September 9, 2012 – The North American economy should grow 2% this year and improve through 2013, with a strong performance from commercial construction in Canada and residential building in the States, according to the North American Outlook released by BMO Economics.

According to the report, Canada’s economy is on track to grow 2% this year and should improve modestly through 2013, reaching 2.4% by the end of the year. “On the positive side, business investment, though moderating, continues to lead the expansion,” said Sal Guatieri, senior economist, BMO Capital Markets. “Commercial construction is supported by low vacancy rates, and companies are taking advantage of the strong loonie to buy productivity-enhancing equipment.”

Elevated commodity prices will continue to drive investment in Alberta, Saskatchewan and Newfoundland & Labrador, says BMO, adding that Central Canada and the other Atlantic Provinces will face challenges with the strong currency and weak global demand.

With the exception of autos, consumer spending has moderated in the face of high household debt, tepid job growth and rising cross-border shopping, continues BMO. Personal loan growth has slowed the most in two decades, and the trade deficit continues to widen due to a strong dollar and weak external demand.

The Canadian dollar is expected to trade close to parity against the greenback in the year ahead, explains BMO, benefiting from elevated commodity prices and steady capital inflows.

“For those businesses looking to upgrade their processes, technology and equipment to boost their productivity, the high value of the Canadian dollar can provide them with additional purchasing power when importing this equipment, and purchasing supplies and inventory from the global market,” said Cathy Pin, VP BMO Commercial Banking.

Guatieri noted that recent mortgage and credit rule changes will restrain household debt growth, leading to a further moderation in consumer spending and housing market activity, and stabilizing home prices in most regions. The notable exceptions will be British Columbia and Toronto, where high valuations point to weaker prices ahead.

The outlook for interest rates indicates that modest growth, low inflation, a strong currency and tighter credit rules add extra incentive for the Bank of Canada to maintain the current low-rate policy. “Further Fed easing should encourage the Bank of Canada to hold overnight rates steady at 1% for somewhat longer than we previously thought—likely until autumn 2013,” added Guatieri.

Meantime, the modest growth of 2% for 2012 in the States will pick up through 2013 amid improved household finances and a strengthening housing recovery, notes BMO, with growth expected to reach 2.8% by the end of 2013.

“Home sales and starts have picked up from depressed levels, supported by record-low mortgage rates, pent-up demand and investor interest,” noted Guatieri. “House prices are rising, lifting household wealth and encouraging first-time buyers to take the plunge. Rising house and equity values should allow households to soon recover the rest of the $16 trillion in wealth that was lost during the Great Recession.”

In the States, residential construction is now leading the expansion. Housing starts are still about 40% below demographic needs, suggesting plenty of running room for residential construction to lead the expansion, says BMO. Because of elevated unemployment, “we now expect the U.S. Fed will delay any rate hikes until mid 2015,” added Guatieri.

According to Guatieri, several risks to the North American economy remain, including a possible Eurozone breakup, pending spending cuts and tax increases, a sharp correction in the Vancouver and Toronto housing markets, and the potential for a hard landing in China.