NAFTA s Uncertain Future Continues to Undermine the Economic Outlook

Transcription

1 SEPTEMBER 19, ECONOMIC & FINANCIAL OUTLOOK NAFTA s Uncertain Future Continues to Undermine the Economic Outlook #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff There is a slowdown in global trade volumes since last winter. Most G2 countries even saw their exports drop in the spring. This situation, resulting from trade constraints imposed by the United States and the retaliatory measures taken by other countries, is also reflected in the decrease in PMI indexes associated with export orders. ff In the United States, the economy rebounded in the spring. Bolstered by a pick-up in real consumption, real GDP rose to 4.2% (annualized). Growth should continue to be solid in the third quarter, with business inventories and investment making a positive contribution. That said, trade tensions are not helping either. ff In Canada, despite the uncertainty stemming from trade issues with the United States, the outlook for economic growth remains fairly good. Even though they appear to be heading in the right direction, the North American Free Trade Agreement (NAFTA) renegotiations had yet to wrap up at the time of writing, and Canada is still facing the threat of new U.S. customs tariffs. ff Economic growth for most of the other provinces could near the national average in and 219. Furthermore, GDP growth should slow in Ontario and British Columbia due to a less vibrant housing market. ff The Federal Reserve seems poised to announce another key rate increase at its September 26 meeting and is expected to continue to signal further hikes in the coming quarters. ff As expected, the Bank of Canada opted for the status quo in September, but made it clear that it intends to continue its monetary tightening in October. We are therefore still expecting key rates to gradually rise, which should foster higher bond yields. ff Widening interest rate spreads with the United States could somewhat weaken the loonie against the greenback until next spring. ff Developments in trade negotiations between Canada and the United States may keep Canadian financial markets quite volatile in the short term. ff In, households continue to drive economic growth. The low unemployment rate and wage acceleration, due to the growing scarcity of available labour, are boosting ers confidence. Consumer spending and the residential sector are moving forward at a good pace. CONTENTS Highlights... 1 Risks Inherent in our Scenarios... 2 Financial Forecasts... 3 Economic Forecasts Overseas... 4 Canada... 8 United States Ontario and Other Provinces...12 Medium-Term Issues and Forecasts...15 François Dupuis, Vice-President and Chief Economist Hélène Bégin, Senior Economist Mathieu D Anjou, Senior Economist Benoit P. Durocher, Senior Economist Francis Généreux, Senior Economist Hendrix Vachon, Senior Economist Desjardins, Economic Studies: or , ext desjardins.economics@desjardins.com desjardins.com/economics NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright, Desjardins Group. All rights reserved.

2 RISKS INHERENT IN OUR SCENARIOS The recent rise in protectionism is deepening uncertainty all around the world. A faster increase in import prices could raise inflationary pressures, while undermining economic and employment growth. In Canada, and other provinces, some sectors and regions could be hard hit by the protectionist measures or, potentially, by a possible end of the North American Free Trade Agreement (NAFTA). Moreover, growing uncertainty and a shake-up in global supply chains could further curb business investment and reduce productivity. Geopolitical risks continue to weigh on the global economy. Financial imbalances are still a consideration in several regions, especially in Europe and in emerging economies like China. Tough Brexit negotiations between the United Kingdom and the European Union could also disrupt the global economy. In the United States, the Trump administration s policies could make the economic situation diverge from our scenarios, either positively (tax cuts, increased federal spending and higher infrastructure investment) or negatively (protectionism and immigration reform). Political uncertainty fed by doubts concerning the administration s integrity may also affect the markets. The financial struggles of emerging nations could worsen and begin to weigh negatively on North American markets. Stronger or weaker inflation than forecast would have major consequences, especially for the bond market. The outbreak of a major conflict in the Middle East or a deep plunge in Iranian production after renewed U.S. sanctions might drive up oil prices further. In Canada, the rise in interest rates is intensifying concerns over high household debt. Signs of overvaluation in the Toronto and Vancouver real estate markets are high, and Montreal is on the verge of becoming overheated, making the market more vulnerable to a potential correction. TABLE 1 World GDP growth (adjusted for PPP) and inflation rate WEIGHT* Ontario Japan United Kingdom Euro zone Germany France Italy Other countries Australia Emerging and developing economies North Asia China India South Asia Latin America Mexico Brazil Eastern Europe Russia INFLATION RATE f 219f f 219f IN % Advanced economies United States Canada REAL GDP GROWTH Other countries South Africa World f: forecasts; PPP : Purchasing Power Parities, exchange rate that equates the costs of a broad basket of goods and services across countries; *. Sources: World Bank, Consensus Forecasts and Desjardins, Economic Studies SEPTEMBER 2

