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.
Rising house prices are "lifting household wealth and encouraging first-time buyers to take the plunge," he added. "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."
Residential construction is now leading the expansion.
Housing starts are still about 40 per cent 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.
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.
Based in Chicago, BMO Harris Bank N.A. provides a broad range of personal banking products and solutions through over 650 branches and approximately 1,350 ATMs in Illinois, Wisconsin, Indiana, Kansas, Missouri, Minnesota, Nevada, Arizona and Florida.
Originally published by BMO Financial Group.
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