Economic Outlook May 2017

Transcription

1 Economic Outlook May 2017 Derek Burleton VP & Deputy Chief Economist TD Economics

2 Key Questions Global Economy 1. Does the global economic upswing have further room to run? 2. What are the imminent risks to keep an eye on? U.S. Economy 3. Can the U.S. economy hit 3% growth? 4. What scope is there for tax reform? 5. What's the Fed path look like? 6. What are the key Trump-related economic risks? Canadian Economy 7. Will housing embark on a soft landing? 8. What's next for the Bank of Canada? 2

3 International

4 Synchronous Global Pickup Underway Since Mid Global composite PMIs 17Q2 Snapshot Expansion Contraction 48.0 Global Advanced Economies Emerging Economies Source: Composite PMIs from JP Morgan and Markit via Bloomberg. Last Observation: April

5 Canada Has Led the Growth Parade Within the G Average annual growth %, 16Q3-17Q1* Real GDP Growth Underlying Trend Growth Canada U.S. UK Eurozone Japan Source: Haver Analytics, TD Economics. 5

6 Still Divergence in Underlying Inflation 2.5 Core Inflation, % US Canada Eurozone Japan Source: Haver Analytics, TD Economics. Last Observation: 2017Q1. 6

7 And Central Bank Policy Rates Presentation 0.0 Title Here -0.5 Central bank policy rates, % U.S. Canada Japan Eurozone -1.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: TD Economics

8 Ongoing U.S. Yield Premium Hides Broader Global Rise 0.0 Spreads with U.S. 10Y Treasury Canada Germany Japan -0.5 Forecast Presentation -2.0 Title Here Source: Haver Analytics, Forecasted by TD Economics as of May

9 USD Close to a Peak But Will Remain in Favour U.S. nominal trade-weighted dollar Forecast Source: Haver Analytics, TD Economics. 9

10 United States

11 Unusual Gap Between "Soft" and "Hard" Data 60 TD U.S. Soft Data Index U.S. GDP Growth, % Q/Q Annualized Soft Data Index* (LHS) Quarterly GDP Growth (RHS) Source: BEA, NFIB, FRB Philadelphia, FRB New York, FRB Kansas City, FRB Richmond, Institute of Supply Management, University of Michigan via Haver Analytics, TD Economics. 11

12 Softness in Q1 U.S. GDP Becoming the Norm 4.0 Real GDP, % Average 2017* Presentation 1.1 Title Here Q1 Q2 Q3 Q4 Source: Haver Analytics, *2017Q2, Q3, Q4 Forecast by TD Economics as of May

13 U.S. Consumer Still Rests on a Strong Foundation Household Debt-Income Ratio, % Source: Haver Analytics, TD Economics. 13

14 Why 2% is the New 3% Real business output; annual average % change 5 Labor productivity Forecast Labor hours LT Source: Bureau of Labor Statistics, forecast by TD Economics 14

15 Trump's Tax Plan Would Make Bad Fiscal Situation Worse Federal Deficit as a % of GDP 0% -1% -2% -3% -4% -5% -6% -7% -8% CBO CBO Trump n In order for Trump's estimated $5.5 trillion in tax cuts to be revenue neutral, real GDP would need to grow by roughly 4.5% per year, for the next 10 years. n Economic studies have shown that deficitfinanced tax cuts only pay for a fraction of their cost. n "Revenue Neutrality" also does nothing toward fixing the existing structural budget deficit that is set to worsen in the years ahead Source: CBO, CFRB, TD Economics 15

16 How Did Reagan Manage to Lower Taxes in the 1980s? Presentation 50 Title Here TRA Year Revenue Change Estimates ($ Billions) Tax rate reductions Individual -207 Corporate -117 Non-rate changes (base broadeners) Individual 85 Corporate 237 Total Individual -122 Total Corporate 120 Source: Tax Foundation 2005 Highest marginal tax rates, % Source: IRS/Haver Analytics 1981 Tax Cut 1986 Tax Reform Personal Corporations n Reagan enacted massive tax cuts in 1981, then revenue-neutral tax reform in 1986 (TRA 1986) n To achieve revenue neutrality tax rate cuts in 1986 were offset by the repeal and limit of various deductions and credits. Because of this necessity the overall economic impact was fairly limited Micro impacts were still desirable, it minimized the reward to tax-driven economic activity (tax shelters) The share of income tax paid by higher income households rose strongly after the reforms n 1986 tax reform did not solve the underlying deficit problem n Rate cuts didn't last, top personal rate was increased 4 years later 16

17 Significant Fiscal Stimulus at this Stage of the Cycle Could Ultimately Be Recessionary 6 % NBER Recessions Real Effective Fed Funds Rate R* Forecast Source: TD Economics, BLS, FRB. R* is the natural real rate of interest using long run growth and inflation. 17

18 Canada

19 Canadian Dollar to Remain on its Back Foot this Year USD per CAD Forecast Source: Bank of Canada, Bloomberg. Forecast by TD Economics as of April

20 Canada's Economic Expansion Has Broadened Recently 50% 45% Weighted net share of expanding industries, 3mma. Dispersion 40% 35% 30% Trend 25% 20% Presentation 15% Title Here 10% 5% 0% Oct-2014 Feb-2015 Jun-2015 Oct-2015 Feb-2016 Jun-2016 Oct-2016 Feb-2017 Source: Statistics Canada, TD Economics. 20

21 Impact of Booming Housing Market Can't Be Understated 200% Share of real GDP growth, 6mma. 150% 100% Post-2014 Average: 40% 50% 0% -50% -100% Source: Statistics Canada, TD Economics. Note that real estate is defined as residential construction plus real estate services. 21

22 Lack of Wage Growth in Canada Points to Ongoing Slack 9.0 %, 3mma %, 3mma Unemployment Rate (lhs) 7.0 Wage Growth (rhs) Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan Source: TD Economics, Haver Analytics. 22

23 Oil Prices to Rise Back to US$50-60 Range Index Supply-Demand Balance (lhs) Oil Price (rhs) Forecast US$/barrel Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep Source: Haver Analytics, Bloomberg. Forecast by TD Economics as of May

24 Recent Measures, Declining Affordability to Slow Housing Juggernaut 20.0 Existing Home Prices, Y/Y % Chg F 2018F Toronto Vancouver Canada Source: CREA, forecast by TD Economics as of May

25 Housing Slowdown to Dent But Not Derail Canadian Growth Q/Q Annualized Real GDP Growth, % Forecast H H Q e* Q to Q Source: Statistics Canada, Haver Analytics. Forecast by TD Economics as of May *Estimate 25

26 Return to Broader-based Expansion Regionally Alberta Ontario British Columbia Canada Quebec Manitoba Saskatchewan Atlantic Real GDP, Y/Y % Chg Source: Haver Analytics, Statistics Canada. Forecast by TD Economics as at April

27 Rising U.S. Protectionism a Major Risk % of Real GDP Machinery Motor Vehicle Energy* Wood Dairy Dairy Source: Haver Analytics, TD Economics. * Energy: Oil, Gas Extraction & Support Activities. 27

28 This report is provided by TD Economics for customers of TD Bank Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. 28