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

Lévis, December 27, 2007 - 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 Desjardins.

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

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 March.

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 weakness.

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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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 poste 2336
1-866-866-7000, poste 2336

Yves St-Maurice
Director and Deputy Chief Economist
Desjardins Group
514-281-7000 poste 2336
1-866-866-7000, poste 2336