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Alberta will be lucky to skirt recession, BMO warns

First quarter was 'low point'

Canada’s oil provinces will be slammed this year, with a full-on recession in Newfoundland and Labrador, BMO Nesbitt Burns warns in a new outlook.

The oil shock will cut about one half of a percentage point from economic growth across the country, “hammering the three oil-rich provinces the hardest,” senior economist Sal Guatieri said in fresh forecast.

The good news is that the first quarter of the year should prove to be the “low point” for Canada, with the economy probably having contracted, but with a rebound of 2 per cent for the rest of the year and “slightly faster” in 2016 as crude prices rally and U.S. activity perks up.

Other provinces should fare better amid lower fuel costs and a weaker Canadian dollar, with British Columbia and Ontario leading the nation.

“Facing severe fiscal restraint, Newfoundland and Labrador will slip into recession, and Alberta will do well to avoid one,” Mr. Guatieri said.

“Saskatchewan’s growth is expected to slow to 1 per cent, the weakest since the recession.”

Don’t expect another rate cut from the Bank of Canada, BMO added, but don’t expect a hike any time soon, either. BMO projected the Bank of Canada’s benchmark overnight rate, now 0.75 per cent, won’t begin to rise until July of next year.

Which means Canada’s central bank will lag the Federal Reserve in starting to bring rates back to normal.

That, in turn, means that the Canadian dollar, now buoyed somewhat by oil prices, a weaker U.S. currency and a more upbeat Bank of Canada, should tumble again but then strengthen next year.

“While Fed tightening will likely haul the currency back below 80 cents in the fall, tailwinds should appear next year,” said Mr. Guatieri.

“The currency, which is arguably close to fair value on a purchasing power parity basis, is expected to rise to 85 cents U.S. by late 2016 amid higher oil prices and central bank tightening.”

BMO projected Canadian economic growth of 1.7 per cent this year, and 2.2 per cent in 2016.

Unemployment, in turn, was forecast to hold stubbornly at 6.8 per cent this year, and 6.6 per cent next year.

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Markets mixed

Chinese stocks surged today, buoyed by a Sunday rate cut by the People's Bank of China, but several European exchanges are down at this point.

“Another rate cut over the weekend in China was a boost to domestic markets but the effect looks more muted in Europe and the U.S., which both finished last week strongly and are pulling back on Monday,” said analyst Jasper Lawler of CMC Markets in London.

The Shanghai composite climbed 3 per cent, Tokyo’s Nikkei gained 1.3 per cent, and Hong Kong’s Hang Seng 0.5 per cent.

But in Europe, Germany’s DAX and the Paris CAC 40 were down by between 0.3 per cent and 1.1 per cent by about 8:10 a.m. ET, while London’s FTSE 100 was up 0.2 per cent.

New York futures were little changed.

“U.S. futures are so far pointing to a relatively quiet open, after jobs data that helped to restore some confidence in the American recovery but did little to change expectations regarding the timing of the first rate increase,” said IG senior market analyst Chris Beauchamp, referring to Friday’s U.S. employment report and speculation over when the Fed will hike.

“Earnings season is beginning to wind down, while the economic calendar is almost barren for today. Despite warnings of a bubble and fears about what rising rates will do to stocks, forward earnings ratios in U.S. markets still look compelling, and there is little reason just yet to abandon stocks for the supposed haven of government bonds.”

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What to watch for this week

It’s not shaping up to be quite as exciting as last week, but there are still some key events to watch for.

There’s Greece, of course. But there’s always Greece.

Finance ministers from across the euro zone are meeting in Brussels today to deal with just that, and what might happen should Athens miss a key payment to the International Monetary Fund tomorrow.

On Wednesday, we’ll get a reading on U.S. retail sales. And on Friday, a reading on Canadian manufacturing shipments.

And feeding our national obsession, this week brings two fresh measures of the housing market.

The Teranet-National Bank home price index will be released Thursday, and the Canadian Real Estate Association’s April report a day later.

As The Globe and Mail’s Tamsin McMahon reports, this week’s numbers should underscore Canada’s two-speed market: Toronto and Vancouver, and everywhere else.

“Canadian existing home sales likely rose 8 per cent year-over-year in the month, while average prices are expected to post a solid 6.5-per-cent year-over-year increase,” said senior economist Robert Kavcic of BMO Nesbitt Burns.

On the earnings front, first-quarter reporting season is winding down, but there are still some biggies to come, including Air Canada, Encana, Rona, Gildan, Power Corp. and Power Financial, and Onex.

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