Rising Protectionism Is Intensifying Risks

Transcription

1 JUNE 21ST, ECONOMIC & FINANCIAL OUTLOOK Rising Protectionism Is Intensifying Risks #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff Growth in most major economies slowed in Q1 compared to the rapid expansion observed in the second half of. Better performance is expected as of spring, even though early signs are not all pointing to that. ff In the United States, after fairly modest growth in the first quarter of, spring is expected to usher in a rebound in real GDP. Consumption has also recovered since the end of the winter. While higher gas prices pose a moderate risk, we can already see some respite. ff The Canadian economy is expected to rebound in the second quarter with a gain of around 3%. Growth of close to 2% is then anticipated for the second half of. For the time being, our scenario continues to be based on the assumption that the free trade agreement between Canada, the United States and Mexico will ultimately be renewed. ff However, 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 job growth. ff Economic growth for most of the provinces should near the national average in and and British Columbia, which have stood out from the pack in recent years due mainly to their red-hot housing markets, are particularly affected by the adjustments underway in real estate. ff On June 13, the Federal Reserve (Fed) once again hiked its key rates, and its leaders are now signalling that it will continue to raise its rates by 0.25% every quarter during the second half of. This Fed position, combined with clear signals of a rebound in the U.S. economy during the spring, leads us to forecast a slightly quicker pace for monetary tightening in the United States. ff The Bank of Canada (BoC) also adopted an upbeat tone in its last statement, clearly signalling its intention to raise key rates again in July. What comes after that remains unclear for the BoC, but serious ongoing concerns about the real estate sector and trade relations could persuade it to keep its increases at a very gradual pace of just 0.25% every six months. Slower tightening of Canada s monetary policy should keep the Canadian dollar below US$0. ff s economy is faring well, even though growth has been more moderate. The real GDP forecast is around % for and % for next year, a slower pace compared to the % increase in. The stricter federal government mortgage rules that took effect on January 1st, left s residential sector relatively unscathed. CONTENTS Highlights... 1 Risks Inherent in our Scenarios... 2 Financial Forecasts... 3 Economic Forecasts Overseas... 4 Canada... 8 United States 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 job growth. In Canada, and the other provinces, some sectors and regions could be hard hit by the protectionist measures. 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 persist in numerous regions, including Europe and 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. Uncertain monetary policy movement could have a big influence on the financial markets in the coming quarters. In this context, 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 continued gradual rise in interest rates is intensifying concerns over high household debt. This could trigger a sharper housing market correction than forecast, and a considerable slowdown in spending on durable goods. TABLE 1 World GDP growth (adjusted for PPP) and inflation rate WEIGHT* Advanced economies United States Canada 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 REAL GDP GROWTH INFLATION RATE f 2019f f 2019f IN % 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 JUNE 2

3 FINANCIAL FORECASTS Geopolitical issues have been front-page news over the past few weeks. A political crisis in Italy brought back financial tensions in Europe, while a stronger U.S. dollar severely disadvantaged emerging countries. Fears of a trade war also ratcheted up following the U.S. administration s decision to impose customs tariffs on European Union s, Canadian and Mexican steel and aluminum. U.S. and Canadian stock exchanges nonetheless climbed back above their levels from the start of the year. International worries drove down bond yields, but there is no indication that they will prevent the central banks from continuing their monetary tightening. On June 13, the Federal Reserve (Fed) once again hiked its key rates, and its leaders are now signalling that it will continue to raise its rates by 0.25% every quarter during the second half of. This Fed position, combined with clear signals of a rebound in the U.S. economy since spring, leads us to forecast a slightly quicker pace for monetary tightening in the United States. The Bank of Canada (BoC) also adopted an upbeat tone in its last statement, clearly signalling its intention to raise key rates again in July. What comes after that remains unclear for the BoC, but serious ongoing concerns about the real estate sector and trade relations could persuade it to keep its increases at a very gradual pace of just 0.25% every six months. Slower tightening of Canada s monetary policy should keep the Canadian dollar below US$0. TABLE 2 Summary of the financial forecasts END OF PERIOD IN % (EXCEPT IF INDICATED) Key interest rate United States Canada Euro zone United Kingdom 2019 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f Federal bonds United States 2-year 5-year 10-year 30-year Canada 2-year 5-year 10-year 30-year Currency market Canadian dollar (USD/CAD) Canadian dollar (CAD/USD) Euro (EUR/USD) British pound (GBP/USD) Yen (USD/JPY) Stock markets (level and growth)* United States S&P 500 Canada S&P/TSX Commodities (annual average) WTI oil (US$/barrel) Gold (US$/ounce) 2,674 16,209 Target: 2,875 (+7.5%) Target: 17,000 (+%) Target: 3,025 (+5.2%) Target: 18,300 (+7.6%) 51 (60*) 1,258 (1,303*) 66 (66*) 1,300 (1,280*) 65 (68*) 1,255 (1,215*) f: forecasts; WTI: West Texas Intermediate; * End of year. Sources: Datastream and Desjardins, Economic Studies JUNE 3

