North American Economic Outlook: Gradual Though Sustained Recovery

Transcription

1 ECONOMICS I RESEARCH North American Economic Outlook: Gradual Though Sustained Recovery Presentation to the Canadian Association of Movers Paul Ferley (416) Assistant Chief Economist paul.ferley@rbc.com November 16, 21

2 U.S. Economic Outlook: Strengthening Employment Growth Key to Sustaining the U.S. Recovery

3 The U.S. recovery has slowed after initially rebounding strongly from the severe financial market shock U.S real GDP growth Quarter-over-quarter annualized % change Year-over-year % change Source: Bureau of Economics Analysis, RBC Economics Research ECONOMICS I RESEARCH 3

4 As fiscal policy support subsides and inventory building ends, private spending will need to kick in 6 U.S. fiscal and inventory support Percentage points, quarterly annualized rate Inventory Build Stimulus Impact Overall GDP Growth Source: RBC Economics Research, Macroeconomic Advisers ECONOMICS I RESEARCH 4

5 What is needed to sustain the U.S. recovery? ECONOMICS I RESEARCH 5

6 The uncertainty as to who was holding U.S. subprime mortgages weighed on financial markets though these pressures have reversed Weekly observation 16 Level S&P 5 composite index Basis points Three-month TED spread* Source: Bloomberg, RBC Economics Research *Three-month LIBOR rate minus Three-month T-bill Source: Federal Reserve Board, RBC Economics Research ECONOMICS I RESEARCH 6

7 U.S. commercial banks have ceased tightening lending standards 1 NSA, % Bal Federal reserves senior loans officer survey 75 Large/mid-sized firms Small firms 5 Tightening 25 Easing Source: Federal Reserve Board, RBC Economics Research ECONOMICS I RESEARCH 7

8 which augurs well for the improving trend in lending to continue U.S. C&I loans at commercial banks 4 % 3 2 y/y % change 3m moving average of m/m % change annualized Source: Federal Reserve Board, RBC Economics Research ECONOMICS I RESEARCH 8

9 Private sector hiring needs to continue to improve Private sector employment growth 4 change from previous month (Thous.) Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Source: Bureau of Labor Statistics, RBC Economics Research ECONOMICS I RESEARCH 9

10 To help facilitate this, the Fed is poised to embark on another round of Quantitative Easing 24 SA, Bil. $ Reserves held by the Fed 2 Monetary base Total reserves Source: Federal Reserve Board, RBC Economics Research ECONOMICS I RESEARCH 1

11 Our forecast assumes that this private sector support along with policy actions will sustain the recovery U.S. real GDP Annualized % change, quarter-over-quarter Annual growth rates f 211f Forecast Source: Bureau of Economic Analysis, RBC Economics Research ECONOMICS I RESEARCH 11 11

12 Canadian Economic Outlook: Less Damaged by the U.S. Recession -Though Still Dependant on Sustained U.S. Recovery ECONOMICS I RESEARCH 12

13 Canada has weathered the U.S. downturn helped by an aggressive easing in policy 7 % Bank of Canada overnight rate Source: Bank of Canada, RBC Economics Research ECONOMICS I RESEARCH 13

14 with the impact of the U.S. recession also tempered by three additional factors: less upward pressure on the cost of capital commodity prices, though trading lower, remained at historically high levels which helped boost export revenues the Canadian housing market avoided the freefall in activity evident in the U.S. ECONOMICS I RESEARCH 14

15 The rise in the cost-of-capital was more muted in Canada Basis points Short-term funding spreads 3 month LIBOR vs. OIS Canada U.S U.K. Eurozone Source: Bloomberg, RBC Economics Research ECONOMICS I RESEARCH 15

16 Oil prices have generally remained, and are expected to continue to remain, historically high US$/barrel Oil price forecast Forecast Source: Wall Street Journal, Bloomberg, RBC Economics ECONOMICS I RESEARCH 16

17 as demand from emerging markets, though slowing, did not collapse and has started to rebound Major emerging economies % change in real GDP China India Brazil Mexico World Source: IMF, RBC Emergin Markets Research, RBC Economics Research ECONOMICS I RESEARCH 17

18 More prudent mortgage lending in Canada with less involvement in subprime mortgages 4 Percentage of mortgage in arrears % Subprime Canada Prime Canada Subprime U.S. Prime U.S Source: Bank of Canada, Mortgage Bankers Association, RBC Economics Research ECONOMICS I RESEARCH 18

19 limited the extent of declines in residential investment in Canada relative to the U.S. 17 % change, year-over-year Residential investments Canada U.S * Forecast Source: Statistics Canada, Bureau of Economic Analysis, Office for National Statistics, RBC Economics Research * ECONOMICS I RESEARCH 19

