The recovery is starting to take root, according to Desjardins Group
economists, but inherent risks call for caution

    Easing of financial tensions facilitates the return to growth

LÉVIS, QC, Sept. 18 /CNW Telbec/ - In the past few weeks, the economic indicators have posted their share of good and bad news. And despite these obvious contradictions, we have to admit that some signs just don't lie. The return of confidence among consumers and entrepreneurs, the upturn in stock markets and the overall easing of financial tensions around the world are seen as basic elements that help support recovery. That is the conclusion that Desjardins Group's economists reached in their latest economic forecasts, released today.

"It is now possible for us to seriously consider the restoration of our economies, even if we may face many pitfalls on the road to recovery, since risks are everywhere!," stated Mr. François Dupuis, Desjardins Group Vice-President and Chief Economist.

Foreign trade and inventories put a hamper on recovery

The upturn started in the spring in the Desjardins Leading Index (DLI), an index that forecasts movements in Québec's economy three to six months in advance, was the most convincing signal that the current cycle might reach its trough soon. Rising consumer confidence has already pushed up the real estate market and consumer spending. Exports continue heading downwards however, and business inventories compared to sales remain high. "According to our scenario, Québec's economy will begin growing again starting in the last quarter of 2009, leaving us with a 1.8% real GDP contraction. The improvement will be slow afterwards, so real GDP growth of only 1.6% is expected for next year," asserted Mr. Yves St-Maurice, Director and Deputy Chief Economist at Desjardins Group.

The recent increase in the Canadian dollar, which relies mostly on the upsurge in prices for oil and raw materials, should continue and reach parity with the greenback by mid-2010. By then, oil prices should reach about US$90 a barrel, a necessary condition to maintain parity. The loonie's rise will be relatively gradual, thus preventing any intervention from the Bank of Canada on foreign exchange markets. However, Canada's exporters will have to swim against the tide to fight international competition.

Foreign trade is not the only obstacle to economic growth in Canada and Québec. Historical comparisons show the current level of inventories to be high and that further corrections are needed. "Before kick-starting production, businesses will have to reduce their inventories," added Mr. St-Maurice. The impact will be felt on both business investments and the labour market. The unemployment rate will soon close in on 10% in Canada and Québec and, like in the U.S., job losses will continue to mount until early 2010. "To do so, the federal and provincial governments will have to pursue their economic recovery plans, making sure they do not restore the budget balance too quickly, despite record deficits", stated Mr. Dupuis.

The 2010 Winter Olympic Games bode well for British Columbia

The recession will have hit Ontario the hardest due to its overexposure to the automobile sector. Ontario's real GDP should decline by 3.8% in 2009, a paltry performance when compared to the 2.7% pullback for Canada. Further West, the drop in oil prices and a shakier housing sector call for a 2.8% decline in Alberta's real GDP and a 2.4% decline for British Columbia. Québec will come out of this in better shape with a decline of only 1.8% for 2009.

In 2010, British Columbia will host the Winter Olympic Games. As a result, BC should post the strongest growth in Canada with gains of 3.0%. The rebound in oil prices will allow Alberta to follow close behind with 2.5%. Ontario will benefit from the recovery in the automobile industry, posting growth similar to the Canadian average. Québec will lag behind somewhat, recording real GDP growth of 1.6%.

Emerging countries fare better

Even if the global economy grows by only 2.9% in 2010, close to the 3% level the International Monetary Fund (IMF) qualifies as recessionary, it is still high enough to make us forget the 1.5% drop posted in 2009, the worst performance since the Second World War. The emerging countries, dominated by China and India, will obviously lead the way with growth of 4.7% in 2010. The industrialized countries will be unable to keep up, with a meagre increase of 1.3% in their real GDP. "The U.S. and Canada will be the front runners with increases of 2.2% and 2.0% respectively, signalling a U-shaped rather than a more traditional V-shaped recovery. All of the other G7 countries, with the exception of Japan, will post economic growth of less than 1% in 2010," specified Desjardins' economists.

Key interest rates to remain flat

All the elements are aligning to convince the central banks not to tighten their monetary policy, and this is true for the Federal Reserve, the Bank of Canada, the European Central Bank, the Bank of England and the Bank of Japan. The economic and financial environment is far too fragile for them to act any earlier than in mid-2010. Unused production capacities are significant, inflation is not a threat at the moment and credit conditions are still relatively difficult. Under these circumstances, any intervention by the central banks will be limited, in some cases, to continuing to take non-traditional actions.

"Interest rates will therefore remain weak for the next few quarters. Those who are calling for the curb to flatten out substantially in the short term could be in for a surprise," insisted Mr. Dupuis. Long-term bonds' real return should feel upward pressures due to the nascent economic recovery, but weak inflation and low expectations will hold back the nominal rates. The spectacular increases in stock markets and concerns about the recovery's strength are prompting investors to act with caution. Demand for good quality securities remains high which helps dispel concerns about financing the huge U.S. deficit. Despite all this, we expect the S&P 500 to post gains of 11% in 2009 and 14% in 2010. The respective anticipated increases for the S&P/TSX are 20% and 11%.

"Before we can talk of any renewed prosperity, we still have to bridge a few gaps. Some structural problems, i.e. the automobile industry, the banking sector, household and government indebtedness, etc., will take some time to clear up, since some of these problems will require concerted action on a global scale. These problems could in fact mortgage economic growth for a long time," concluded Desjardins' economists. In addition, there are plenty of risks to worry about (a new wave of high-risk mortgage loan renewals in the U.S., financial risks in East European countries, influenza A (H1N1), etc.), meaning that we cannot totally rule out the possibility of a W-shaped recovery.

To find out more, consult the Economic and Financial Outlook, Fall 2009, Economic Studies, Desjardins Group at

About Desjardins Group

Desjardins Group is the largest cooperative financial group in Canada, and the ninth largest in the world, with overall assets of approximately $160 billion. Drawing on the strength of its caisse network in Québec and Ontario, as well as its subsidiaries, several of which are active throughout Canada, Desjardins offers a full range of financial products and services to its 5.8 million individual and business members and clients. Desjardins Group is also home to a wealth of expertise in property and casualty insurance, life and health insurance, wealth management, services for businesses of all sizes, securities brokerage, venture capital, asset management and secure leading-edge virtual access methods, all part of an integrated offer that is the only one of its kind in Canada. One of the largest employers in the country, Desjardins is backed by the knowledge and skills of its 42,000 employees and the commitment of its 6,300 elected officers. To find out more, consult

SOURCE Desjardins Group

For further information: For further information: (for journalists only): Hélène Lavoie, Advisor, Information and Media Relations, (514) 281-7275, 1-866-866-7000, ext. 7275; François Dupuis, Vice-president and Chief Economist, (514) 281-7000, ext. 7322, 1-866-866-7000, ext. 7322; Yves St-Maurice, Director and Deputy Chief Economist, (514) 281-7000, ext. 7009, 1-866-866-7000, ext. 7009

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