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

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moderate to 6.7% next year after averaging just
under 8% in 2004.
China is a key risk to the Asian outlook.
Despite the negative impact of SARS last year,
growth was still 9.4% and accelerated to 9.7%
(y/y) in the first half of this year. With inflation
rising rapidly to over 5% and investment
soaring, fears of overheating led the
government to tighten policy in early 2004,
mainly through targeted administrative
measures. Indicators suggest the economy is
headed for a soft landing, but the evidence
remains mixed and further tightening measures
may be needed. Ultimately, a soft landing is
expected, with growth slowing to under 8% in
2005, but the risk of a hard landing would have
a distinctly negative impact on the region.
While uncertainties remain, China is unlikely to
soon alter its currency peg to the US dollar, but
the government’s stated intent of moving to a
more flexible exchange rate may lead to a
modest appreciation in the latter part of 2005 or
in 2006.
Latin America: Solid Recovery
Latin America had only a modest recovery last
year from the economic decline of 2002, with
GDP for the region rising 1.8%. In fact, tight
economic policies produced a marginal GDP
decline in Brazil while political and economic
turmoil led to a massive 9.2% fall in Venezuela.
This year, Latin America is undergoing a much
more robust recovery, with GDP expected to
rise more than 5% — the best result since
1997. Even excluding the anomalous
outperformance of Argentina and Venezuela,
growth will rise 4.5% this year. The region has
been helped by external developments,
including higher commodity prices, healthy US
and Chinese markets and low international
interest rates. Regional growth should subside
as these advantages wane in 2005 and as
economic policies are tightened in response to
emergent inflation pressures.
Brazil’s rebound has been particularly robust.
After falling 0.2% last year, GDP growth will rise
sharply to an expected 4.8% this year. Fiscal
and monetary austerity has firmly established
policy credibility, boosting confidence and
leading to strong growth in domestic demand.
This is being complemented by strong export
growth which is lifting the current account
surplus to around 1.5% of GDP. The strong
growth is raising inflationary pressures leading
the central bank to begin interest rate
increases. Policy tightening and slowing
exports will lower growth next year, but it
should remain healthy at 4.0%.
Mexico has been riding the strength of the US
economy and is expected to see growth of
4.1% this year after only 1.3% last year.
However, as in Brazil, rising inflationary
pressures are leading to monetary policy
tightening. Combining the tighter policies with
the expected slowing of US growth, Mexico’s
GDP growth should moderate next year to
around 3.5%.
Elsewhere, Venezuela’s expected 12.5%
growth this year is due to a politically driven, oil
boom-financed, expansionary fiscal policy.
Growth should moderate sharply in 2005.
Other Andean countries have also benefited
from strong commodity prices, with Chile
expected to register particularly strong growth
of over 5%. Meanwhile, Argentina may register
strong growth of around 7% this year, but the
economy is already clearly slowing and growth
of 3.5% is expected for 2005.
Barney Bonekamp, Senior Economist
416-867-4942
barney.bonekamp@bmo.com
Laurie Peterson, Senior Economist
416-867-4793
laurie.peterson@bmo.com