4 Overseas A Flattening of Growth FORECASTS Growth in most of the major economies slowed in Q1 compared with the rapid expansion observed in the second half of. Better performance is expected as of spring, even though early signs are not all pointing to that. In the euro zone, real GDP growth is expected to be % for all of and % in The United Kingdom, meanwhile, is expected to see just % growth for each of the two years. The Japanese economy contracted last winter, and the annual real GDP growth forecast was revised downward. After % growth in, global real GDP should advance % in and Many indications suggest that global economic growth seems to be on the verge of plateauing. A number of economic indicators have been disappointing since the start of the year, beginning with annualized real GDP growth rates in the major economies during the first quarter (graph 1). The data on international trade volume also suggest a deceleration. A number of factors may be behind this: inclement weather in Europe, higher interest rates and oil prices, and steeper prices for a number of other commodities. Greater volatility in the major stock markets, the bond market and currencies of emerging economies may also be a factor. This is coupled with concerns about rising protectionism, with the U.S. launching the initial volley and the affected economies retaliating. The recent escalation in trade tensions has become a major risk for global growth, and a continued increase in tariff barriers can only slow the world economy. EURO ZONE The euro zone was not spared from the headwinds. Growth continued but nonetheless slowed, with an annualized real GDP gain of % in the first quarter, compared to an average of % over the past year. Confidence indexes remain high, despite levelling out and showing slight decreases since the beginning of the year. PMI indexes are also pulling back from the cyclical peaks reached at the end of (graph 2). The political situation in Italy is stirring up renewed fears of a repeat of the euro zone crisis that gripped the continent at the turn of the decade. The success of the two populist movements that now form the Italian government stems in part from the country s economic hardship. The Italian GDP did not benefit as much from the current growth cycle as the other euro zone countries (graph 3 on page 5), and the jobless rate has hardly gone down at all in recent years. The extent of regional disparities also forced voters to make non-traditional choices. It now remains to be seen what public policies the new Italian government will put in place in a context marked by the country s still precarious fiscal position. Despite this deeper uncertainty for not just Italy, but the entire euro zone as well, Euroland s real GDP growth should quicken in the spring compared to the disappointing performance in the first quarter. A % gain is expected for the year as a whole, followed by a % increase in The multitude of risks will keep the European Central Bank from raising its key rates before the end of summer GRAPH 1 GRAPH 2 Real GDP growth in major advanced economies slowed at the start of PMI indexes are down in the euro zone Real GDP Euro zone PMI indexes Quarterly annualized variation in % Index Q3 and Q4 averages Q U.S. Canada Euro zone U.K. Sources: Datastream and Desjardins, Economic Studies Germany France Italy Japan Composite Manufacturing Services Retailers Construction Sources: Markit, Datastream and Desjardins, Economic Studies JUNE 4