3 FINANCIAL FORECASTS A breakthrough in trade negotiations between the United States and Mexico and encouraging economic data injected some optimism back into financial markets in late August. This, combined with outstanding business earnings, propelled the S&P 5 to a new historical peak. The bull market that began in March 29 thus became the longest in U.S. history. Concerns over emerging countries and trade tensions did, however, return to the fore in the first few weeks of September. Despite that, long-term bond yields were pulled up recently by accelerating wage growth in the United States and by the positive comments of central bank leaders. The Federal Reserve seems poised to announce another key rate increase at its September 26 meeting and is expected to signal further hikes in the coming quarters. As expected, the Bank of Canada opted for the status quo in September, but made it clear that it intends to continue its monetary tightening in October. We are therefore still expecting key rates to gradually rise, which should foster higher bond yields. Widening interest rate spreads with the United States could somewhat weaken the loonie against the greenback until next spring. Developments in trade negotiations between Canada and the United States may keep Canadian financial markets quite volatile in the short term. TABLE 2 Summary of the financial forecasts END OF PERIOD IN % (EXCEPT IF INDICATED) Key interest rate United States Canada Euro zone United Kingdom 219 Q3 Q4 Q1 Q2 Q3f Q4f Q1f Q2f Q3f Q4f Federal bonds United States 2-year 5-year 1-year 3-year Canada 2-year 5-year 1-year 3-year Currency market Canadian dollar (USD/CAD) Canadian dollar (CAD/USD) Euro (EUR/USD) British pound (GBP/USD) Yen (USD/JPY) Stock markets (level and growth)* United States S&P 5 Canada S&P/TSX Commodities (annual average) WTI oil (US$/barrel) Gold (US$/ounce) 2,674 16,29 Target: 2,925 (+9.4%) Target: 17, (+%) Target: 3,75 (+%) Target: 18,3 (+7.6%) 51 (6*) 1,258 (1,33*) 67 (68*) 1,27 (1,25*) 7 (72*) 1,23 (1,215*) f: forecasts; WTI: West Texas Intermediate; * End of year. Sources: Datastream and Desjardins, Economic Studies SEPTEMBER 3

4 Overseas Trade Tensions Are Being Felt FORECASTS Growth of the global economy remained relatively slow in the spring. There was widespread weakness in exports, the first sign that the trade conflicts stirred up by the Trump administration are having an effect. The lack of a rebound is particularly obvious in the euro zone, where confidence indexes continue to soften. Euroland s real GDP growth forecasts were revised downward. In the United Kingdom, the economy is still plagued by uncertainty about Brexit, although growth was slightly better in the spring. Japan saw improved performance after the staggering contraction in winter. In China, the escalation in trade tensions with the United States garnered all the attention. Global real GDP should climb % in and 219. After a stellar, many advanced economies saw their economic growth slow in the first quarter of and, in many cases, continue on that path into the spring and early summer. Alongside this downturn are lower global trade volumes as well (graph 1). Most G2 countries even saw their exports drop in the spring (graph 2). This situation, resulting from trade constraints imposed by the United States and the retaliatory measures taken by other countries, is also reflected in the decrease in PMI indexes associated with export orders. the rate of such growth is expected to remain below that of. After rising % in the past year, Euroland real GDP should increase by no more than % this year and % next year. Given the situation, Euroland core inflation should remain modest. GRAPH 2 Most G2 economies saw their exports drop in the spring Quarterly change in exports in Q2 In % 1 EURO ZONE GRAPH 3 Global trade has slowed since the beginning of the year Confidence is eroding slightly in the euro zone Annual change in international trade volume Index month moving average Brazil Argentina China United Kingdom Euro zone Confidence indexes In % 213 Euro zone Italy Sources: Organisation for Economic Co-operation and Development and Desjardins, Economic Studies GRAPH France Germany Indonesia Turkey South Korea G2 South Africa Japan Mexico Russia Australia United States India -2 Canada -15 Saudi Arabia After rising % in the first quarter, Euroland real GDP ended with a mere % increase by late spring. Two observations of note were a slowdown in consumption and a negative contribution by net exports. The indicators available for the third quarter have so far not really offered any signs of a rebound. The PMI indicators are down overall, as are the main household and business confidence indexes (graph 3). While these indicators have not reached dramatic levels, they do suggest that the economy will continue to grow, generally speaking. However, Sources: CPB - Netherlands Bureau for Economic Policy Analysis and Desjardins, Economic Studies Consumer confidence Business confidence Sources: European Commission and Desjardins, Economic Studies SEPTEMBER 4

