June 2016 C Q1/16 GDP

Transcription

1 June 216 C Q1/16 GDP W C 216

2 Volume 4, Number 6 June 216 RBC ECONOMICS RESEARCH CRAIG WRIGHT SENIOR VICE PRESIDENT & CHIEF ECONOMIST DAWN DESJARDINS VICE PRESIDENT & DEPUTY CHIEF ECONOMIST Financial Markets & Financial System PAUL FERLEY ASSISTANT CHIEF ECONOMIST Macroeconomics ROBERT HOGUE SENIOR ECONOMIST Regional Economies NATHAN JANZEN SENIOR ECONOMIST Macroeconomics LAURA COOPER ECONOMIST Public Policy JOSH NYE ECONOMIST Financial Markets and Macroeconomics GERARD WALSH ECONOMIST Sector Analysis and Provincial Economies EDITOR Brian Waterman rbceconomicsresearch@rbc.com SUBSCRIPTION INFORMATION rbceconomicsresearch@rbc.com ECONOSCOPE is published and produced monthly by RBC Economics Research. Address all correspondence to the Editor, RBC Economics Research, RBC, 9th Floor, South Tower, 2 Bay Street, Toronto, Ontario, M5J 2J5. IN BRIEF H 2 C Q1/16 GDP First-quarter 216 GDP growth strengthened to 2.4% from a.5% increase in the fourth quarter of 215. The strengthening in the first quarter resulted from rising exports, consumer spending, and residential investment that more than offset continued declines in business investment. On a monthly basis, most of the strength came from the outsized.5% gain in January, with February and March declining.1% and.2%, respectively. 5 W The global economy has yet to emerge from 215 s moderate growth path with real GDP forecasted to rise by 3.1% this year. Low energy prices and interest rates created the conditions for most advanced economies to accelerate in 216, and were it not for the wavering in confidence early in the year that dampened activity, growth forecasts would be higher. With central banks committed to maintaining accommodative policy and governments no longer implementing fiscal policy restraint, we see the easing in financial market volatility as a precursor to firmer growth in the advanced economies as the year progresses. 9 C 216 The outlook for provincial economies continues to vary substantially across Canada. Oil-producing provinces face another year of contracting activity in 216; whereas, all oil-consuming provinces are set to grow, and quite vigorously in the case of British Columbia, Ontario, and to a lesser extent, Manitoba. Royal Bank of Canada. The material contained in Econoscope is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authorization of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information obtained from sources considered to be reliable. Royal Bank of Canada makes no representation or warranty, express or implied, with respect to its accuracy or completeness. This publication is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities. Econoscope is indexed in the Canadian Business Index available online in the Canadian Business & Current Affairs Database. Registered trade-mark of Royal Bank of Canada Printed on recycled and recyclable paper. Visit our web site...at and Get your issues delivered by ... by sending your request along with your address to rbceconomicsresearch@rbc.com.

3 PAUL FERLEY, DAWN DESJARDINS, NATHAN JANZEN, LAURA COOPER, JOSH NYE CURRENT TRENDS C Q1/16 GDP HIGHLIGHTS First-quarter 216 GDP growth strengthened to 2.4% from a.5% increase in the fourth quarter of 215. The gain in employment along with a 22,9 drop in the labour force contributed to the unemployment rate unexpectedly dropping to 6.9% from April s 7.1%. Nominal retail sales rose.9% in April, slightly above expecta ons for a.8%. Housing starts inched downward to 189, in May (thereby matching market expecta ons) from 191, in April. Canada s trade deficit narrowed to $2.9 billion in April from a revised (but s ll record-high) $3.2 billion deficit in March. Market expecta ons had been for a smaller $2.5 billion deficit. With the seasonal pressures not quite matching what occurred a year ago, the overall and core year-over-year CPI rates moderated to 1.5% and 2.1%, respec vely. Real GDP % change, month-over-month Source: Sta s cs Canada Unemployment Rate % of labour force Source: Sta s cs Canada LATEST AVAILABLE: MARCH RELEASE DATE: MAY 31, 216 First-quarter 216 GDP growth strengthened to 2.4% from a.5% increase in the fourth quarter of 215. The strengthening first quarter resulted from rising exports, consumer spending, and residential investment that more than offset continued declines in business investment. On a monthly basis, most of the strength came from the outsized.5% gain in January, with February and March declining.1% and.2%, respectively. C M 13,8 LATEST AVAILABLE: MAY RELEASE DATE: JUNE 1, 216 The gain in employment along with a 22,9 drop in the labour force contributed to the unemployment rate unexpectedly dropping to 6.9% from April s 7.1%. The May employment report represented the first major release that reflected economic activity in the face of the Alberta wildfires and attendant shutdown of approximately half of the country s oil sand production. The gain in May hiring was stronger than the 1,8 that had expected. There were strong employment gains in both Quebec (21,6) and Ontario (21,6), which pushed both provincial unemployment rates downward by.4 percentage points to 7.1% and 6.6%, respectively. 2 ECONOSCOPE, ROYAL BANK OF CANADA