5 GRAPH 3 GRAPH 4 Italy did not benefit from the current growth cycle The British economy decelerated again Real GDP U.K. s real GDP Q1 = 100 In % Quarterly annualized variation Annual variation Euro zone Germany France Italy Portugal Spain Greece Sources: Eurostat and Desjardins, Economic Studies Sources: Office for National Statistics and Desjardins, Economic Studies GRAPH 5 UNITED KINGDOM Britain s real GDP was also a source of disappointment in Q1, with an annualized gain of just 0.4% (graph 4). A number of factors, including adverse weather and the uncertainty created by Brexit, have contributed to this poor growth since the end of Little headway has been made where Brexit is concerned, and the British government has yet to take a clear stance on future ties with the European Union. This state of ambiguity is frustrating not only European negotiators, but also British and foreign companies. Economic growth should remain fairly slow in the United Kingdom, with gains of % forecast for and With that in mind, the Bank of England is not expected to raise key rates before the end of 2019, especially since the effect of the earlier drop in the pound sterling on inflation now seems to be waning (graph 5). British inflation is starting to ease Annual variation in % Annual variation in % Import prices (left) Consumer prices (right) -4 Production prices (right) Sources: Office for National Statistics and Desjardins, Economic Studies GRAPH 6 A very disappointing first quarter for Japan JAPAN While growth in the major economies slowed in the first quarter, Japan s plunged right into negative territory. The annualized 0.6% decline represents the worst performance since fall and is a reflection of both anemic consumption and a contraction in investment (graph 6). Better performance is, however, expected for the second quarter, although the April data published thus far are still weak. Annual real GDP growth was revised downward for, from % to %. A % increase is still expected for Contribution to annualized quarterly growth in Japan s real GDP In % 4 3 Net exports 2 Inventory change 1 Business investment Government expenditures 0 Consumer spending -1-2 Total Q1 Q2 Q3 Q4 Q1 Sources: Cabinet Office and Desjardins, Economic Studies JUNE 5

6 United States A Spring Rebound FORECASTS After fairly modest growth in the first quarter of, spring is expected to usher in a rebound in real GDP. Consumption has also recovered since the end of the winter. While higher gas prices pose a moderate risk, we can already see some respite. Business inventories and net exports will also support growth in the very short term. Therefore, real GDP growth of close to 4% is expected for the second quarter. Our growth forecast for as a whole holds at % and is expected to be followed by a % increase in real GDP in The second estimate of the national accounts for the first quarter of pegs annualized real GDP growth at %, a hair below the initial estimate of %. Despite the tax cuts passed in late, consumer spending was fairly weak in the first quarter, with annualized growth of just %, reflecting monthly declines in real consumption in January and February (graph 7). This was the first time since winter 2009 that consumption dropped for two months in a row. However, household spending rallied in March, and consumption should be much stronger throughout the spring. An annualized gain of about % is expected. that limit the size of the labour force, the jobless rate should decline further in the coming year. Some of the weakness in household spending comes from the auto sector. After the hurricanes in late summer, car sales rebounded significantly, but the return to more normal levels led to an annualized retreat of 1% in the first quarter of. After surging in March, however, car sales slumped again in April and May. That said, other types of spending have done well in recent months despite higher gas prices, which ate up some household disposable income. It should be noted that household confidence continues to be very strong, buoyed by good labour market performance. The jobless rate sank in May to its cyclical low of % last seen at the end of the 1990s cycle. We would have to go back to the late 1960s to see a lower rate than that (graph 8). Spurred by a hiring boom and by demographic factors Business investment saw a nice upward momentum of 9.2% (annualized) in the first quarter. We expect growth to remain lively, though a little more modest. The ISM indexes are still relatively high, albeit lower than at the start of the year, but new capital goods orders have been disappointing in recent months. It seems that, for the time being, lower corporate taxes are doing little for investment. Meanwhile, the oil sector benefited from higher oil prices, and drilling increased. However, a cap for the coming quarters is expected. Robust employment is one of the factors that should boost the U.S. housing market, but the sense is that the market is running out of steam. Residential investment retreated in three of the last four quarters. That said, home prices are rising fairly quickly, and the S&P/Case-Shiller national index has now outstripped the peak it reached in the 2000s (without adjusting for inflation) (graph 9 on page 7). In the short and medium term, the United States may be harder hit by the Trump administration s decision to impose additional tariffs of 25% and 10% on steel and aluminum, respectively, GRAPH 7 GRAPH 8 U.S. real consumption regained strength at the end of the winter U.S. jobless rate is headed for new lows Contributions to real consumption s monthly growth Jobless rate In % In % JAN. MAR. MAY. Durable goods JUL. SEP. Non-durable goods NOV. JAN. MAR. Services Total Sources: Bureau of Economic Analysis and Desjardins, Economic Studies % in April 2000 % in May Sources: Bureau of Labor Statistics and Desjardins, Economic Studies JUNE 6