5 UNITED KINGDOM The British economy performed somewhat better this spring than last winter. After an annualized increased of just % in the first quarter, real GDP then rose %. Nonetheless, the pace is still sluggish, and the vagueness surrounding Brexit does not inspire confidence. In the very short term, however, temporary factors such as weather helped start the third quarter on a positive note, with monthly real GDP by industry advancing.3% in July (graph 4). As for Brexit, it seems that a clean break in trade between the United Kingdom and the European Union (no-deal or Hard Brexit) has become a greater possibility recently, especially since the official plan proposed by Theresa May s government has very little support on both sides of the Channel. Although some common ground may still be found, the compromises that are emerging offer little clarity, undermining confidence and business investment. Annual real GDP growth of % is forecast for the United Kingdom in and 219. JAPAN Along with the United States and Canada, Japan is one of the advanced economies that have managed to rebound after a disappointing first quarter. The % annualized contraction in real GDP over the winter was followed by a % gain. This performance, the best since winter, is due in large part to a revival in consumption (graph 5). However, such strong growth will be difficult to sustain. For the year as a whole, the forecast calls for % growth, followed by a % gain the following year. GRAPH 4 Britain s monthly real GDP for July bodes well for the third quarter United Kingdom Real GDP Monthly variation in % Quarterly variation in %.8 Monthly GDP (left) Quarterly GDP (right) Sources: Office for National Statistics and Desjardins, Economic Studies GRAPH 5 Japan s real GDP rebounded in the second quarter Contribution to annualized quarterly growth in Japan s real GDP In % 4 Net exports 3 2 Inventory change 1 Business investment Government expenditures -1-2 Consumer spending Q1 Q2 Q3 Q4 Q1 Total Q2 Sources: Cabinet Office and Desjardins, Economic Studies GRAPH 6 EMERGING ECONOMIES The past few months have been difficult for the main emerging countries. Their economies are still expected to expand, but negative investor perception sent currencies and stock markets into a nosedive for the most part. In China, it is more the escalation in trade tensions with the United States that is causing concern. In addition to imposing blanket tariffs on washing machines, solar panels, steel and aluminum, the United States has already added tariffs on US$5B worth of imported Chinese goods, with another US$2B slated to be added on September 24. President Donald Trump has also mused about adding a further US$267B to cover all U.S. imports from China. So far, Chinese retaliation has targeted US$113B of U.S. goods, including US$6B on September 24. The Chinese PMI indexes are already suffering as a result of these trade constraints (graph 6). It remains to be seen what the effect will be on the real economy. After gaining 6.9% last year, China s real GDP is expected to grow % this year and % next year. The Chinese economy could soon be feeling the effects of higher U.S. tariffs Index Quarterly variation in % Chinese manufacturing PMI Exports, lagged three months (left) U.S. imports of Chinese goods (right) Sources: Datastream, Bureau of Economic Analysis and Desjardins, Economic Studies SEPTEMBER 5

6 United States Solid Growth Continues FORECASTS As expected, the U.S. economy rebounded in the spring. Bolstered by a pick-up in real consumption, real GDP rose to 4.2% (annualized). Growth should continue to be solid in the third quarter, with business inventories and investment making a positive contribution. Some weakness in the real estate market has, however, been noted and trade tensions are not helping either. Real GDP growth could exceed 3% in the summer. Our growth forecast for as a whole holds at % and should be followed by a % increase in real GDP in 219. The second estimate of the national accounts for the second quarter of pegs annualized real GDP growth at 4.2 %, the biggest gain since summer 214. After a fairly shaky start to the year, consumer spending rallied significantly, posting annualized growth of %. A temporary spike in exports and another round of strong data in non-residential construction boosted growth. However, the pick-up in consumption comes more from the end of winter and the beginning of spring, in addition to being tied to the tax cuts announced at the tail end of. Since then, consumption has been decent, but nothing more. The healthy growth in spending on services (especially in energy and food services) offsets a weakness in durable goods, particularly auto sales. Since consumer confidence is still very high, changes in household spending can be expected to remain quite lively. Residential investment is struggling, however. This component has seen growth in just one quarter since spring. New and existing home sales have also been down since last fall (graph 7). Higher mortgage rates and issues with the supply of homes are being given as the reason behind this sag. Stellar job market performance should, however, help boost activity in this sector, and housing starts should get back to a more positive trend. In August, the ISM manufacturing index hit its highest point since May 24 (graph 8). This is one of the factors suggesting that growth in business investment will continue to be high in the short term. The effect of corporate tax cuts is one contributor, even though this policy was especially favourable to the stock market, particularly through share buybacks. It is still too early to see the actual impact of the Trump administration s protectionist policy on the U.S. economy. However, some effects can be observed, including the astonishing US$26.9B drop in business inventories in the second quarter of. This slump is associated with higher exports of agricultural products and aviation ahead of the retaliatory tariffs imposed by other countries, notably China. At the same time, real goods exports climbed 1%, the largest quarterly gain since fall 213. However, the opposite is expected for the current quarter, as a drop in exports will go hand in hand with a rise in business inventories. In the longer term, President Donald Trump s trade policy must be viewed as limiting to U.S. economic growth. The breakout of the trade war already led to a significant appreciation of the U.S. currency, which will degrade net U.S. exports and this is GRAPH 7 GRAPH 8 Home sales slowed in the United States The ISM manufacturing index has reached its highest level since May 24 ISM manufacturing index In thousands In thousands New single-family homes (left) Existing homes (right) Index 5,9 6 5,7 55 5,5 5 5,3 45 5, , , Sources: National Association of Realtors, U.S. Census Bureau and Desjardins, Economic Studies Sources: Institute for Supply Management and Desjardins, Economic Studies SEPTEMBER 6

