Desjardins Group's economists believe a U.S. recession should be averted in 2008

    For the first half of the year, monetary easing will be the order of the
    day, while Québec and Ontario continue to be hurt by the strong dollar

    LEVIS, QC, Dec. 27 /CNW Telbec/ - The economists at Desjardins Group,
Canada's largest integrated cooperative financial group, believe that a U.S.
recession should be averted in 2008. During this time, Québec and Ontario
will, for better or worse, grapple with a strong dollar that will continue to
disrupt economic growth.
    Desjardins' economists note that a wind of panic blew through the globe's
financial markets in the summer and fall of 2007. A consequence of the
increased defaults on payment in the subprime mortgage market, investors lost
confidence in asset-backed commercial paper (ABCP) and risk suddenly surged.
The financial markets then experienced a shortage of liquidity.
    The ensuing tightening of credit conditions worldwide by financial
institutions, and especially in the United States, is affecting the real
economy in the same way as an interest rate increase would. To counter this
effect, the monetary authorities had no choice but to ease interest rates to
bring credit conditions to a more accommodating level. "We must at all costs
avoid a recession in the United States, which would have undesirable
repercussions on the economies of a number of other countries, particularly
Canada," stated François Dupuis, Vice-President and Chief Economist at

    In Québec, the slowdown will be limited, despite the problems in foreign

    Need we reiterate that it is Québec and Ontario that are the hardest hit
by the strong loonie? The Canadian manufacturing sector, concentrated in these
two provinces, has to absorb a brutal shock, which raises a lot of questions
concerning the medium-term viability of certain industries.
    However, domestic demand in these two provinces remains solid enough to
partially offset the difficulties in foreign trade. Québec's real GDP will
grow by 1.7% in 2008 and 2.3% in 2009 (1.9% in 2007). For Ontario, the
respective forecasts are for 1.8% and 2.5% (2.1% in 2007). The western
provinces are still benefiting from the presence of oil and investment related
to the Olympic Games.
    Notwithstanding the problems with foreign trade, Québec's economic
slowdown should be limited in 2008. A number of factors will help keep the
domestic economy at cruising speed. "Investment in public infrastructures, the
tax cuts announced by the federal and provincial governments, and the cut to
the goods and service tax (GST) are positives that will help mitigate the
economic slowdown," stressed Yves St-Maurice, Director and Deputy Chief
Economist at Desjardins Group.

    The loonie is still the burning issue for Canada

    The loonie's dizzying rise to above parity with the greenback created
considerable emotion and raised concerns for the Canadian economy. Combined
with tougher credit conditions for consumers and business, the negative impact
of such a strong dollar on foreign trade and on Canada's manufacturers
encouraged the Bank of Canada to lower its key rates by 25 basis points on
December 4. "Even though the economy still seems to be fairly solid, it was
necessary to loosen the belt preventively so as to combat the tougher
conditions for obtaining credit. Our forecast for GDP growth is 2.4% for 2008,
compared with 2.6% in 2007. The return to full production potential is
expected for 2009, for growth of 3%," added Mr. St-Maurice.
    In spite of everything, Canadian domestic demand is doing rather nicely
and all is far from bleak. Consumers remain confident, corporate profits are
strong and cuts to income and sales taxes will come into force at the
beginning of the year. The job market remains vigorous, ensuring income
growth. The positive effects of a strong currency should result in lower
prices for a number of goods. "Subject to some volatility based on prices for
oil, commodities and the interest rate spread with the United States, the
loonie should weaken early in 2008 and then climb back up toward parity for
the remainder of our forecast period," noted Mr. Dupuis. The price of oil
(WTI) could fall as low as $70 a barrel in the first half of 2008, but then
return to an upward trend, as soon as fears of a recession in the United
States dissipate.

    On the lookout for signs of a recession in the United States

    There is currently a concentration of bad news stirring up fears of
recession in the United States. Under the circumstances, according to
Desjardins' economists, the outlook for real GDP growth in the U.S. is 2.0% in
2008 (2.2% in 2007). "However, our neighbours should avoid a recession, even
though the risk remains at around 40%," Mr. Dupuis noted. "This will largely
be due to the weakness of their dollar, which favours their foreign trade
sector by stimulating exports and slowing the growth rate of imports. In 2009,
the storm will have passed and the economy will regain strength with growth of
2.6%, very close to potential."
    Faced with an elevated risk of recession, the U.S. Federal Reserve will
not hesitate to lower rates. We expect a 25 basis point cut to the target for
the federal funds rate at the next three Fed meetings. By next May, this rate
should have reached 3.50%. It will stabilize at that point until the end of
2008. The Bank of Canada will follow this movement, but with only two
decreases. This means that Canada's key rate should stabilize at 3.75% next

    The stock markets and exchanges will remain highly volatile

    Stock markets continued to show extreme volatility over the last few
months. The rebound by the indexes in September and October gave way to
another correction as concerns about the subprime crisis returned in force.
Next year, the markets could continue to seesaw and their growth could be
limited by the consequences of the crisis and the economic slowdown. In spite
of it all, the key North American indexes should advance by about 5% to 10%
over the next two years.
    As for the currencies, the greenback continued to tumble this fall,
pushing the Canadian and European currencies higher. However, investor
perception of the British and Canadian economies has since deteriorated and
only the euro has succeeded in consolidating its gains. The context is
favourable for a consolidation in the US$1.45 to US$1.50 range. Although the
yen cashed in on the resurgence of risk and the unwinding of carry trades, the
potential gains are limited because of the Japanese economy's structural

    Emerging nations buoy the global economy

    According to Desjardins' economists, the world economy's growth is
getting good support from that of the economies of emerging countries such as
China and India. In contrast with the industrialized nations, which must
undergo a period of risk revaluation, Chinese authorities are deliberately
attempting to restrict credit by every means possible to prevent overheating.
In spite of these efforts, the world's second largest economy will likely
continue to see real GDP grow by over 10% during the next two years.
    The Japanese economy will maintain its pace, with an increase of 1.8%
forecast for 2008 and 2.0% for 2009 (2.0 % in 2007). Europe will be affected
by tighter credit facilities and a currency that is a little too strong. A
meagre 2% increase is expected for 2008 and 2009 (2.6 % in 2007). It's the
same story for the United Kingdom. "Despite the weakness of the industrialized
economies, the developing countries will come to the aid of global growth,
keeping it at 4.7% in 2008, down only slightly from 2007," concluded
Mr. St-Maurice.

    About Desjardins Group

    Desjardins Group is the largest integrated cooperative financial group in
Canada, with overall assets of $147 billion, as at September 30, 2007. 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 6,800 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.

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For further information:

For further information: (for journalists only): Nathalie Genest,
Advisor, Information and Media Relations, Desjardins Group, (514) 281-7275,
1-866-866-7000, ext. 7275,; François Dupuis,
Vice-president and Chief Economist, Desjardins Group, (514) 281-7000, ext.
2336, 1-866-866-7000, ext. 2336; Yves St-Maurice, Director and Deputy Chief
Economist, Desjardins Group, (514) 281-7000, ext. 2336, 1-866-866-7000, ext.

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