7 TABLE 3 United States: Major economic indicators QUARTERLY ANNUALIZED VARIATION IN % (EXCEPT IF INDICATED) Real GDP (2009 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) ANNUAL AVERAGE Q3 Q4 Q1 Q2f Q3f Q4f f 2019f ,172 1, ,317 1, , ,345 1,178 1,208 1, , f: forecasts; * Annual change; 1 Annualized basis; 2 Before taxes; 3 Excluding food and energy. Sources: Datastream and Desjardins, Economic Studies course, an escalation in protectionist measures on either side would be even more detrimental to the U.S. economy. GRAPH 9 Existing home prices in the United States surpassed their pre-crisis peak S&P/Case-Shiller index of existing home prices The increase in import prices may drive up core inflation in the next year. This will add to the effect of the reduction in unused production capacity. Total inflation will be mostly affected by changing gas prices. It is therefore revised upward to % this year, but should slow to % next year. Index Sources: Standard & Poor s and Desjardins, Economic Studies particularly since Canada and Mexico are now targeted by this measure. U.S. companies will be paying more for these metals. The net effect on growth will not be enormous, but it will nonetheless be more negative than positive, especially if the affected countries go through with their retaliatory tariffs. This is one reason why real GDP growth will be curbed after spring, even though confidence indexes remain high and tax cuts still have the potential of propping up the domestic economy. Of JUNE 7

8 Canada Slower Growth in Domestic Demand FORECASTS The Canadian economy is expected to rebound in the second quarter with a gain of around 3%. Growth of close to 2% is then anticipated for the second half of. The weaker-than-expected performance in the first quarter is, however, leading to a slight downgrade in our forecast for as a whole, from % to %. A % gain is still expected for real GDP in Real GDP in Canada rose just % (annualized) in Q1, coming in below expectations. Moreover, domestic demand has seen its weakest growth since the end of, with a gain of a mere %. As recent retail trade results suggest, consumer spending struggled in early. In addition, residential investment fell 7.2% due to the negative effects of fewer existing home sales since the introduction of tighter mortgage rules. Non-residential investment nonetheless continued on its upward path, while spending on structures, machinery and equipment rose 1%. However, this increase was accompanied by a significant expansion in imports, causing a deterioration in the trade balance during the quarter. resulting in a slowdown in demand for new and existing homes in the coming quarters. That said, the recent change in real GDP by industry provides for a fairly high carryover for the second quarter, potentially ending in a gain of around 3%. Consumer spending is also expected to pick up the pace. The job market is doing well, and wage growth (graph 10) continues to accelerate, as some sectors and regions are seeing labour shortages. For the time being, our scenario continues to be based on the assumption that the free trade agreement between Canada, the United States and Mexico will ultimately be renewed. The recently imposed protectionist measures will unquestionably have negative effects on some sectors and regions, but the consequences for the Canadian economy as a whole should be fairly insignificant at the end of the day. Falling residential investment should also gradually abate. The number of housing starts has remained quite high in recent months due to continued strong housing market demand, with a sustained increase in the 25 to 34 population associated with the formation of new households (graph 11). The gradually climbing interest rates are nonetheless expected to be increasingly felt, In terms of non-residential investment, the disappearance of excess production capacity should continue to provide an environment for growth over the next few quarters. Business spending on non-residential structures and on machinery and equipment could, however, ease somewhat in the coming quarters. The uncertainty surrounding the renegotiation of the North American Free Trade Agreement (NAFTA) has gone up a notch recently and may prompt a number of companies to put their development projects on the back burner. Lastly, inflation will have to be monitored over the next few months. After staying below the median target (2%) most of the time since 2012, the annual change in the total consumer price index (CPI) accelerated recently. Thus, the relative size of components in the CPI basket with annual changes below 1% GRAPH 10 GRAPH 11 Wage growth is accelerating in Canada Number of new households is up in many parts of Canada Annual variation in % Annual variation in % Population aged 25 to 34 Average weekly earnings 5 Average hourly wage British Columbia Other provinces Sources: Statistics Canada and Desjardins, Economic Studies Sources: Statistics Canada and Desjardins, Economic Studies JUNE 8

