
2.7
3.0
Jul
98
Apr
98
Oct
98
Jan
98
Oct
97
Jul
97
Apr
97
Jan
97
Unemployment rate
CPI year-over-year % change
ANNUAL GROWTH GROSS
DOMESTIC PRODUCT (%)
(estimates for the year ending Dec. 31)
1998 1999
Canada 2.9 2.1
United States 3.5 2.1
Mexico 4.4 3.1
ANNUAL AVERAGE
EXCHANGE RATES
(estimates for the year ending Dec. 31)
1998 1999
Cdn$/US$ 1.490 1.500
Peso / US$ 9.18 10.71