4 C A LATEST AVAILABLE: APRIL RELEASE DATE: JUNE 22, 216 Nominal retail sales rose.9% in April, largely offsetting March s.8% decline with most of the April increase resulting from higher prices. Excluding the impact of prices, the volume of sales rose just.1% in April. Although nominal gains were relatively broadly-based, with Statistics Canada noting that seven of 11 subsectors posted increases, the bulk of the overall rise came from a 6.% jump in gasoline station sales that was largely due to higher prices rather than sale volumes. Retail Sales % change, month-over-month C M LATEST AVAILABLE: MAY RELEASE DATE: JUNE 8, 216 Housing starts inched downward to 189, in May from 191, in April (see Housing Starts chart on page 4). Housing starts have now moderated in each of the last three months after averaging more than the 2, level for the six-month period from September 215 to February 216. The dip in the latest month reflected a 5.7% pullback in the multi-unit component (a third consecutive monthly decline) with single-detached home starts bouncing back by 4.2% following a 5.2% April drop. C A Q2 LATEST AVAILABLE: APRIL RELEASE DATE: JUNE 3, 216 Canada s trade deficit narrowed to $2.9 billion in April from a revised (but still record-high) $3.2 billion deficit in March (see Merchandise Trade chart on page 4). Exports rose by 1.5% (.7% volumes) and imports were up.9% (volumes 1.6%). The increase in nominal exports was partially due to a price-related increase in energy exports, while energy volumes were down in April, possibly reflecting the temporary shutdown of the Keystone oil pipeline in the US that reduced takeaway capacity from Alberta Source: Sta s cs Canada ECONOMY AT A GLANCE % change from: Latest Previous Year month month ago Real GDP Mar Industrial produc on Mar Employment May.1.6 Unemployment rate* May Manufacturing Produc on Mar Employment May Shipments Apr 1..7 New orders Apr Inventories Apr Retail sales Apr Car sales Apr Housing starts (s)* May Exports Apr Imports Apr Trade balance ($billlions)* Apr Consumer prices May * Levels are shown for the latest period and the same period a year earlier. Source: Sta s cs Canada, RBC Economics Research ECONOSCOPE, ROYAL BANK OF CANADA 3

5 Housing Starts Thousands C M CPI LATEST AVAILABLE: MAY RELEASE DATE: JUNE 17, 216 With the seasonal pressures not quite matching what occurred a year ago, the overall and core year-over-year rates moderated to 1.5% and 2.1%, respectively. The overall monthly increase remained sizeable in May 216 at.4%, up from the.3% gain recorded in April. These above-average increases in part reflected strengthening gasoline prices, which were up 4.1% and 8.9% in May and April, respectively. Gasoline prices have continued to increase to date in June; although with crude oil prices moderating in recent weeks, some of this pressure could be reversed beyond the current month Source: Canadian Mortgage and Housing Corpora on Merchandise Trade C$billions, annualized Exports Imports Source: Sta s cs Canada Consumer Price Index % change, year-over-year Source: Sta s cs Canada 4 ECONOSCOPE, ROYAL BANK OF CANADA