9 TABLE 4 Canada: Major economic indicators ANNUAL AVERAGE QUARTERLY ANNUALIZED VARIATION IN % (EXCEPT IF INDICATED) Q3 Q4 Q1 Q2f Q3f Q4f f 2019f Real GDP (2007 $) 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 (2007 $B) Exports Imports Final domestic demand Other indicators Nominal GDP Real disposable personal income Employment Unemployment rate (%) Housing starts1 (thousands of units) Corporate profits*2 Personal saving rate (%) Total inflation rate* Core inflation rate*3 Current account balance ($B) f: forecasts; * Annual change; 1 Annualized basis; 2 Before taxes; 3 Excluding food and energy. Sources: Datastream and Desjardins, Economic Studies dropped to just 2% in April. In contrast, the relative size of components in the CPI basket with annual changes in line with the Bank of Canada (BoC) target (between 1% and 3%) increased to 55.4% (graph 12). This attests to the widespread inflationary pressures in the country. Yet, with the disappearance of excess production capacity and the recent rise in gas prices, price growth could still accelerate in the coming months and edge closer to the upper BoC target. GRAPH 12 Proportion of the CPI basket with inflation below the lower target fell sharply in Canada Proportion of the total CPI basket In % With inflation below 1% With inflation above 3% With inflation between 1% and 3% CPI: Consumer price index Sources: Statistics Canada and Desjardins, Economic Studies JUNE 9

10 Many Positive Signals despite Trade Tensions FORECASTS s economy is faring well, even though growth has been more moderate. The real GDP forecast is around % for and % for next year, a slower pace compared to the % increase in. The year started off slowly for retail sales and employment, but the residential sector proved fairly resilient to the new federal mortgage rules. More strained trade relations with the United States and the steel and aluminum tariffs that were introduced cast a bit of a shadow on the outlook. Even though total employment has made little progress since the beginning of the year, the number of full-time positions has skyrocketed. Job market conditions remain tight: the % jobless rate in May is close to the historic monthly low of %. Many industries are dealing with staff shortages, putting upward pressure on wages (graph 13). The minimum wage increase from $15 to $10 on May 1st, means that many employees are getting paid more. Aside from rapidly rising earnings, tax cuts for individuals totalling around $1B introduced by the government this spring will put extra cash in household pockets. With all these positive factors, real consumer spending should grow about 3% in, at the same pace as in. This is the best run in the past ten years. The stricter federal government mortgage rules that took effect on January 1st, left s residential sector relatively unscathed.1 The pullback in the number of properties sold at the beginning of the year was minor, and the impact seems to have dissipated since. Despite these jolts, sales numbers remain high in (graph 14) and have not fallen like in some provinces, particularly. The market remains under pressure, GRAPH 13 Wage acceleration continues in Average hourly wage however, with average annual prices up 4.8% since the start of. New construction did not falter and multi-unit housing starts are going strong. Residential activity will remain sustained this year, but a lull is expected next year as a result of cumulative interest rate hikes and a higher number of new apartments available. Even though the global economy is doing well, s international export growth continues to be weak. The statistics available for, which are from January to April, show a % increase in real terms from the same period last year. On June 1st, the United States imposed a 10% tariff on aluminum and a 25% tariff on steel from Canada, Europe and Mexico. It is worth noting that has nine of the country s ten aluminum plants. In, 93% of the province s aluminum exports were headed for the United States. It remains to be seen what the effect will be on demand for primary aluminum and for minimally processed products. Despite the uncertainties, our scenario calls for total exports to tick up in and 2019, owing to the economic strength of our key clients. The outcome of the North American Free Trade Agreement (NAFTA) negotiations will, however, be a decisive factor. If the agreement is scrapped, World Trade Organization (WTO) rules might apply to member countries Variation in % 4.2 Existing home sales In thousands * * Average for the first three months of compared to the same period in. Sources: Statistics Canada and Desjardins, Economic Studies Suffers Major Jolts, But Is Doing Fine, Desjardins, Economic Studies, Spotlight on Housing, May 24,, 4 p. 1 GRAPH 14 The effect of new mortgage rules was limited in, as opposed to In thousands 275 (left) (right) Sources: Canadian Real Estate Association and Desjardins, Economic Studies JUNE 10

11 TABLE 5 : Major economic indicators ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) f 2019f Real GDP (2007 $) 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 (2007 $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 , ,807 2,338 3,500 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 Potential scrapping of NAFTA: effects on s real GDP if WTO rules were to return Corporate profit growth in should continue to support the recovery in investment Effect on the status quo In $B Real GDP - 56 Consumer spending Investment Exports In 2007 $B 1 Profits (left) Investment in machinery and equipment (right) Imports In % NAFTA: North American Free Trade Agreement; WTO: World Trade Organization Source: The Economic and Budget Plan March of the Ministère des Finances du Québec Sources: Institut de la statistique du Québec and Desjardins, Economic Studies with average tariffs of about 3% to 4%. According to the Ministère des Finances du Québec, the impact would be felt mainly in exports and investment (graph 15), and would shave % off real GDP growth over a period of ten years. For the time being, business investment is bouncing back as a result of the recovery in profits (graph 16), and exports are up; however, the future remains uncertain. JUNE 11

