BMO Financial Group - Outlook 2005(1.1Mb pdf File) - Boardwalk REIT

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US GDP Detail
US GDP Detail
2003 2004 2005
Q4/Q4 % Change
GDP 4.4 3.9 3.6
Consumer expenditure 3.8 3.4 3.0
Government expenditure 2.2 2.6 1.5
Residential construction 12.0 8.5 -8.8
Business investment 9.4 7.8 9.4
Non-res. Construction 1.5 1.7 3.6
Equipment & software 12.1 9.8 11.4
Imports 4.9 8.7 5.2
Exports 6.1 6.7 12.2
Levels- Annual (A), Q4 (Q)
Ch. in inventories (00US$bn,Q) 8.6 42.0 35.0
Housing starts (mn of units,A) 1.853 1.914 1.665
Current account bal. (US$bn,A) -530.7 -632.1 -586.3
to January 2004, the dollar firmed up through
the spring and summer. Faster economic
growth and narrowing rate spreads between
the US and several other countries, most
notably the Euro-zone and Canada,
underpinned the greenback. More recently,
however, doubts about the durability of the US
expansion in the face of rising oil prices have
kept the dollar on the defensive.
…but its long-run prospects look bleak
Movements in rate spreads will largely
determine the greenback’s near-term
performance. Rising US interest rates should
underpin the dollar until the spring of 2005, at
which time the Fed’s expected hiatus will have
the opposite effect.
A more significant influence over the longer
term is the growing US external debt. In the
second quarter of 2004, the nation racked up a
record shortfall in its current account equal to
5.7% of nominal GDP. To finance the gap
between domestic investment and savings, the
US relies on a steady inflow of foreign capital.
While net external debt – at 22% of GDP in
2003 – is far from alarming, it is projected to
expand to 36% of GDP by 2008. To stabilize
this trend, the dollar must depreciate further,
likely by 10 to 15 per cent on a broad tradeweighted
basis. Because it has already fallen
significantly against most of the major industrial
currencies, the next stage of adjustment will
mostly likely occur against the currencies of
emerging nations.
Economic risks appear balanced
With the recovery on solid ground, the risk of a
significant slowdown appears small – barring a
negative shock. Of prominent concern is that
crude oil prices might remain near current
record highs, or worse, head higher. Should
prices remain around $52 a barrel, economic
growth could downshift a further one-half
percentage point in 2005, on a fourth quarterover-fourth
quarter basis, relative to our current
forecast. This would likely keep the Fed
sidelined until well into 2005. As well, a
terrorist attack in the US could destabilize
business sentiment and the recovery. In this
event, the Fed might need to reverse course
and lower rates temporarily to shore up
confidence.
One possible upside risk to our growth outlook
for 2005 derives from the Fed’s go-slow
approach to policy renormalization. In the past,
this tactic has run the risk of the economy
growing too rapidly and overshooting its
capacity limits. Should this occur, the Fed
would need to boost rates aggressively, which
would lead to a sharper economic slowdown in
2006.
Sal Guatieri, Senior Economist
416-867-5258
sal.guatieri@bmo.com