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U.S., Canadian Economy Looking Up for 2013

The North American economy should grow 2 percent this year and improve through 2013, with a strong performance from residential building in the U.S. and commercial construction in Canada, according to the North American Outlook released by BMO Economics.

The modest growth of 2 percent for 2012 in the U.S. will pick up through 2013 amid improved household finances and a strengthening housing recovery. Growth is expected to reach 2.8 percent by the end of 2013.

“Home sales and starts have picked up from depressed levels, supported by record-low mortgage rates, pent-up demand and investor interest,” said Sal Guatieri, senior economist, BMO Capital Markets. “House prices are rising, lifting household wealth and encouraging first-time buyers to take the plunge. Rising house and equity values should allow households to soon recover the rest of the $16 trillion in wealth that was lost during the Great Recession.”

Other factors include:

  • Residential construction is now leading the expansion.
  • Housing starts are still about 40 percent below demographic needs, suggesting plenty of running room for residential construction to lead the expansion.

Because of elevated unemployment, “we now expect the Fed will delay any rate hikes until mid-2015,” said Guatieri.

Canada's economy is on track to grow 2 percent this year and should improve modestly through 2013 – reaching 2.4 percent by the end of the year. “On the positive side, business investment, though moderating, continues to lead the expansion,” said Guatieri. “Commercial construction is supported by low vacancy rates, and companies are taking advantage of the strong loonie to buy productivity-enhancing equipment.”

Other factors include:

  • Elevated commodity prices will continue to drive investment in Alberta, Saskatchewan, and Newfoundland & Labrador.
  • Central Canada and the other Atlantic Provinces will face challenges with the strong currency and weak global demand.
  • With the exception of autos, consumer spending has moderated in the face of high household debt, tepid job growth and rising cross-border shopping.
  • Personal loan growth has slowed the most in two decades, and the trade deficit continues to widen due to a strong dollar and weak external demand.
  • The Canadian dollar is expected to trade close to parity against the greenback in the year ahead, benefiting from elevated commodity prices and steady capital inflows.

Guatieri noted that recent mortgage and credit rule changes will restrain household debt growth, leading to a further moderation in consumer spending and housing market activity and stabilizing home prices in most regions. The notable exceptions will be British Columbia and Toronto, where high valuations point to weaker prices ahead.

The outlook for interest rates indicates that modest growth, low inflation, a strong currency, and tighter credit rules add extra incentive for the Bank of Canada to maintain the current low-rate policy. “Further Fed easing should encourage the Bank to hold overnight rates steady at 1 percent for somewhat longer than we previously thought, likely until autumn 2013,” added Guatieri.

Guatieri noted that several risks to the North American economy remain, including a possible Eurozone breakup, pending spending cuts and tax increases in the U.S., a sharp correction in the Vancouver and Toronto housing markets and the potential for a hard landing in China.