6 CRAIG WRIGHT, DAWN DESJARDINS, PAUL FERLEY, NATHAN JANZEN ECONOMICS AND FINANCIAL MARKETS OUTLOOK W The global economy has yet to emerge from 215 s moderate growth path with real GDP forecasted to rise by 3.1% this year. Low energy prices and interest rates created the conditions for most advanced economies to accelerate in 216, and were it not for the wavering in confidence early in the year that dampened activity, growth forecasts would be higher. Anxiety about the outcome of the June 23 referendum on UK membership in the European Union has likely weighed on growth in that country although our assumption that the status quo will prevail argues for a firming in growth in the second half of this year. With advanced economy central banks remaining committed to maintaining accommodative policy and governments no longer implementing as much fiscal policy restraint, we see firmer growth in the advanced economies as the year progresses. Emerging market economies, conversely, are likely to remain on a slower growth trajectory in 216. As the rebalancing in China s economy continues, the slowing in investment and industrial production will weigh against firmer consumption and service sector activity. Real GDP in China is forecasted to expand by 6.5% this year, which would be slower than 215 s 6.9% pace. Combined with lower revenues earned by commodity exporters and rising financing costs, 216 will mark a year of subdued economic activity in many emerging economies, in our view. US! The US economy is poised to emerge from its recent weak patch. After averaging just 1.1% in the six months ended March, April data pointed to sharp acceleration in activity with our forecast calling for a 3.1% annualized increase real GDP in the second quarter. We expect this stronger momentum to persist throughout the remainder of this year and next although the soft start to the year sets up real GDP growth to average 2.% in 216, which would be slower than 215 s 2.4% gain. The economy s stronger momentum should continue in 217 with real GDP growth forecasted to strengthen back to 2.4%. C. The US consumer is projected to maintain the dominant role in driving real GDP growth this year. In April and May, gains in non-farm payroll employment averaged 81,, which was the slowest pace of increase since 21. That said, the unemployment rate in May fell to 4.7%, and broader measures of unemployment showed a further reduction in labour market slack. Part of the abrupt slowdown in employment growth in May will likely be reversed in the near-term. We still see the underlying pace of job creation as likely to run closer to 15, per month rather than the 223, average posted during the prior three-year period but reflecting supply rather than demand factors (shrinking excess capacity in labour markets and slow underlying growth in the working-age population) that have offsetting upward implications for wage growth. Given firm underpinnings, we expect Global GDP Growth Annual % change Emerging World Advanced Source: Interna onal Monetary Fund, RBC Economics Research West Texas Intermediate (WTI) - spot market US$/bbl f 217f WTI $49. $41. $ Source: Haver Analy cs, RBC Economics Research Non-residen al Business Investment % Canada Euro Area US Source: StatsCanada, BEA, Eurostat, RBC Economics Research ECONOSCOPE, ROYAL BANK OF CANADA 5

7 US Real GDP Quarter-over-quarter % change, annualized rate f 17f Real GDP Source: Bureau of Economics Analysis, RBC Economics Research US Infla on % change, year-over-year Headline Core Source: Bureau of Labor Sta s cs, RBC Economics Research Fed Funds Rate % Source: Federal Reserve Board, RBC Economics Research households will continue to spend with motor vehicle sales forecasted to rise again in 216 and the upward trend in home sales to continue. I. Headline inflation in the US continues to run well below the Fed s 2% target because of falling energy prices. The core CPI rate, conversely, was at or above the Fed s 2% objective for six months running as of April, which has been the longest such streak since 212. The recent recovery in oil prices sets up for these two measures of inflation to converge during the remainder of 216. Gradual acceleration in wage growth as labour market slack shrinks should also exert upward pressure on consumer price growth over time. Based on the inflation and labour market readings, the Fed would have little hesitation following up the December 215 rate hike with another 25 basis point increase; however, because the risks from global economic and financial developments increased early in the year, policymakers assumed a cautious stance about the pace of further tightening. The Fed will likely remain on the sidelines monitoring international events, including the UK referendum on membership in the European Union and the negotiations regarding Greece s upcoming debt repayment. A benign outcome and continued strengthening in US activity would put a summer hike in play; although given all the caveats to this occurring, our forecast is that the Fed will delay its next move until later in the year. US F. For most of 216, the tradeweighted US dollar was under downward pressure as economic data sagged and markets factored in lower expectations of Fed rate hikes in 216. Sentiment turned in early May as data reports soothed concerns that the economy would continue along the first quarter s modest growth path, with April reports suggesting a much stronger outturn in the second quarter. We expect the US dollar will appreciate against both the euro and Canadian dollar in the second half of 216, as markets increasingly anticipate a fed funds rate hike that is then realized while domestic issues ensure the Bank of Canada and ECB maintain their current policy stance. B C. The news on the Canadian economy has been mixed since the Bank of Canada s last forecast update in April. The economy posted a healthy 2.4% annualized gain in the first quarter; however, the trend in the monthly reports sets up a weaker outcome in the second quarter. The weakening will be exacerbated by the wildfires in northern Alberta that took almost 5% of the production from the oil sands offline for a month. The volatility in the economy s performance in the near term makes it unlikely that the Bank will adjust monetary policy, with the effect of the wildfires viewed as a 6 ECONOSCOPE, ROYAL BANK OF CANADA

