Q2 Economic Update Drivers and Investment Implications

Transcription

1 Q2 Economic Update Drivers and Investment Implications Brett House Vice-President & Deputy Chief May 31, 218

2 Highlights Synchronized growth begins to roll over: 1. Canada: Solid growth and inflation mean more rate hikes by BoC 2. Canadian housing: Metrics remain strong 3. US: Fiscal stimulus primes an already hot economy, Fed tightens 4. Yields: Curves set to flatten further 5. CAD: Going sideways 6. Commodities: Oil prices to remain firm, metals higher 7. NAFTA: Heading into 219 1

3 Global Growth Synchronized: Only 4 Economies Set to Contract 2

4 Global Synchronization is Rare; Trade Has Provided Some Support 5 OECD & Related EM Countries Growing in Sync number of countries Accelerating Growth Slowing Growth Contraction y/y % change World Trade Volume Sources: Scotiabank Economics, IMF Sources: Scotiabank Economics, Netherlands Bureau for Economic Policy Analysis. 3

5 Canadian Growth: Upside Risks Real GDP growth: impact of policy developments 218f 219f Model-based projections based on fundamentals Less: adjustments for policy developments B-2 mortgage rules -.1. NAFTA uncertainty -.1. Global protectionism Current baseline Source: Scotiabank Economics. 4

6 Canadian Growth Above Potential Canada's Growth Above Potential y/y % change Real GDP growth CPI inflation Estimated potential f 19f Sources: Scotiabank Economics, Statistics Canada. 5

7 Canadian Supply Side: Excess Demand, Inflation Picking Up Canadian Inflation & Output Gap % Output gap, RHS Average 'Core' Inflation y/y % change Average of 3 core CPI measures, LHS f 19f 2f 21f 22f 23f Sources: Scotiabank Economics Sources: Scotiabank Economics, Statistics Canada. 6

8 Scotiabank Economics Augmented Phillips Curve for Canada 3 y/y % change Phillips Curve Fit 2.2 Core Inflation Dynamic Simulation y/y % change 2. 2 Average of 3 core CPIs Observed core inflation 1 Fit 1.4 Augmented Phillips curve Sources: Scotiabank Economics, Statistics Canada Sources: Scotiabank Economics, Statistics Canada. 7

9 Capacity Tightest in Export-Intensive Sectors Set to Benefit from US Demand Canadian Capacity Utilization Rate Diffusion Index % share of total industries % Integrated framework output gap, RHS Rising Manufacturing Sentiment to Lift Machinery Exports to the US 5+ = growth y/y % change, 3mma US ISM manufacturing index 6-mth lead (LHS) Balance of industries at or above long-term average rate vs. industries below longterm average rate, LHS Sources: Scotiabank Economics, Statistics Canada Machinery exports to the US (RHS) Sources: Scotiabank Economics, ISM, Statistics Canada

10 Canadian Wage Growth: Organic and Mandated 4 Canadian Wage Growth y/y % change 8 Explosive Wage Gains in Two Key Provinces y/y % change, permanent employees 3 6 Ontario British Columbia SEPH Hourly Earnings of All Empl.* LFS Hourly Wage Permanent Empl. * Weighted hourly earnings of salaried and hourly employees. Sources: Scotiabank Economics, Statistics Canada Sources: Scotiabank Economics, Statistics Canada. 9

11 Canadian Household Balance Sheets Household Credit-Market Debt to Disposable Income Total Household Liabilities as % of Total Assets Household Credit-Market Debt to GDP household credit liabilities as % of disposable income Adjusted Canadian* Official Canadian Official US * Adjusted for US concepts and definitions. Sources: Scotiabank Economics, BEA, Federal Reserve Board, Statistics Canada household debt as % of assets US Canada Sources: Scotiabank Economics, Statistics Canada, Federal Reserve Board % of GDP US with unincorporated business debt Original Canada Canada* Original US * Adjusted for US concepts and definitions. Sources: Scotiabank Economics, BEA, Federal Reserve Board, Statistics Canada

12 Canadian Real Estate: Not the US More than 5 Percent of Households Do Not Have a Mortgage or HELOC High Percentage of Equity (equity as % of real estate assets) 45 4 % 8 75 % Official (excludes HELOCs) o/w have a HELOC Cda estimate including HELOCs US estimate with NFPs excluding HELOCs Official FRB with NFPs (includes HELOCs) Owned dwelling with a mortgage Owned dwelling without a mortgage Rented Band housing (217 data) Sources: Scotiabank Economics, OSFI, FCAC, Statistics Canada, Federal Reserve Board. 11

13 Mortgage Debt Remains Sustainable 16 Household Debt-Service Costs % of PDI 5 Five-year Fixed Mortgage Rates versus 5 years ago, basis points Sources: Scotiabank Economics, Statistics Canada Sources: Scotiabank Economics, CREA. 12

