Bank of Montreal 2008 Annual Report Download - page 36

MANAGEMENT’S DISCUSSION AND ANALYSIS
MD&A
32 | BMO Financial Group 191st Annual Report 2008
Economic Developments
Canadian and U.S. Economic and Financial Services
Developments in 2008
The Canadian economy grew at a modest pace in 2008, as exports con-
tinued to decline in response to weak U.S. demand. Growth in consumer
spending moderated from last year’s rapid pace, as employment
growth and confidence weakened. Business investment also slowed in
response to persistent uncertainty about the impact of the global credit
crisis on the economy. Housing sales declined from last year’s record
levels, reflecting reduced affordability. The softer economy led to some
slowing in residential mortgages and business and personal credit in
the second half of the year, although growth remained relatively brisk.
Rising commodity prices in the first half of the year lifted inflation
to the highest level in five years; however, most prices continue to
rise modestly and in some cases, such as motor vehicles, are falling.
The Bank of Canada reduced overnight lending rates 225 basis
points in the fiscal year to address the economic slowdown, the recent
downturn in commodity prices and credit concerns in the market.
The U.S. economy grew modestly in the first half of 2008 and
likely contracted in the second half, despite aggressive monetary and
fiscal stimulus and strong export gains. The worsening credit market
environment and housing slump, coupled with record-high energy
costs, significantly affected consumers and businesses. Interbank lending
spreads widened to all-time highs in early October amid the government-
assisted recapitalization and consolidation of a number of banks and
Wall Street brokers, severely curtailing the availability of credit and raising
borrowing costs for businesses and consumers. While the downward
trend in housing sales appears to have stabilized, the large number of
unsold homes continues to weigh on prices. Growth in residential
mortgages and personal and business loans slowed in 2008. The Federal
Reserve aggressively reduced interest rates and expanded its liquidity
provisions to support bank lending and the economy.
Economic and Financial Services Outlook for 2009
The Canadian economy is expected to contract moderately in the
first half of 2009 as exports decline further, before recovering modestly
in the second half of the year in response to low interest rates and
recent weakness in the currency. The unemployment rate is expected
to climb more than one percentage point by late 2009 to above 7%,
still a historically low level. Consumer and business spending will likely
remain soft, further moderating credit growth. Housing activity is
expected to continue to decline, dampening demand for residential
mortgages. The Bank of Canada is expected to reduce interest
rates further as inflation falls. The Canadian dollar is expected
to strengthen modestly relative to the U.S. dollar in the second half
of the year, supported by steadier commodity prices.
The U.S. economy is expected to continue contracting in the first
half of 2009, before improving slightly as the housing market stabilizes
and credit conditions ease. Personal and business credit and residential
mortgage demand will likely remain weak, at least in the first half
of the year. U.S. unemployment has climbed steadily in the past year
and is expected to rise about two percentage points to 9% in 2009,
well above Canada’s rate. The Federal Reserve may continue to reduce
interest rates to support the economy. Weakness in capital markets
is expected to extend into early 2009, with some improvement expected
in the second half of the year as the economy recovers and housing
prices stabilize.
Canadian and U.S. jobless rates
are expected to climb further.
The Canadian and U.S. economies
are expected to remain weak
in 2009.
Real Growth in Gross
Domestic Product (%)
Canada
United States
*Estimate
2009*2008*20072006
2.7
(0.7)
2.8
2.0
(2.0)
0.6
1.3
3.1
Canadian and U.S.
Unemployment Rates (%)
Canada
United States
4.6
6.2 6.26.5
8.6
7.5
Oct
2007
Jan
2007
Oct
2008
Oct
2009*
*Estimate
Energy prices are expected to
remain elevated in 2009, though
well off their highs of 2008.
Homebuilding in Canada should
continue to slow in 2009, while
construction in the United States
is expected to remain very weak.
100.0
137.5
175.0
212.5
250.0
700
1150
1600
2050
2500
Housing Starts
(in thousands)
Canada (left axis)
United States (right axis)
05040302 06 07 08*09*
*Estimate
0
25
50
75
100
125
150
0
3
6
9
12
15
Energy Prices (US$)
Crude oil (West Texas Intermediate,
US$/barrel) (left axis)
Natural gas (Henry Hub, US$/mmbtu)
(right axis)
Oct
2007
Oct
2009*
Oct
2008
*Estimate
Jan
2007
The Canadian dollar is expected
to strengthen modestly in 2009
relative to the last quarter of 2008.
The Bank of Canada and U.S.
Federal Reserve will likely keep
rates low well into 2009.
Canadian and U.S.
Interest Rates (%)
Canadian overnight rate
U.S. federal funds rate
*Estimate
Oct
2009*
Oct
2008
Apr
2008
Oct
2007
Apr
2007
5.25
4.25
0.50
1.50
2.50
1.54
Canadian/U.S. Dollar
Exchange Rates
Oct
2007
Jan
2007
Oct
2009*
Oct
2008
1.18 1.16
1.18
*Estimate