7 TABLE 3 United States: Major economic indicators QUARTERLY ANNUALIZED VARIATION IN % (EXCEPT IF INDICATED) Real GDP (29 US$) Personal consumption expenditures Residential construction Business fixed investment Inventory change (US$B) Public expenditures Exports Imports Final domestic demand Other indicators Nominal GDP Real disposable personal income Employment according to establishments Unemployment rate (%) Housing starts1 (thousands of units) Corporate profits*2 Personal saving rate (%) Total inflation rate* Core inflation rate*3 Current account balance (US$B) 219 ANNUAL AVERAGE Q1 Q2 Q3f Q4f Q1f Q2f f 219f , ,261 1, , ,352 1,377 1, , ,28 1, f: forecasts; * Annual change; 1 Annualized basis; 2 Before taxes; 3 Excluding food and energy. Sources: Datastream and Desjardins, Economic Studies not counting foreign retaliation. Consequences for prices in the United States are also plausible, and we are already seeing a changing trend on certain prices (graph 9). In that respect, the escalation with China is an increased risk, while the new wave of tariff increases imposed by the United States could further affect consumer goods. The midterm election on November 6 could lead to a change in the economic policy implemented since Donald Trump s inauguration. The possibility that the Democrats will win a majority in the House of Representatives is quite high, even though a Republican win is favoured for the Senate. As we saw after 21 during Barack Obama s presidency, a divided Congress would considerably narrow the Trump administration s sphere of influence. GRAPH 9 Some prices have already been affected by tariff hikes United States Jan. = JAN. APR. CPI Laundry equipment PPI Electricitygenerating equipment PPI Metals for manufacturing JUL. OCT. JAN. APR. JUL. PPI Steel products manufactured using purchased steel CPI: Consumer price index; PPI: Producer price index Sources: Bureau of Labor Statistics and Desjardins, Economic Studies SEPTEMBER 7