12 and Other Provinces More Consistent Growth as of FORECASTS Economic growth for most of the provinces should near the national average in and and British Columbia, which have stood out from the pack in recent years due mainly to their red-hot housing markets, are particularly affected by the adjustments underway in real estate. The catch-up noted in Alberta and Saskatchewan in following a tough and could give way to less frenzied growth this year and next. In Manitoba, economic diversification will continue to support real GDP growth of around 2% in the coming years. In Atlantic Canada, growth is expected to be a tad below the national average. Furthermore, the energy sector is still struggling in Newfoundland and Labrador and in Nova Scotia. ONTARIO According to Department of Finance data, ended with a % increase in s real GDP, slightly below the national average a first since. Exports of goods and services in fell % in, whereas Canada as a whole saw a % rise. A tough year for the auto industry is the main reason behind this disappointing performance. In, s economy will have to overcome a number of challenges. The auto industry might face less robust demand, as new car sales in May were down % over one year in Canada and up just 0.6% in the United States (graph 17). The gradual rise in interest rates and higher gas prices are clearly beginning to have an effect. For now, the working assumption in our scenario is continued free trade between Canada, the United States and Mexico. It goes without saying that if further protectionist measures were to be introduced by the United States, particularly in connection with the auto industry, s economy might be particularly hard hit. In addition, has been leading in lower existing home sales since the introduction of new restrictive measures in January (graph 18). Under the circumstances, s real GDP growth could be lower than the national average in the first quarter of. The growth outlook is nonetheless still quite good for most of the other segments of s economy. Moreover, business investment, stimulated by the disappearance of excess production capacity, should continue to contribute significantly to economic growth. The same goes for consumer and government spending, although the election of a new provincial government could potentially change the public spending profile. All in all, s real GDP should grow by about 2% in. A similar gain is also expected next year. WESTERN PROVINCES As forecast, Alberta s and Saskatchewan s economies were back in positive territory in. Stabilization in the energy industry led to an increase in real GDP by industry of % in Alberta and % in Saskatchewan (graph 19 on page 13). The outlook remains good for and 2019, but the growth rates could be closer to the national average since the recovery seems to be well underway already. In Manitoba, effective economic diversification should keep growth close to the national average. GRAPH 17 GRAPH 18 New car sales have been weaker in Canada and the United States for the past few months Most provinces are posting a significant decline in existing home sales Number of new motor vehicles sold Change in existing home sales since the end of In millions In thousands In Canada (left) In the United States (right) Sources: DesRosiers Automotive Consultants, Datastream and Desjardins, Economic Studies In % B.C. Alta. Sask. Man. Ont. Que. N.B. N.S. P.E.I. N.L. Sources: Canadian Real Estate Association and Desjardins, Economic Studies JUNE 12

13 TABLE 6 : Major economic indicators ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) f 2019f Real GDP (2007 $) Final consumption expenditure [of which:] Household consumption expenditure Governments consumption expenditure 3.6 Gross fixed capital formation [of which:] ,479-1,328 5,654-5, , , , , Residential structures Non-residential structures Machinery and equipment Intellectual property products Governments gross fixed capital formation Investment in inventories (2007 $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* f: forecasts; * Annual change; 1 Annualized basis. Sources: Statistics Canada, 's Ministry of Finance, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies ATLANTIC PROVINCES GRAPH 19 A return to positive territory for Alberta and Saskatchewan Real GDP by industry in Annual variation in % Generally speaking, economic growth in Atlantic Canada stayed below the national average in, a trend expected to continue in and Even with the recent commissioning of the Hebron extraction site, oil production in Newfoundland and Labrador is still fairly stable because of scaled-down production at other sites. The oil and gas and mining extraction sector is also struggling in Nova Scotia, as production has virtually ground to a halt at the Deep Panuke site. B.C. Alta. Sask. Man. Ont. Que. N.B. N.S. P.E.I. N.L. Sources: Statistics Canada and Desjardins, Economic Studies In British Columbia, the robust economic growth of recent years is expected to give way to a slightly more moderate forward momentum in and The province is particularly impacted by the housing market adjustments resulting from new restrictive measures and the gradual rise in interest rates. JUNE 13