8 temporary factor. More worrying to us was the decline in export volumes in February and March and the weak tone in the 216 investment intentions survey. In its May policy statement, the Bank appeared to look through the gyrations in export activity, and the April trade report showed a modest recovery in exports of non-commodity products. The Bank asserted that the process of adjustment to lower oil prices is continuing but is proving to be uneven. Household spending, on the other hand, has continued to prove resilient reflecting continued job gains despite weaker conditions in the oil producing provinces. The most likely course of action is that the Bank will hold the overnight rate at.5% for the remainder of 216 to ensure that the transition in the drivers of growth proceeds. C! The consumer will be the lead support for the economy once again in 216. Record auto and home sales were reported in the first four months of the year and with activity likely to remain at these lofty levels barring any interruption in the labour market. The tax changes in the federal government s budget will provide a further lift to disposable incomes this year. On balance, consumer spending is forecasted to increase by 2.1% in 216 with auto sales projected to hit a record-sales pace for the fourth year running. Even with auto sales running at an elevated pace, however, Canadian households pared back their accumulation of non-mortgage loans in the first quarter, with growth in this credit component sustaining a slowing trend. Conversely, households continued to take on residential mortgage debt at a robust rate. Rising home prices and low interest rates underpinned demand for property loans with balances expanding by 6.3% in the first quarter, which was the quickest pace of accumulation since September 212. Despite the expansion in outstanding debt balances, service costs continued to run at 14% of disposable income, largely in line with the average during the past decade. The share of mortgages in arrears inched higher to start 216 but remained historically low. While balance sheets bear watching, recent indicators do not signal deterioration in the health of consumer balance sheets or flag imminent risk to the consumer outlook C 216. Canada s housing market posted a record number of sales in early 216, and on average, prices increased at a double-digit pace. These headlines masked significant deviations across regions. In Alberta and Saskatchewan, sales were below year-ago levels while Ontario and British Columbia sales soared and posted the largest increases among provinces. This pattern was echoed in prices, with Vancouver prices up 25% and Toronto prices running at a 12.6% clip compared to a year earlier. These strong price increases translated into sharp deterioration in affordability in these two cities while most Bank of Canada Overnight Rate % Source: Bank of Canada, RBC Economics Research forecasts Canada Real GDP Quarter-over-quarter % change, annualized rate f 17f -1 Real GDP Source: Sta s cs Canada, RBC Economics Research forecasts Employment By Province Year-over-year level change in s Rest of Canada Alta, Sask, and Nfld/Lab Source: Sta s cs Canada, RBC Economics Research ECONOSCOPE, ROYAL BANK OF CANADA 7

