(Newsroom America) -- The North American economy should grow 2 per cent this year and improve through 2013, with a strong performance from residential building in the U.S. and commercial construction in Canada, according to the North American Outlook released by BMO Economics.
BMO said the modest growth of 2 per cent for 2012 in the U.S. will pick up through 2013 amid improved household finances and a strengthening housing recovery. Growth is expected to reach 2.8 per cent 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," said Sal Guatieri, Senior Economist, BMO Capital Markets.
"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."
Other factors include, residential construction is now leading the expansion and housing starts are still about 40 per cent below demographic needs, suggesting plenty of running room for residential construction to lead the expansion.
Because of elevated unemployment, "we now expect the Fed will delay any rate hikes until mid-2015," said Mr. Guatieri.
Canada's economy is on track to grow 2 per cent this year and should improve modestly through 2013 – reaching 2.4 per cent by the end of the year.
"On the positive side, business investment, though moderating, continues to lead the expansion," said Mr. Guatieri.
"Commercial construction is supported by low vacancy rates, and companies are taking advantage of the strong loonie to buy productivity-enhancing equipment."
Mr. 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 to hold overnight rates steady at 1 per cent for somewhat longer than we previously thought, likely until autumn 2013," added Mr. Guatieri.
Mr. Guatieri said several risks to the North American economy remain, including a possible eurozone breakup, pending spending cuts and tax increases in the U.S., a sharp correction in the Vancouver and Toronto housing markets and the potential for a hard landing in China.