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

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6 Strong productivity growth... Labour Productivity Y/Y% Change, Nonfarm Business 6.0 5.0 bound to moderate in 2005, albeit to a still healthy clip of 2%. Further out, we see productivity growing at an estimated long-run trend of 2½% in 2006 – a full percentage point faster than the average between 1975 and 1995. Factoring in the usual 1% expansion of the labour force, this implies long-run potential growth of about 3½%. 4.0 3.0 2.0 1.0 2001:Q1 ...has contained growth in jobs and labour costs... Nonfarm Payroll Employment M/M Change, Thousands ...thereby keeping inflation in check. Consumer Price Index Y/Y% Change 3.5 3.0 2.5 2.0 1.5 350 250 150 50 -50 -150 -250 Jan-02 Jul-02 1.0 2002:Q1 Q3 Q3 Historical Average Jan-03 Jul-03 2003:Q1 2002:Q1 Jan-04 Q3 Jul-04 2004:Q1 Q3 Unit Labour Costs Y/Y% Change, Nonfarm Business -2.0 2001:Q1 Q3 3.0 2.0 1.0 0.0 -1.0 2003:Q1 2005:Q1 2002:Q1 FORECAST Q3 Q3 2003:Q1 2006:Q1 2004:Q1 Core Overall Q3 2004:Q1 Inflation to remain controlled in 2005… Rapid growth in productivity, by adding to the economy’s productive capacity and boosting profit margins, has helped to keep inflation in check. Although rising health care costs have pushed hourly compensation up 4.2% in the second quarter from a year earlier, unit labour costs still managed to decline by 0.3% owing to a 4.6% spurt in labour productivity. Accordingly, cost pressures have been subdued even in the face of soaring resource prices and a weakening dollar. Inflation at the consumer level, as measured by annual growth in the allitems CPI, has risen in 2004, but only moderately to 2.7% in August from 1.9% at the start of the year. Most of the increase has stemmed from the rising cost of gasoline and other energy products. An expected unwinding of energy costs should allow inflation to moderate to 1.9% in 2005. The “core” CPI inflation rate, which excludes the volatile food and energy prices, has also climbed this year, but only to 1.7% in August from 1.1% in January. The upturn reflects higher costs of medical care and shelter. The core rate is projected to remain fairly steady at 1.8% in 2005 as the persistence of a small margin of slack in the economy should largely offset upward pressure on import prices stemming from the weaker dollar.
7 Tame inflation will allow the Fed to tighten slowly... Federal Funds Rate % 5.0 4.0 3.0 2.0 1.0 0.0 2002:Q1 ...though rising US rates won't halt the dollar's descent... US$ Trade Weighted Exchange Rate Index Level, Against 7 Major Currencies 115 Q3 2003:Q1 Q3 2004:Q1 Q3 2005:Q1 FORECAST Q3 2006:Q1 Q3 …abetting the Fed’s go-slow strategy The Fed cut rates a cumulative 550 basis points from early 2001 to mid-2003, taking overnight rates down to a 46-year low of 1.0% to bolster the economy’s defenses against the ravaging effects of the tech-investment bust and several geo-political shocks. Policymakers then paused for a year to assess the impact of their actions on aggregate demand, all the time pledging to step harder on the monetary accelerator if the risk of deflation mounted. In June 2004, with the recovery gaining strength, the Fed reversed course and lifted rates 25 basis points. It warned that it would continue to remove the policy accommodation, albeit at a “measured” pace. Since then, the Fed has stuck to its script, raising rates in increments of 25 basis points at the August and September policy meetings. 105 95 85 75 2002:Q1 Q3 2003:Q1 Q3 2004:Q1 2005:Q1 2006:Q1 ...amid a rapidly worsening external position. Current Account Balance % of GDP 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 -6.0 2003:Q1 2004:Q1 2005:Q1 FORECAST 2006:Q1 Q3 FORECAST Q3 Net External Indebtedness % of GDP 40.0 35.0 30.0 25.0 20.0 15.0 2002 2003 2004 FORECAST 2005 2006 Q3 2007 2008 Provided that growth remains at or above potential, the Fed is expected to continue lifting rates in bite-sized steps at each of the next four policy meetings to March 2005. By then, with a full 175 basis points of tightening under its belt, policymakers will likely sit back to assess the impact of their actions on the economy. Though growth is poised to moderate, the pace should remain sufficiently high to deplete the slack in the economy, assuming of course that productivity gains moderate. By the fall of 2005, the Fed should resume its tightening cycle, slowly guiding the federal funds rate to a more neutral level of 4.5% by the fall of 2006. Rising rates have bought the dollar time… The onset of Fed tightening in the summer of 2004 acted as a safety net to catch a freefalling dollar. After plunging 13% against a broad trade-weighted basket of currencies from February 2002
Page 3 and 4: OUTLOOK 2005 United States Outlook
Page 5 and 6: 3 United States Outlook Economy gai
Page 7: 5 Rising interest rates... 10-year
Page 11 and 12: 9 Canada Outlook Canada hit by nume
Page 13 and 14: 11 In 2005, the high C$ will restra
Page 15 and 16: 13 Though rates will rise in both C
Page 17 and 18: 15 Canada’s Regional Outlook Afte
Page 19 and 20: 17 have been trending downward sinc
Page 21 and 22: 19 fees and fines. Despite rising t
Page 23 and 24: 21 non-residential investment, and
Page 25 and 26: 23 The mining and oil and gas secto
Page 27 and 28: 25 average, with growth of 3.1% in
Page 29 and 30: 27 While interest rates are still l
Page 31 and 32: 29 moderate to 6.7% next year after
Page 33 and 34: 31 Global oil supply outpacing dema
Page 35 and 36: 33 This year's surge in oil prices

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

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