Desjardins Group economists believe the Bank of Canada will have to raise its key rates to counter increasing inflationary pressures



    Central Canada continues to pay the price for the loonie's strength

    LEVIS, QC, June 20 /CNW Telbec/ - Québec's economy moved into low gear in
the first quarter of 2007 according to Desjardins Group economists' most
recent economic and financial forecasts. Residential construction slowed down,
retail sales advanced modestly, and international exports declined.
"Difficulties in foreign trade should not compromise the recovery of the
Québec economy," said Desjardins head economist François Dupuis.
    The Desjardins Leading Index's rising trend is also promising that
economic activity will accelerate in Québec soon, bringing an end to the
slowdown that began in 2005. "Among other things, the robust labour market,
the pay equity settlement and the tax cuts will positively impact consumer
spending in the coming quarters," continued Mr. Dupuis.
    Nevertheless, Desjardins' economists predict that this year's real GDP
will only climb 1.3% because of the drop in international exports. Next year,
the U.S. economy's faster pace will boost Québec exports, allowing real GDP
growth to reach 2.3% in 2008, a pace that is close to the province's
potential.
    For its part, Ontario's economy appears to have accelerated somewhat in
the last few months, fuelled by a rebound in motor vehicle production and
exports. The nice start to the year should translate into a real GDP increase
of just over 2.0% in 2007. However, according to Mr. Dupuis, "Despite this
improvement, the Ontario economy still has some obstacles to overcome.
Manufacturers are still adjusting, and the loonie's recent surge augurs very
poorly for the province's exporters. Consequently, economic growth will again
be limited in 2008, to about 2.6%."

    Economic activity picks up in Canada

    After a solid rebound in the first quarter of 2007, Canadian real GDP
growth should be close to potential until the end of 2008. A robust labour
market and wage growth will fuel consumer spending, while high commodity
prices will continue to drive the Canadian economy. "We therefore believe
economic activity will pick up to 2.5% in 2007 and 3.0% in 2008," said
Mr. Dupuis.
    Desjardins' chief economist notes that with Canadian production already
well above economy's potential, Canadian monetary authorities are becoming
increasingly concerned about the economic outlook and growing inflationary
pressures.
    "With inflation hovering in the upper target range, the Bank of Canada
has much less leeway than a few months ago. Consequently, we can expect
Canadian key rates to begin rising this summer, probably in July," stated
Mr. Dupuis.
    This first increase could be followed by a second one in September,
leading to a status quo and time to assess the impact of the loonie's sharp
appreciation on economic growth these past few weeks.

    Parity with the greenback?

    In this regard, the loonie's determinants remain positive, but
Desjardins' economists really don't envision parity with the greenback in the
near term. "Although the change in the Bank of Canada's tone has helped boost
the dollar close to its long-term equilibrium value, any subsequent increase
will depend on the evolution of energy and non-energy commodity prices," says
Mr. Dupuis. "If oil prices gradually increase as we expect, so will the
loonie; however, metals prices should rise more slowly, or even decrease,
which will limit the gains. In such a case, don't expect to see lasting parity
before the second half of 2008 or in 2009."
    However, the damage will have already been done. With a loonie trading at
over US$0.90, the manufacturing and tourism industries will face even tougher
times ahead. And as has been the case in the last few years, Québec and
Ontario will shoulder the brunt of the slowdown.

    World economy: sustained growth

    As regards the world economy, Desjardins' economists are still banking on
sustained economic growth and moderate inflation.
    Growth has slowed somewhat in the euro zone and Japan, but the carry over
gained at the end of 2006 ensure strong growth in 2007. In China, the first
quarter's phenomenal advance suggests the economy's pace will be faster than
expected again this year, but rebalancing growth should cause some slowing
along the way.
    Finally, the U.S. economy is expected to rebound as of this spring, but
current residential market adjustments will make for modest gains in 2007
overall. Accordingly, after a 5% increase in 2006, Desjardins is expecting a
slight decrease in global economic growth, to 4.7% in 2007 and 2008.

    About Desjardins Group

    Desjardins Group is the largest integrated cooperative financial group in
Canada, with overall assets of more than $135 billion, as at December 31,
2006. It comprises a network of caisses, credit unions and business centres in
Québec and Ontario, and some twenty subsidiary companies in life and general
insurance, securities brokerage, venture capital and asset management, many of
which are active across the country. Drawing on the expertise of its
40,000 employees and the commitment of 7,020 elected officers, Desjardins
offers its 5.8 million individual and corporate members and clients a full
range of financial products and services. Its physical distribution network is
complemented by leading-edge virtual access methods. To find out more, consult
www.desjardins.com.




For further information:

For further information: The following telephone numbers are intended
only for journalists: François Dupuis, Vice-President and Chief Economist,
Economic Studies, (514) 281-2336, 1-866-866-7000, ext. 2336,
francois.dupuis@desjardins.com; Source: André Chapleau, Director, Information
and, Media Relations, (514) 281-7229, 1-866-866-7000, ext. 7229,
andre.chapleau@desjardins.com


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