20 There was concern that a housing market bubble might be emerging with an earlier sharp rise in house prices 25 Canadian house prices % change, year-over-year Source: CREA, RBC Economics Research ECONOMICS I RESEARCH 2

21 however, those increases largely reversed earlier weakness with greater stability emerging Canadian house prices 35 Average price ($) Source: CREA, RBC Economics Research ECONOMICS I RESEARCH 21

22 RBC s Housing Affordability measure is not flagging any major imbalances similar to the early 199s Housing affordability 6 % of household income taken by ownership cost Two-storey Bungalows Townhouses Condos Source: Statistics Canada, Royal LePage, RBC Economics Research ECONOMICS I RESEARCH 22

23 The financial market turmoil has hit household net worth though conditions are improving Household net worth % change, year-over-year Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 23

24 However, the hit to balance sheets will keep the recovery in housing subdued going forward SAAR, Thous. units Housing starts Annual(s) f 211f Forecast Source: CMHC, RBC Economics Research ECONOMICS I RESEARCH 24

25 Similarly following an initial bounce from recession lows, growth will slow for both housing sales Housing resales % change, year-over-year level % change, year-over-year ( LHS) Level (RHS) Forecast Annual Growth Rates f 211f Source: CREA, RBC Economics Research ECONOMICS I RESEARCH 25

26 and housing prices Housing prices % change, year-over-year level Annual Growth Rates Forecast f 211f % change, year-over-year ( LHS) Level (RHS) , 33, 31, 29, 27, 25, 23, 21, 19, 17, 15, Source: Royal LePage, RBC Economics Research ECONOMICS I RESEARCH 26

27 Easing credit conditions, stimulative policy, and U.S. recovery should allow Canada to sustain positive growth Canada's real GDP 8 Annualized % change, quarter-over-quarter 6 Forecast Annual growth rates f 211f Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 27

28 The modest rebound will keep the pace of improvement in the unemployment rate gradual % Canadian unemployment Inflation-safe range Forecast Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 28

29 This slack in the economy will also keep inflation below target near term 4. % change, year-over-year Canadian core inflation Forecast BoC inflation target Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 29

30 Low inflation and high unemployment rate will keep the pace of Bank of Canada tightening gradual 7 6 % Bank of Canada overnight rate Forecast Source: Bank of Canada, RBC Economics Research ECONOMICS I RESEARCH 3

31 Bond yields will rise modestly as the central bank tightens 9. % Canadian 1-year bond yield Forecast Source: Bank of Canada, RBC Economics Research ECONOMICS I RESEARCH 31

32 The Canadian dollar to mirror growing optimism about the global recovery and attendant rise in commodity prices 1.1 Canadian dollar forecast U.S dollar per Canadian dollar Forecast Source: Bank of Canada, RBC Economics Research ECONOMICS I RESEARCH 32

33 Fiscal policy will need to tighten though more over the medium rather than near term Federal government budgetary balance Billions of dollars Fed budget projection Department of Finance Parliamentary Budget Office Source: Department of Finance, Parliamentary Budget Office, RBC Economics Research ECONOMICS I RESEARCH 33

34 Regional Outlook: The Recovery in Ontario is Very Much Dependant on Sustained U.S. Growth ECONOMICS I RESEARCH 34

35 Employment growth in Ontario is bouncing back after sizeable declines through the recession 6 % change, year-over-year Ontario employment Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 35

36 However, the recent job gains have only resulted in a modest retracement of the earlier deterioration in the unemployment rate 1 % Ontario unemployment rate Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 36

37 The recovery in jobs has been helped by a return to growth in manufacturing 3 Ontario manufacturing % change, year-over-year Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 37

38 The weakness in manufacturing resulted from Ontario feeling the full brunt of slumping U.S. demand in 29, particularly for autos Mil. Units U.S. auto sales Source: BEA, RBC Economics Research ECONOMICS I RESEARCH 38

39 resulting in Ontario declining more last year than the country as a whole MAN. P.E.I N.S. N.B. QUE. B.C. CANADA ONT. SASK. ALTA. N.& L. Provincial real GDP growth Annual % change, ranked by 29 growth Sources: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 39

40 However, as the U.S. recovers so should the Ontario economy 1 % change, year-over-year Real GDP growth 8 Forecast Ontario U.S. Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 4

41 High commodity prices will have a varying impact among the provinces SASK. ALTA. MAN. N.& L. CANADA ONT. B.C. QUE. P.E.I N.B. N.S. Provincial real GDP growth Annual % change, ranked by 211 growth Sources: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 41

42 The impact of high commodity prices will likely reinforce the recent pattern of intra-provincial outflows from Ontario and Quebec 1 NSA, Persons Inter-provincial migration 8 Ontario 6 Quebec Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 42

43 into Saskatchewan, Alberta, and B.C NSA, Persons Inter-provincial migration Saskatchewan Alberta British Columbia Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 43

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