8 Canada A Turbulent First Half of Should Give Way to Greater Stability FORECASTS Despite the uncertainty stemming from trade issues with the United States, the outlook for Canada s economic growth remains fairly good. Real GDP should rise an average of about 2% in the coming quarters, meaning that could end with a % gain, followed by a % increase in 219. After expanding just % in the first quarter of, Canada s economy picked up in the second quarter, gaining % (annualized). Consumer spending regained momentum, and residential investment stabilized following a difficult start to the year in response to tighter rules. International trade made a significant contribution to economic growth in the spring owing to a surge in exports. Over the coming quarters, the Canadian economy should enjoy greater stability, and real GDP should climb around 2% on average. As for domestic demand, household consumption expenditures will continue to get a boost from favourable factors. Despite certain vagaries, the labour market is still doing well with a very low unemployment rate, historically speaking. Wage growth remains at a fairly high level, as some sectors and regions are increasingly feeling the pinch of labour shortages. Consumer confidence is therefore still quite high. For non-residential investment, the coming quarters are looking mixed. On the one hand, the dissipation of excess production capacity brings with it more and more constraints. According to a recent Bank of Canada survey, close to 57% of businesses would struggled to meet an unexpected rise in demand (graph 1). Many were therefore forced to invest more so that they could meet current and future demand. On the other hand, even though they appear to be heading in the right direction, the North American Free Trade Agreement (NAFTA) renegotiations had yet to wrap up at the time of writing, and Canada is still facing the threat of new U.S. customs tariffs, particularly on automotive products. In these conditions, uncertainty continues to hang in the air, preventing many businesses from seeing their investment projects through. It goes without saying that Canada s economic scenario will have to be revised slightly upward in the event of a positive outcome in the negotiations. The housing market has stabilized in most parts of the country in recent months, but demand remains quite lively. That said, the gradual rise in interest rates could be felt more in the coming quarters, which should rein in the forward momentum of residential investment. Mortgage credit has also been growing at a much slower pace since Canadian key interest rates began climbing in mid (graph 11). In the international trade sector, foreign demand, especially with a healthy U.S. economy, is still favourable to an uptrend in exports. However, we should expect the volatility of the past few quarters to continue based mainly on the jolts in the energy sector. For the time being, the introduction of customs tariffs on trade in steel and aluminum products between Canada and the United States as well as on imports of some other household GRAPH 1 GRAPH 11 Canada has greater constraints to production Household credit growth slows in Canada Capacity to respond to an unexpected increase in demand Outstanding household credit In % of respondents 6 3-month variation in % Some difficulty.3 Serious difficulty Sources: Bank of Canada and Desjardins, Economic Studies Mortgage credit Consumer credit Total Sources: Statistics Canada and Desjardins, Economic Studies SEPTEMBER 8

9 TABLE 4 Canada: Major economic indicators 219 ANNUAL AVERAGE QUARTERLY ANNUALIZED VARIATION IN % (EXCEPT IF INDICATED) Q1 Q2 Q3f Q4f Q1f Q2f f 219f Real GDP (27 $) Final consumption expenditure [of which:] Household consumption expenditure Governments consumption expenditure Gross fixed capital formation [of which:] Residential structures Non-residential structures Machinery and equipment Intellectual property products Governments gross fixed capital formation Investment in inventories (27 $B) Exports Imports Final domestic demand Other indicators Nominal GDP Real disposable personal income Employment Unemployment rate (%) Housing starts1 (thousands of units) Corporate profits*2 Personal saving rate (%) Total inflation rate* Core inflation rate*3 Current account balance ($B) f: forecasts; * Annual change; 1 Annualized basis; 2 Before taxes; 3 Excluding food and energy. Sources: Datastream and Desjardins, Economic Studies products is expected to have a fairly limited overall effect on the country s exports and imports as a whole. The impact of these tariffs on inflation should also be rather small. GRAPH 12 Temporary factors are causing Canada s inflation to rise Consumer price index (CPI) July The annual inflation rate, which reached the top of the target range (3%) in July, should lose some ground over the next few months and converge toward the midpoint (2%). As more stable growth is anticipated in oil prices, the effects of past spikes in the price of gas and air transportation should gradually fade (graph 12). Alcohol and tobacco Recreation, education and reading Health and personal care Air transportation Gasoline Non-gasoline and non-air transportation Clothing and shoes Living expenses, furniture and equipment Housing Food TOTAL Annual variation in % 25 3 Sources: Statistics Canada and Desjardins, Economic Studies SEPTEMBER 9

