Canadian Economic Forecast Sideswiped by Weaker U.S. Short-Term Prospects, says Bank of Montreal Economic Report

Bank of Montreal economists have downgraded their short term forecast for the North American economy as a result of the terrorist attacks in the United States.

“The near term prospects of our major trading partner have weakened considerably and that has forced us to reassess our outlook for the Canadian economy,” said Tim O’Neill, chief economist at Bank of Montreal.

BMO’s latest economic forecast is contained in a special report released today on the economic, sectoral and regional implications of the terrorist attacks. The report predicts that the Canadian economy will flirt with recession this year, with output expected to decline modestly in the third quarter and stagnate in the fourth quarter.

In light of this weakness, O’Neill expects that the Bank of Canada will match future rate cuts by the Federal Reserve Board and lower interest rates an additional 75 basis points over the balance of this year.

“Despite this near-term economic pain, the stage is set for a powerful rebound in the North American economy by next spring,” said O’Neill. “The U.S. economy is also expected to benefit from an anticipated massive dose of monetary and fiscal stimulus.”

Substantial monetary ease in Canada, combined with a rebound in the U.S. economy, should underpin moderately positive growth in the domestic economy in the first quarter of 2002. BMO economists are also predicting increasingly stronger economic expansion as next year progresses, with real growth expected to top 4% in the second half of the year.

The bank’s economic report states that while almost all industry sectors will be touched by the weaker macroeconomic environment created by the events of September 11, the most direct and immediate impacts are expected to be felt by airlines, travel agencies, major tourist destinations and insurance companies.

The commentary also concludes that the energy sector will be subject to conflicting pressures with fears about security of supply being offset by the expectation that lower global activity will drive down demand and lower prices.