Desjardins Economic Forecasts – The U.S. economic downturn should remain contained unless financial strains intensify further

Ontario will be in a recession in the early part of the year. Québec will barely escape it

Lévis (Québec), March 25, 2008 – The U.S. economy will see a downturn in 2008, especially in the first half of the year. According to Desjardins Group economists, GDP growth forecast for the United States is about 1.0% for the year. However, the drama usually associated with the word recession must, this time, be soft-pedalled. This recession, if it becomes official, should be a small one, not in the least a marked economic contraction over a long period.

Such are the main conclusions of Desjardins Group most recent economic forecasts published today.

“Nations in Europe and Asia will therefore not be spared. However, there is no question of a recession in these regions,” said François Dupuis, Vice-President and Chief Economist at Desjardins Group. “Global economic growth should slow to around 4% in 2008, compared with over 5% in 2007.” According to Dupuis, tightening credit conditions as a result of the liquidity crunch are limiting growth by consumer spending and business investment in many nations, particularly in North America, as well as Japan, the UK and in Continental Europe.

As for Canada’s economy, it is dealing with a sharp contrast. On one hand, domestic demand is very lively. It posted 6.9% growth in the fourth quarter of 2007. On the other, foreign trade is seeing some very tough times, with real exports down 8.5% in that same quarter, and imports up by 10.9%. “With the dollar to hold close to parity and a declining U.S. economy, this situation will persist in 2008. The battle between these two components of the economy will result in growth of only 1.3% for 2008, half that recorded in 2007 which stood at 2.7%,” added Yves St-Maurice, Director and Deputy Chief Economist at Desjardins Group.

According to St-Maurice, Ontario will be the province that is most affected by the downturn in U.S. activity. “Its economy is at the mercy of the manufacturing industry, especially the automotive sector, which is going through a period of major restructuring. It is more dependent on international exports than Québec is, and will not be able to avoid a drop in production in the first two quarters of 2008. Technically, therefore, Ontario will be in a recession in the early part of the year. Québec will barely escape it, thanks to tax cuts and public spending on infrastructure.”

Yves St-Maurice estimates real GDP growth in Ontario and Québec will be 0.5% and 1.2% respectively in 2008, compared with 2.1% and 2.4% in 2007. The western provinces will dominate Canadian economic activity, posting real GDP growth from 1.7% for Manitoba to 3.0% for Alberta.

“With the ongoing mortgage credit crisis and liquidity crunch, stock market volatility, renewed risk aversion in the financial markets, and a deteriorating worldwide economic climate, monetary easing will continue in 2008 almost worldwide. In the United States, the federal funds rate should drop below the 2% mark by summer whereas, in Canada, the key rate will most probably go below 3%,” stressed François Dupuis.

With this kind of rate spread between the United States and Canada, and high prices for commodities, especially oil, we can expect the loonie to stay close to parity in 2008. The average price per barrel should settle in at about US$92/barrel in 2008, compared with US$72/barrel in 2007. The Dow Jones and S&P 500 will record gains of less than 2% in 2008, then bounce back by 8% in 2009. Thanks to natural resources, the S&P/TSX will do a little better, with a 3% gain in 2008 and a 10% gain in 2009.

The full version of Desjardins 2008 Economic Forecasts can be viewed on www.desjardins.com.

About Desjardins

The largest integrated cooperative financial group in Canada, with global assets of over $144 billion as at December 31, 2007, Desjardins Group consists of a network of caisses, branches, credit unions and business centres in Québec and Ontario, as well as some twenty subsidiaries in life and general insurance, securities brokerage, venture capital, and asset management, many of which are active nationwide. With the skills of its 40,000 employees and the commitment of more than 6,500 elected officers, Desjardins offers its 5.8 million members and clients–individuals and businesses alike–a full range of financial products and services. Its physical distribution network is rounded out by virtual access methods supported by leading-edge technology.

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André Chapleau
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François Dupuis
Vice-president and Chief Economist
Yves St-Maurice
Director and Deputy Chief Economist
514-281-7000, ext. 2336
1-866-866-7000, ext. 2336