Bank of Montreal 2010 Annual Report Download - page 33

MD&A
Canadian and U.S. Economic and Financial Services
Developments in 2010
After contracting in 2009, the Canadian economy grew by an estimated
2.9% in 2010. Consumer spending and business investment have led
the recovery, supported by very low interest rates. Housing markets were
strong early in the year, supporting mortgage growth, but weakened
in response to modest increases in interest rates and tighter mortgage
insurance rules. The trade sector continued to restrain economic
growth. While exports were strong early in 2010 due to improved global
demand, imports rose even faster, reflecting solid domestic spending and
the strong Canadian dollar. Employment recovered faster than expected
in 2010, supporting consumer spending and personal credit growth.
However, personal deposit growth slowed, as an increase in investors’
risk tolerance redirected savings toward equity mutual funds. Businesses
continued to finance spending from cash flow and new bond issuances,
limiting business credit demand. However, business deposit growth
remained solid due to strong growth in profits and the uncertain
invest-
ment climate. Although inflation remained low, the Bank of Canada
raised its overnight rate target several times from record low levels, as
the economy no longer required significant stimulus. However, the
Bank did not raise rates in October in light of slowing economic growth.
The U.S. economy grew by an estimated 2.8% in 2010 after
contracting in 2009. Inventory rebuilding and fiscal incentives drove
the recovery early in the year, but growth slowed when the incentives
ended. Consumer spending has grown modestly, as households continued
to save more of their income to pay down debt, and personal credit
continued to contract. Housing demand weakened sharply following
the expiry of the homebuyer tax credit in the spring, and commercial
construction was hampered by high vacancy rates. Deep cutbacks at
the state and local levels largely offset increases in federal government
spending. While business spending on equipment and machinery
remained exceptionally strong, private-sector hiring has remained weak
due to uncertainty about the economy and health care costs. The Federal
Reserve has maintained a near-zero rate policy and recently expanded
its asset purchases to support the economy. In the Midwest, where the
bulk of our U.S. operations are located, the economy continued to grow
modestly, benefiting from strong export sales and an upswing in auto
production but held back by weak housing markets.
Economic and Financial Services Outlook for 2011
The Canadian economy is expected to grow by 2.4% in 2011, supported by
still-low interest rates and firmer commodity prices. The unemployment
rate should decline slightly to 7.7% by year end. Growth in residential
mortgages and personal credit will likely be moderate relative to 2010.
Business credit demand should improve in response to continued
strong investment spending. The Bank of Canada is expected to raise
interest rates only slightly in 2011, pausing for extended periods to
assess the still uncertain global outlook. Supported by higher interest
rates and firm commodity prices, the Canadian dollar is expected to
rise above parity with the U.S. dollar in 2011. The resource-producing
Western provinces will likely lead the recovery again next year.
The U.S. and U.S. Midwest economies are projected to grow
moderately in 2011, improving as housing markets stabilize and credit
standards ease. Healthier business balance sheets should encourage
growth in capital spending and employment, supporting consumer spend-
ing. Demand for business and personal credit and residential mortgages
should strengthen next year. In a subdued inflation climate, the Federal
Reserve will likely not raise interest rates until 2012. Capital markets
are expected to strengthen as the recovery broadens and business
confidence improves.
Economic Developments
Note: Data points are averages for the month or year, as appropriate.
The Canadian and U.S. economies
are expected to continue to
grow moderately in 2011.
Unemployment rates are expected
to decline slowly in 2011, with
the U.S. rate remaining high.
Real Growth in Gross
Domestic Product (%)
Canada
United States
*Estimate
Homebuilding should strengthen
moderately from low levels in the
United States, remaining near his-
torically normal levels in Canada.
*Estimate
Inflation should remain low,
especially in the United States,
where the unemployment rate
is expected to remain high.
2010*2011*20092008
(2.5)
2.9
0.5
2.8 2.4 2.3
0.0
(2.6)
Canadian and U.S.
Unemployment Rates (%)
Canada
United States
Oct
2009
Jan
2009
Oct
2010
Oct
2011*
*Estimate
100.0
137.5
175.0
212.5
250.0
500
1000
1500
2000
2500
Housing Starts
(in thousands)
Canada (left axis)
United States (right axis)
060504 07 08 09 10*11*
Consumer Price Index
Inflation (%)
*Estimate
Canadian and U.S.
Interest Rates (%)
Canadian overnight rate
U.S. federal funds rate
Canadian/U.S. Dollar
Exchange Rates
Oct
2009
Jan
2009
Oct
2011*
Oct
2010
Interest rates should remain
low in 2011, increasing modestly
in Canada.
The Canadian dollar is expected
to rise above parity with the
U.S. dollar in 2011.
*Estimate *Estimate
Canada
United States
2010*2011*20092008
2.4
3.8
2.1
0.3
1.7
1.3
1.6
(0.3)
Oct
2009
Jan
2009
Oct
2010
Oct
2011*
7. 3 7.7 7. 9
9.6
7.7
9.1
1.30
1.00
1.75
0.13 0.13 0.13
1.22
1.02 0.98
BMO Financial Group 193rd Annual Report 2010 31