10 The Economy Is Keeping a Good Pace FORECASTS Households continue to drive economic growth in. The low unemployment rate hovering at around % and wage acceleration, due to the growing scarcity of available labour, are boosting ers confidence. Consumer spending and the residential sector are moving forward at a good pace. Real GDP growth is on track to hit % this year and should ease to % next year. The uncertainty over trade relations with the United States could further chip away at exports and business investment. Real GDP increased sharply by % in May. This is the fifth straight monthly gain. Annualized quarterly growth should therefore close in on % in the second quarter, compared to % in the previous quarter. Even though data on employment have been disappointing for the past few months, the economy s expansion cycle will continue at a moderate pace. Employment saw six monthly declines in the space of eight months this year, which may seem surprising given the robust economic growth. This is probably a correction following the impressive improvement in. The unemployment rate rose around % after reaching a historic monthly low of 5.% at the end of last year. However, the labour market is very tight in virtually all parts of, with most regions posting an unemployment rate below 6% (graph 13). The scarcity of workers, which has become quite widespread in the province, is spurring businesses to raise wages in order to attract and retain employees. Annual average weekly earnings and the average hourly wage are now up by around 4% (graph 14). Despite lacklustre employment statistics, household income in real terms and consumer spending will see a decent increase again this year. The cumulative increases in interest rates will, however, eventually restrain consumers as of 219. The housing market continues to surprise with its liveliness. Sales of existing properties continue to rise in, mainly thanks to the strong activity in the Greater Montreal area. The annual increase in average prices is around the 5% mark on the island, a pace not seen for many years. There are also more and more cases of overbidding, that is, when a buyer bids above the asking price. This type of sale now accounts for 1% of single-family homes sold in Greater Montreal and 8% of condos.1 The stock of available properties on the market is shrinking quickly in the province, putting upward pressure on prices in nearly every part of (graph 15 on page 11). Some easing is expected next year as mortgage rates continue to rise, which should gradually cool the residential sector. Meanwhile, business investment is catching up. These results are disappointing given that confidence among SME leaders is close to a 1 year peak (graph 16 on page 11). Some investment decisions are likely being delayed pending the outcome of trade negotiations with the United States on the A Growing Number of Properties Are Selling Above the Asking Price, Québec Federation of Real Estate Boards, A Word From the Economist, May, 6 p. 1 GRAPH 13 GRAPH 14 Low unemployment rate in many parts of Wage growth is accelerating in Unemployment rate First half of Annual variation in % Gaspésie Îles-de-la-Madeleine Montréal Laval Lanaudière Laurentides Saguenay Lac-Saint-Jean as a whole Mauricie Bas-Saint-Laurent Outaouais Centre-du-Québec Côte-Nord et Nord-du-Québec Estrie Montérégie Abitibi-Témiscamingue Capitale-Nationale Chaudière-Appalaches 5 Average weekly earnings Average hourly wage month moving averages In % 8 Sources: Institut de la statistique du Québec and Desjardins, Economic Studies Sources: Statistics Canada and Desjardins, Economic Studies SEPTEMBER 1

11 TABLE 5 : Major economic indicators ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) f 219f Real GDP (27 $) Final consumption expenditure [of which:] Household consumption expenditure Governments consumption expenditure Gross fixed capital formation [of which:] Residential structures Non-residential structures Machinery and equipment Intellectual property products Governments gross fixed capital formation Investment in inventories (27 $B) Exports Imports Final domestic demand Other indicators Nominal GDP Real disposable personal income Weekly earnings Employment Unemployment rate (%) Personal saving rate (%) Retail sales Housing starts1 (thousands of units) Total inflation rate , ,87 2,266 3,899 4, f: forecasts; 1 Annualized basis. Sources: Statistics Canada, Institut de la statistique du Québec, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies GRAPH 15 GRAPH 16 Average home prices: Increases almost across the board in Despite strained trade relations with the United States, SME confidence remains high in Average home prices First half of * Index Centre-du-Québec Montréal as a whole Abitibi-Témiscamingue Montérégie Mauricie Estrie Capitale-Nationale Laval Lanaudière Laurentides Outaouais Chaudière-Appalaches Saguenay Lac-Saint-Jean Bas-Saint-Laurent Côte-Nord Gaspésie Îles-de-la-Madeleine 75 7 Full economic potential zone Annual variation in % * Year to date from January to June compared with the same period in. Sources: Québec Federation of Real Estate Boards via the Centris system and Desjardins, Economic Studies future of North American Free Trade Agreement (NAFTA) and by the tariffs on steel and aluminum imposed by that country in June, which are also affecting the industrial chain for these products. The volume of international exports from rose % in the first half of from the same period in. Despite the uncertainties, our scenario calls for total exports to Sources: Canadian Federation of Independent Business and Desjardins, Economic Studies tick up this year and next, owing to the expected strength of the global economy. SEPTEMBER 11

