Economic Outlook and Review
The Canadian economy continues to grow modestly, held back by a strong Canadian dollar, elevated household debt and fiscal restraint. In addition, activity in the housing market has slowed in response to tighter mortgage rules and reduced affordability in some regions. Although consumer spending and the housing market are expected to grow moderately in 2013, economic growth should improve in the second half of the year in response to a pickup in global demand. Moreover, business investment should strengthen amid elevated commodity prices and low commercial real estate vacancy rates, extending a recent upturn in business loan growth. The major resource-producing provinces of Newfoundland & Labrador, Alberta and Saskatchewan should lead the economic expansion. The unemployment rate is expected to remain near 7% in 2013 and inflation should stay below 2%. The Canadian dollar is expected to trade close to parity with the U.S. dollar, encouraging the central bank to hold overnight rates at 1% for a third consecutive year.
The U.S. economy is gradually improving. Although real GDP stalled in the latter part of 2012, this weakness was primarily due to a decline in defence spending and a drawdown in business inventories due to Hurricane Sandy. Meantime, strong gains in business spending and residential construction, as well as a pickup in consumer spending, indicate good momentum in domestic demand. However, tighter fiscal policy will likely restrain the expansion in 2013. Although lawmakers averted most of the tax increases that were scheduled to take effect on January 1, 2013, increases in payroll taxes and higher rates on upper-income earners will likely dampen household spending. In addition, widespread cutbacks in federal spending are scheduled to take effect this year, and political uncertainty related to government funding could temper business spending and hiring. However, assuming a resolution of the political issues, business investment and job growth should subsequently strengthen. Together with improved household finances and pent-up demand for housing and motor vehicles, this should encourage stronger economic growth in the second half of the year and reduce the unemployment rate to a five-year low of 7.5%. Despite the improving economy, the Federal Reserve will likely maintain a near-zero interest-rate policy for a fifth consecutive year, and continue to purchase debt securities for some time to come.
The U.S. Midwest economy is growing at a comparable rate to the rest of the country despite a restrictive fiscal policy, supported by rising automotive production. The economy is expected to gain momentum this year as the housing recovery strengthens, the manufacturing industry benefits from a pickup in global demand and the agricultural industry rebounds from a drought-ravaged year.
This Economic Outlook and Review section contains forward-looking statements. Please see the Caution Regarding Forward-Looking Statements.
Foreign Exchange
The Canadian dollar equivalents of BMO's U.S.-dollar-denominated net income, revenues, expenses, provisions for credit losses and income taxes were decreased relative to the first quarter of 2012 by the weakening of the U.S. dollar, and were increased by a strengthening of the U.S. dollar relative to the fourth quarter of 2012. The average Canadian/U.S. dollar exchange rate for the quarter, expressed in terms of the Canadian dollar cost of a U.S. dollar, decreased by 1.8% from a year ago and increased by 0.6% from the average of the fourth quarter. The following table indicates the relevant average Canadian/U.S. dollar exchange rates and the impact of changes in the rates.
----------------------------------------------------------------------------Effects of U.S. Dollar Exchange Rate Fluctuations on BMO's Results Table 3---------------------------------------------------------------------------- Q1-2013(Canadian $ in millions, except as noted) vs Q1-2012 vs Q4-2012----------------------------------------------------------------------------Canadian/U.S. dollar exchange rate (average) Current period 0.9953 0.9953 Prior period 1.0133 0.9894Effects on reported resultsIncreased (decreased) net interest income (16) 5Increased (decreased) non-interest revenue (10) 3----------------------------------------------------------------------------Increased (decreased) revenues (26) 8Decreased (increased) expenses 17 (6)Decreased (increased) provision for credit losses 1 -Decreased (increased) income taxes - -----------------------------------------------------------------------------Increased (decreased) net income (8) 2----------------------------------------------------------------------------Effects on adjusted resultsIncreased (decreased) net interest income (13) 4Increased (decreased) non-interest revenues (9) 3----------------------------------------------------------------------------Increased (decreased) revenues (22) 7Decreased (increased) expenses 15 (5)Decreased (increased) provision for credit losses (1) -Decreased (increased) income taxes - -----------------------------------------------------------------------------Increased (decreased) adjusted net income (8) 2--------------------------------------------------------------------------------------------------------------------------------------------------------Adjusted results in this section are non-GAAP amounts or non-GAAP measures.Please see the Non-GAAP Measures section.