14 TABLE 7 Canada: Major economic indicators by provinces ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) Real GDP growth Canada Atlantic Manitoba Saskatchewan Alberta British Columbia f 2019f Employment growth Canada Atlantic Manitoba Saskatchewan Alberta British Columbia Unemployment rate Canada Atlantic Manitoba Saskatchewan Alberta British Columbia Retail sales growth Canada Atlantic Manitoba Saskatchewan Alberta British Columbia Total inflation rate Canada Atlantic Manitoba Saskatchewan Alberta British Columbia Housing starts Canada (thousands of units) Atlantic Manitoba Saskatchewan Alberta British Columbia f: forecasts Sources: Statistics Canada, Institut de la statistique du Québec, 's Ministry of Finance, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies JUNE 14

15 Medium-Term Issues and Forecasts Escalating Protectionist Measures Would Muddy the Scenario Economic growth is expected to remain above or close to its potential in Canada and the United States until Inflationary pressures should therefore heighten in a context where there is little excess production capacity. Continued normalization of monetary policy will, however, prevent inflation from getting carried away. Our medium-term scenario includes an economic slowdown around 2021, as the U.S. economic cycle begins to mature. The slowdown might be caused by a multitude of factors, but at this time, an escalation in protectionist measures around the globe is not one of our assumptions. Staying Above Potential Is Not Always Possible Potential economic growth is essentially determined by higher production capacity and more hours worked, as well as by productivity gains. Economies can grow faster where there is excess production capacity and a lot of available workers. However, when production capacity and labour become scarce, as is presently the case, keeping a pace above potential becomes difficult. Potential growth is estimated at about 2% in the United States, around % in Canada and less than % in. s slower pace is due to a more extensive aging of the population, which augments labour scarcity. If the economy were left to adjust itself, sustained growth would end up being offset by high inflation. However, the interest rate hikes expected will help keep economic growth more on par with potential, thus preventing inflation from rising too high. We predict that the overnight rate will reach 5% in Canada in 2020, compared to 0% for the upper range of U.S. federal funds. A New Record Cycle on the Horizon The longest economic growth cycle recorded in the United States lasted 120 months, from 1991 to At 107 months, the current cycle is the second-longest ever recorded. Several factors suggest that the current cycle will eventually take first place for length. For one, it is difficult to believe that the economy would stumble in the short term considering the stimulating effect of the tax cuts and higher public spending announced in the United States. also become an issue in Europe, potentially curbing the global economy. The Threat of Protectionism Gives Cause for Concern The arduous North American Free Trade Agreement (NAFTA) renegotiations and proliferating protectionist measures provide our economic forecasts with a good dose of uncertainty. The link between international trade growth and the economy is undeniable (graph 20). For now, we are primarily incorporating a penalizing effect associated with greater business caution; businesses could be hesitant to invest in an uncertain context. We are not assuming an escalation in protectionist measures and still believe that a NAFTA deal will be struck. This would be the most beneficial scenario for the countries involved. GRAPH 20 Trade and economic growth generally go hand in hand Annual variation in % Annual variation in % Global GDP (left) International trade volume (right) Sources: CPB - Netherlands Bureau for Economic Policy Analysis, Datastream and Desjardins, Economic Studies Should further protectionist measures be added, the trade volume and economic growth would be penalized. The slowdown we are forecasting for 2021 could become largerscale as a result. It might also happen earlier. The context could also become a real conundrum for central banks, which would have to juggle a troubled economy and inflationary pressures generated by more trade tariffs. Time may take more of a toll on the economic cycle by around Investors might begin to fear a slowdown, which would result in greater volatility on the financial markets. This would have a negative effect on consumer and business confidence. Confidence could also be shaken by higher interest rates, and waning stimulus from tax cuts and increased public spending in the United States. As evidenced by the recent spike in financial tensions in Italy, the state of public finances may JUNE 15

16 TABLE 8 Medium-term major economic and financial indicators ANNUAL AVERAGE AVERAGES f 2019f 2020f 2021f 2022f 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) 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 500 index (var. in %)1 Federal funds rate Prime rate Treasury bills 3-month Federal bonds 10-year Federal bonds 30-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 10-year Federal bonds 30-year Yield spreads (Canada United States) Treasury bills 3-month Federal bonds 10-year Federal bonds 30-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, 's Ministry of Finance, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies JUNE 16