Highlights b Interest rates are forecast to rise in 2003. b Business spending should rise in 2003. b Interest rates in 2002 were at their lowest level in four decades. b The Canadian and U.S. economies are expected to strengthen in 2003. Canadian and U.S. Economic and Financial Services  Developments in 2002 jobless rate is forecast to trend lower. Interest rates should remain low in the near term, though the Federal Reserve will likely shift to a tightening posture in the summer of 2003. Business credit  is expected to improve as capital investment picks up. Although mortgage growth will likely moderate from record highs, con- sumercreditgrowthshouldremainfirmamidrisingemployment. In the regulatory arena, focus has been on implementing Bill C-8, the Canadian government’s financial services reform bill. This has involved the drafting, discussion and passage of numerous regulations necessary to give effect to the legislation. The process is now drawing to a close as essential elements of the consumer- based Access to Basic Banking Services regulations are finalized. Another focus has been on the implementation of the federal anti-money laundering, proceeds of crime and terrorist activ- ities legislation, of which various provisions became effective  in June 2002. Canadian Financial Services Legislation After slowing last year, the Canadian economy has grown strongly so far in 2002. Real GDP rose at an annual rate of 4 $^{1}$⁄ $_{2}$%, on average, in the first three quarters of the year. Activity was led by demand for interest-sensitive goods, with consumers taking advantage of the lowest short-term interest rates in four decades to purchase automobiles and homes. Lofty demand and low sup- pliesofresalehomesinsomeareasliftedhousingstartsto12-year highs. In this supportive environment, demand for residential mortgages accelerated and consumer loans continued to grow. However, business lending continued to decline in the first half of the year amid lingering softness in capital spending.  Canadian job growth accelerated this year, with a net 459,000 positions created in the first ten months of 2002. The strong economy encouraged the Bank of Canada to raise overnight lending rates moderately in the spring and summer. However,  in light of the uncertain outlook for the global economy, the  central bank remained on the sidelines in the fall. With short- term interest rates still low, demand deposits have grown faster than term deposits in the past year. Following last year’s recession, the U.S. economy has expanded at an annual rate of 3 $^{1}$⁄ $_{2}$%, on average, in the first three quarters of 2002, led by record sales of automobiles and new homes.  Accordingly, residential mortgages and personal loans grew briskly this year. However, business spending and hiring have remained soft and business credit has declined. Because of the uneven nature of the expansion, the Federal Reserve has kept overnightratesat40-yearlows.Capitalmarketsactivityremained sluggish amid lower equity prices. The Canadian economy is expected to grow at a respectable pace in 2003. Housing activity and personal spending will continue to benefit from low (albeit rising) interest rates. A weak currency and an anticipated recovery in the U.S. economy should support exports. The jobless rate is expected to decline during the year. Inflation will likely remain low in the absence of excess demand pressures. Interest rates are anticipated to rise gradually in 2003 as the Bank of Canada unwinds the substantial amount  of monetary stimulus in the system. The Canadian dollar is  projected to strengthen against the U.S. dollar amid favourable interest-rate spreads and large trade surpluses. The economic environment should support mortgage and personal loan growth and spur a pickup in business credit in the year ahead. Economic and Financial Services Outlook for 2003 Stimulative monetary and fiscal policies will sustain the expansion of the U.S. economy in 2003. Consumer spending is expected to remain healthy, though sales of automobiles and homes will likely moderate from recent highs. Business invest- ment is projected to recover as capacity use increases. The BMO FINANCIAL GROUP ANNUAL REPORT 2002 51 ECONOMIC AND FINANCIAL S ERVICES DEVELOPMENTS Canadian and U.S. GLYPH<CR> Unemployment Rates  (%) AprGLYPH<CR> 2001 OctGLYPH<CR> 2001 AprGLYPH<CR> 2002 OctGLYPH<CR> 2002 7. 6 7. 6 7. 6 7. 9 7.1 6.9 7. 0 4.2 4.5 5.4 4.6 5.6 6.0 5.9 5.7 Canada United States 7. 4 Canadian and U.S. GLYPH<CR> Interest Rates  (%) AprGLYPH<CR> 2002 OctGLYPH<CR> 2002 OctGLYPH<CR> 2001 AprGLYPH<CR> 2001 5.73 4.92 4.41 3.20 2.11 2.13 2.63 2.75 6.02 4.81 3.78 2.50 1.75 1.75 1.75 1.75 U.S. Federal Funds Rate Canadian Overnight Rate U.S./Canadian DollarGLYPH<CR> Exchange Rates  (US$) 0.63 0.65 0.63 0.63 0.64 0.65 0.64 0.67 AprGLYPH<CR> 2002 OctGLYPH<CR> 2002 OctGLYPH<CR> 2001 AprGLYPH<CR> 2001 Growth in Gross Domestic GLYPH<CR> Product  (%)  *Estimates 2003* 2002* 2001 2000 3.8 3.3 1.5 4.5 3.2 2.4 0.3 3.8 Canada United States