9 Canada Home Resales Thousands of units other markets are running close or slightly below their historical averages. The strong liftoff to 216 led us to revise our forecasts for Canadian housing sales and prices so that we project this year will mark the highest number of sales on record with prices rising 5.% to match 215 s gain Source: Canadian Real Estate Associa on, RBC Economics Research Canadian Public Sector Organiza ons CapEx Year-over-year % change Source: Sta s cs Canada, RBC Economics Research Canadian Dollar US$/C$ Parity Source: Bank of Canada, RBC Economics Research s Inten ons B 216. Business investment, in contrast, is expected to remain weak in 216. Oil & gas companies intend to reduce investment again in 216 with our monitoring showing a 3% drop; however, investment intentions were also soft (although to a far lesser extent) outside of the mining sector. Partially moderating this blow, government investment spending is expected to rise later this year largely due to the federal government s stimulus plan announced in the March Budget. The government spending initiatives and tax changes are projected to lift GDP growth this year by.2 percentage points and by.3 percentage points in 217. E. Canadian exporters posted sharply higher sales abroad in late 215 and early 216, only to falter unexpectedly in February and March. Overall in the first quarter, non-commodity exports were still up relative to a year earlier. The modest recovery in exports in April left sales of non-commodity products up almost 5% compared to a year earlier. On net, February and March s pullback exacerbated the pressure on the economy heading into the second quarter that was compounded by the wildfires in May. Both of these factors are likely to prove to be temporary restraints on growth, with exports forecasted to reaccelerate in the second half of 216 contributing to real GDP rising at an average 2.6% rate. U C. Canada s dollar mirrored the upward move in oil prices and rallied more than 8 cents against the US dollar from its January 216 low of 68 US cents. The recovery stalled in May as markets priced in increased expectations of a US Federal Reserve rate hike with the Bank of Canada expected to maintain the overnight rate at.5% for the remainder of 216. Looking forward, the Canadian dollar will continue to follow the ebb and flow of oil prices, and we anticipate limited upside until later in the year when supply and demand are more closely aligned. As such, the currency will likely take direction from changes in interest rate expectations. In 217, our forecast anticipates oil prices will continue to rise and that the Bank of Canada will be in position to increase the overnight rate as the economy gets closer to eliminating the output gap. Both of these developments will be positive for the currency, and we forecast that the Canadian dollar will appreciate to end next year at 8 US cents. 8 ECONOSCOPE, ROYAL BANK OF CANADA

10 PAUL FERLEY, ROBERT HOGUE, GERARD WALSH PROVINCIAL OUTLOOK C 216 M 216 The complex adjustments to sharply lower energy oil prices that provincial economies began to undergo in 215 will continue to unfold in 216, and we expect that they will result in a marked divergence in provincial growth rates similar to what we saw last year with oil-producing provinces mired in recession at one end of the spectrum and a trio of oil-consuming provinces seeing material growth at the other end. Despite recent increases in oil prices, our working assumption is that they will stay at weak enough levels the WTI benchmark averaging US$41/barrel in 216 to constrain revenues and lead to further substantial declines in capital spending in the energy sector in 216. Such an outcome would continue to weigh heavily on the performance of oil-producing provinces. On the other hand, oil-consuming provinces such as British Columbia, Ontario, and to a lesser extent, Manitoba will continue to lead growth thanks to accommodative interest rates, low energy costs, a depreciated Canadian dollar, and improved US demand. C The poor outlook for capital expenditures in the energy sector was corroborated by the recent release of Statistics Canada s survey of capital expenditure intentions (CAPEX survey), which showed that oil and gas extraction firms plan to cut their capital spending by 26% in 216, which would be on the heels of an even larger reduction of 35% in 215, with much of it taking place in Alberta. While continued retrenchment in this sector was widely anticipated, the CAPEX survey also revealed downbeat intentions by firms in other private-sector industries across Canada, which was disappointing to see. Quebec and Nova Scotia are the only two provinces where the private sector plans to boost its spending in 216. Higher public-sector expenditures will fill at least part of the gap in most provinces, however. B.C. ONT. MAN. QUE. CANADA N.S. P.E.I. N.B. SASK. N.&L. ALTA. 216 % Source: Statistics Canada, RBC Economics Research REAL GDP GROWTH ONT. MAN. B.C. ALTA. CANADA SASK. QUE. N.S. P.E.I. N.B. N.&L HIGHLIGHTS The outlook for provincial economies con nued to vary substan ally across Canada. Oil-producing provinces face another year of contrac on of ac vity in 216; whereas, all oil-consuming provinces are set to grow, and quite vigorously in the case of Bri sh Columbia, Ontario and Manitoba. We lowered our 216 GDP forecast for Alberta to -2.5% from -1.6% previously to reflect a weaker than expected start to 216 and the nega ve effects of the horrific wildfires that devastated Fort McMurray and disrupted oil sands products in May. On the other hand, we slightly boosted our GDP growth forecasts for a few provinces in 216, including Ontario and Bri sh Columbia, to reflect stronger than expected ac vity in the early months of 216. Our provincial growth rankings for 216 con nue to place Bri sh Columbia in first posi on with a growth rate of 3.%, followed by Ontario (2.8%) and Manitoba (2.3%). Quebec (1.5%) is the only other province that we project to grow at a faster rate than the na onal average (1.4%). Along with Alberta, we expect the economies of Newfoundland and Labrador and Saskatchewan to contract slightly in 216. We also made several modest changes to our 217 outlook for the provinces, which were in keeping with downward revisions that we made to our macroeconomic assump ons. The majority of these changes has resulted in slightly slower expected provincial growth next year, except for Alberta where we boosted growth to account for the rebuilding work in Fort McMurray and a lower base for oil produc on in 216. ECONOSCOPE, ROYAL BANK OF CANADA 9