12 Ontario and Other Provinces Developments in the Housing Market and the Energy Sector Will Be Decisive FORECASTS Economic growth for most of the provinces could near the national average in and 219. GDP growth should slow in Ontario and British Columbia due to a less vibrant housing market. In Alberta, oil production will stimulate economic growth, but delivery problems will continue to be a major drag on new investment in the energy sector. In Saskatchewan, the indefinite closure of two uranium mines is raising concerns. In Atlantic Canada, growth is expected to be a tad below the national average as a result of lower potential. ONTARIO Ontario real GDP expanded just % (annualized) in the first quarter of, advancing by the same percentage as the national average. Like the results for Canada s economic accounts, a rebound in Ontario s real GDP is expected in the second quarter. Moreover, the monthly international merchandise trade data are suggesting an increase in exports nearly twice as high as that of imports in the spring, which should lead to a strong positive contribution to the province s growth. After several months of declines, the housing market has stabilized recently, with existing home sales beginning to pick up again in the GTA. It is worth mentioning that demand is still brisk, as the annual change in population in Toronto is % (graph 17), much higher than the national average of %. Under these conditions, the housing market could again make a positive contribution to economic growth in the coming quarters. However, its progression might be increasingly limited by the gradual rise in interest rates. The economic growth outlook for Ontario could also change somewhat in the coming months based on the implementation of new public policies following the Conservative Party s election in June after roughly 15 years of Liberal rule. The fall update and the next Ontario government budget will obviously be decisive in this respect. In addition, developments in the North American Free Trade Agreement (NAFTA) negotiations could greatly influence growth expectations (both up and down) for the provinces, Ontario in particular. For the time being, the forecasts for Ontario s economy have changed very little. Real GDP could rise % on average in. A gain of % is expected for 219. WESTERN PROVINCES The major jolts in the energy sector over the past few months are expected to affect Alberta s economy. On the one hand, oil production was disrupted this summer by the temporary closure of the Syncrude oil sands complex. On the other hand, a large extraction site, that is, the Fort Hills mine north of Fort McMurray, was recently opened after many years of construction and close to $17B in investments. The daily capacity of this new facility is estimated to eventually be 194, barrels a day, which should boost the province s oil production. That said, the constraints associated with the full use of transport capacities will continue to be a barrier to new investment in the energy sector. With oil production full steam ahead, the growth outlook for Alberta s economy is therefore fairly good, and real GDP growth should stay above the national average. GRAPH 17 GRAPH 18 Population growth is much faster in the Greater Toronto area Housing market remains depressed in the Vancouver area Population aged 15 and over Sales of existing properties Annual variation in % Toronto CMA Rest of Canada In units In units 11, 4,4 1, 3,9 9, 3,4 8, 2,4 6, 21 2,9 7, 5, CMA: Census metropolitan area Sources: Statistics Canada and Desjardins, Economic Studies Toronto (left) Vancouver (right) 1,9 Montreal (right) Sources: Canadian Real Estate Association and Desjardins, Economic Studies SEPTEMBER 12

13 TABLE 6 Ontario: Major economic indicators ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) f 219f Real GDP (27 $) Final consumption expenditure [of which:] Household consumption expenditure Governments consumption expenditure Gross fixed capital formation [of which:] Residential structures Non-residential structures Machinery and equipment Intellectual property products Governments gross fixed capital formation Investment in inventories (27 $B) Exports Imports Final domestic demand Other indicators Nominal GDP Real disposable personal income Weekly earnings Employment Unemployment rate (%) Personal saving rate (%) Retail sales Housing starts1 (thousands of units) Total inflation rate* , ,328. 5,628-6,194 4, f: forecasts; * Annual change; 1 Annualized basis. Sources: Statistics Canada, Ontario's Ministry of Finance, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies In Manitoba and Saskatchewan, growth is expected to hover close to the national average over the next few years. For that to be true, Saskatchewan will have to overcome the challenges posed by the indefinite closure of two uranium mines. In British Columbia, it is mainly the housing market that is stealing the spotlight. While many parts of Canada have slightly increase recently, Vancouver continues to see lower sales of existing homes (graph 18). The province s economic growth could therefore lose some of its lustre, while real GDP growth is set to be closer to the Canadian average in and 219. ATLANTIC PROVINCES With lower growth potential, real GDP growth in the Atlantic provinces will remain below the national average in and 219. Prince Edward Island could, however, continue to stand out from the rest with stronger growth owing to favourable demographics and a healthy tourism sector. SEPTEMBER 13

14 TABLE 7 Canada: Major economic indicators by provinces ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) Real GDP growth Canada Atlantic Ontario Manitoba Saskatchewan Alberta British Columbia f 219f Employment growth Canada Atlantic Ontario Manitoba Saskatchewan Alberta British Columbia Unemployment rate Canada Atlantic Ontario Manitoba Saskatchewan Alberta British Columbia Retail sales growth Canada Atlantic Ontario Manitoba Saskatchewan Alberta British Columbia Total inflation rate Canada Atlantic Ontario Manitoba Saskatchewan Alberta British Columbia Housing starts Canada (thousands of units) Atlantic Ontario Manitoba Saskatchewan Alberta British Columbia f: forecasts Sources: Statistics Canada, Institut de la statistique du Québec, Ontario's Ministry of Finance, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies SEPTEMBER 14