11 F C RBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS = Annual Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q GROWTH IN THE ECONOMY PERIOD OVER PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED Household consumption Durables Semi-Durables Non-durables Services Government expenditures Residential investment Business investment Non-residential structures Machinery & equipment Final domestic demand Exports Imports Inventories (change in $b) Real gross domestic product OTHER INDICATORS YEAR OVER YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED Business and labour Productivity Pre-tax corporate profits Unemployment rate (%)* Inflation Headline CPI Core CPI External trade Current account balance ($b) % of GDP Housing starts (s)* Motor vehicle sales (mill., saar)* INTEREST AND EXCHANGE RATES %, END OF PERIOD Overnight Three-month Two-year Five-year year year Canadian dollar * Quarterly averages, level Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts June ECONOSCOPE, ROYAL BANK OF CANADA

12 F U S RBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS = Annual Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q GROWTH IN THE ECONOMY PERIOD OVER PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED Consumer spending Durables Non-durables Services Government spending Residential investment Business investment Non-residential structures Non-residential equipment Intellectual property Final domestic demand Exports Imports Inventories (change in $b) Real gross domestic product OTHER INDICATORS YEAR OVER YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED Business and labour Productivity Pre-tax corporate profits Unemployment rate (%)* Inflation Headline CPI Core CPI External trade Current account balance ($b) % of GDP Housing starts (s)* Motor vehicle sales (millions, saar)* INTEREST RATES %, END OF PERIOD Fed funds Three-month Two-year Five-year year year Yield curve (1s-2s) * Quarterly averages, level Source: US Bureau of Economic Analysis, RBC Economics Research forecasts June 216 ECONOSCOPE, ROYAL BANK OF CANADA 11

13 CURRENT TRENDS CURRENT ECONOMIC INDICATORS C - US C B F F Y - L F F Y - L P Y T - M P Y T - M M A D M A D Industrial production Mar May Mfg. inventory - shipments ratio (level) Apr Apr. New orders in manufacturing Apr Apr. Business loans - Banks Apr May Index of stock prices May May H Retail sales Apr May Auto sales Apr May Total consumer credit Mar Apr. Housing starts May May Employment May May P Consumer price index May May Producer price index Apr May I Policy rate May May 9-day commercial paper rates May May Government bonds (1 years) May Apr. Seasonally adjusted % changes unless otherwise indicated. Interest rates are levels. 1 The U.S. series is an index. 2 Canada = S&P/TSX; United States = S&P 5 3 Excludes credit unions and caisses populaires. 4 Canada s producer price index is not seasonally adjusted. June ECONOSCOPE, ROYAL BANK OF CANADA

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