15 Medium-Term Issues and Forecasts The Precarious Situation of Some Emerging Countries Could Slow the Global Economy in the Medium Term Economic growth is expected to remain above or close to its potential in Canada and the United States until 22. The tighter labour market and inflationary pressures will continue to justify tightening of monetary policies in many countries. The situation might then worsen. The U.S. cycle will begin to age and fears of the cycle ending may intensify. Weaker confidence coupled with higher interest rates might be enough to drag the global economy down. The threat of protectionism and structural problems might also contribute to this scenario. Recently, the volatility of many emerging country currencies brought to light other major macroeconomic imbalances. The Cycle in the United States Is Stretching Out It is always difficult to predict periods of reduced economic activity. Many factors often unforeseeable may rush us into it. The current cycle is now 11 months old and is getting ever closer to the record high of 12 months reached between 1991 and 21. We believe that this cycle may stretch into 219 and 22, but the ravages of time may become increasingly evident. By 221, business and consumer confidence may begin to erode around the world, including in and Canada. This might result in greater volatility on the financial markets, exacerbating the sentiment that a turning point in the cycle is near. Higher interest rates are also expected to have more of an effect in a few years, especially since monetary tightening should spread around the world. A slump in U.S. demand also appears likely when the stimulus from lower taxes and higher government spending in the United States wears off. This is another factor that could potentially dampen household and business confidence. Sources of Vulnerability Are on the Rise Low interest rates encouraged households and governments in many countries to take on debt. While the situation has improved somewhat recently in certain places due to a faster income growth, the new upward trend in interest rates could lead to a deterioration in household and government financial health in the next few years. Generally speaking, it seems that the international climate is becoming less favourable for many emerging countries, and the situation could get worse. Countries dealing with debt problems or current account deficits become more at risk in a context where interest rates are increasing worldwide. The perception that these countries are more fragile quickly causes investors to flee and increases exchange rate volatility, as we have seen happen since the spring (graph 19). In turn, this volatility raises the external debt burden and increases the risk of future defaults. GRAPH 19 Many emerging country currencies have posted significant declines since the spring Change against the U.S. dollar since mid-april Venezuela Argentina Turkey South Africa Brazil Chile Russia Hungary India Colombia Poland China Indonesia Malaysia Romania Thailand Taiwan Mexico Philippines Egypt In % Sources: Datastream and Desjardins, Economic Studies The Protectionist Threat Still Looms Strained negotiations of the North American Free Trade Agreement (NAFTA) and the risk that the United States will announce further protectionist measures are creating a great deal of uncertainty that is already having a downward effect on our economic growth forecasts. If additional protectionist measures are imposed, the decline in economic activity that we are predicting for around 221 might end up being more pronounced. It might also happen earlier. The context could also become a real conundrum for central banks, which would have to juggle weaker economic growth and inflationary pressures generated by trade tariffs. Italy s financial situation has been making headlines since the election of a government that is in less of a hurry to clean up public finances. This shows that Europe s financial woes have not all been resolved. The euro zone is also threatened by the troubles in Turkey. Many European banks could be adversely affected by rising bankruptcies in that country. SEPTEMBER 15

16 TABLE 8 Medium-term major economic and financial indicators ANNUAL AVERAGE AVERAGES f 219f 22f 221f 222f f , , , , , , , , , Real GDP (var. in %) Total inflation rate (var. in %) Employment (var. in %) Employment (thousands) Unemployment rate Retail sales (var. in %) Housing starts (thousands of units) Ontario Real GDP (var. in %) Total inflation rate (var. in %) Employment (var. in %) Employment (thousands) Unemployment rate Retail sales (var. in %) Housing starts (thousands of units) IN % (EXCEPT IF INDICATED) United States Real GDP (var. in %) Total inflation rate (var. in %) Unemployment rate S&P 5 index (var. in %)1 Federal funds rate Prime rate Treasury bills 3-month Federal bonds 1-year Federal bonds 3-year WTI oil (US$/barrel) Gold (US$/ounce) Canada Real GDP (var. in %) Total inflation rate (var. in %) Employment (var. in %) Employment (thousands) Unemployment rate Housing starts (thousands of units) S&P/TSX index (var. in %)1 Exchange rate (US$/C$) Overnight funds Prime rate Mortgage rate 1-year Mortgage rate 5-year Treasury bills 3-month Federal bonds 2-year Federal bonds 5-year Federal bonds 1-year Federal bonds 3-year Yield spreads (Canada United States) Treasury bills 3-month Federal bonds 1-year Federal bonds 3-year f: forecasts; WTI : West Texas Intermediate; 1 Variations are based on observation of the end of period. Sources: Datastream, Statistics Canada, Institut de la statistique du Québec, Ontario's Ministry of Finance, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies SEPTEMBER 16