14 Credit Growth: Adjustment to B-2 Rules HOUSEHOLD CREDIT GROWTH CONSUMER LOAN GROWTH RESIDENTIAL-MORTGAGE GROWTH %, 3-month moving average y/y % change m/m % change, SA Source: Scotiabank Economics, Bank of Canada %, 3-month moving average m/m % change, SA y/y % change Sources: Scotiabank Economics, Bank of Canada %, 3-month moving average y/y % change m/m % change, SA Sources: Scotiabank Economics, Bank of Canada. 13

15 Real Estate: Adjustment to B-2 Rules National Home Sales s of units, annualized 1-year average 8 6 Apartment Construction Price Index by City y/y % change Vancouver Montreal Sources: Scotiabank Economics, CREA. April 218 National Housing Activity m/m sa y/y nsa Sales Listings Average Price MLS HPI Sales-to-new listings (ratio) Halifax Toronto Calgary Source: Statistics Canada. Sources: Scotiabank Economics, CREA. 14

16 Atlantic Canada: Rebound Moderates 3 Atlantic Rebound Moderates y/y % change 4 Net Interprovincial Migration s, 4QMA 2 218f 219f 2 NL NS 1-2 PE -4 NB NL NB NS PE SK MB ON QC AB BC Sources: Scotiabank Economics Sources: Scotiabank Economics, Statistics Canada. 15

17 US Growth: Hot and Getting Hotter US Growth Above Potential y/y % change Real GDP growth CPI inflation Estimated potential f 19f Sources: Scotiabank Economics, BEA, BLS. 16

18 US: Fiscal Policy Provides Unnecessary Stimulus twelve-month moving sum, y/y % change US Federal Receipts Personal income tax Total spending Corporate income tax Source: US Treasury US Fiscal Train Wreck % of GDP, including revised 1-yr April 218 forecast US fiscal deficits adjusted for tax reforms and funding agreement Sources: Scotiabank Economics, CBO US Government Expenditures: Contribution to Real GDP Growth percentage points f Sources: Scotiabank Economics, BEA. 17

19 US Labour Markets Tight Job Vacancies Versus Active Job Seekers number, mn 84 Labour Force Participation Rate % Unemployed 83 Population aged Job Openings Sources: Scotiabank Economics, BLS Sources: Scotiabank Economics, BLS. 18

20 US Housing Rebounding: Affordability and Household Finances Solid 2. units, mn US Housing Starts Singles.5 Multis Sources: Scotiabank Economics, US Census Bureau. 19

21 US Manufacturing Strong as Some PMIs Roll Over Manufacturing Employment Outperforms y/y % change US total y/y % change employment, LHS US manufacturing employment, LHS US manufacturing shipments, RHS Sources: Scotiabank Economics, US Census Bureau, BLS ISM Non-Manufacturing Index 7 composite index Sources: Scotiabank Economics, ISM. 2

22 US Excess Demand Driving Prices Up 4 2 The US Gap Is Gone % US Inflation Is Already Priced % U.S. 5Y5Y Inflation Swap output gap as % of potential GDP IMF estimate Congressional Budget Office estimate Source: Scotiabank Economics, CBO, IMF, NBER US Breakeven 5-Year U.S. Breakeven 1-Year Source: Scotiabank Economics, Bloomberg. 21

23 Anglo Central Banks Lead Tightening Amidst Abundant Liquidity Forecasted Central Bank Rates % End of 219 rate End of 218 rate Current rate 2 15 Combined QE Central Banks Won t Materially Shrink For Years % of GDP ECB 2 1 BoJ 1-1 BoC Fed ECB BoE BoJ PBOC Sources: Scotiabank Economics, BoC, Fed, ECB, BoC, BoJ, CSIC. 5 Fed BoE Sources: Scotiabank Economics, Haver Analytics, IMF. 22

24 North American Curves: Flat 4 3 Further Flattening Forecast 1-yr yield minus 2-yr yield US Canada Scotiabank Economics forecast -2 Sources: Scotiabank 93 Economics, 98 3 Bank 8 of 13 Canada, 18 Federal Reserve Board, NBER, CD Howe Institute. 23

25 North American Curves: They Get Flatter % Canada Yield Curve % US Yield Curve Current 17q4 18q4 19q Current 17q4 18q4 19q4. 3-month T-Bill 2-year Canada 5-year Canada 1-year Canada Source: Scotiabank Economics. 3-year Canada. 3-month 2-year 5-year 1-year 3-year T-Bill Treasury Treasury Treasury Treasury Sources: Scotiabank Economics, Bloomberg. 24

26 CAD Set to Strengthen Mildly As Yields Dampen USD Strength 112 CAD Seasonal Profile index, Jan. 1 = 1 12 Flatter Curve to Curb USD Gains 15 index bps , LHS 217, LHS avg, RHS , LHS index, Jan. 1 = business days Sources: Scotiabank Economics, Bloomberg US 2-1s curve, RHS DXY, LHS 87 Jan-17 May-17 Sep-17 Jan-18 May-18 Sources: Scotiabank Economics, Bloomberg

27 Commodities Prices Heading Higher Energy & Base Metals Leading Commodities Higher WTI Oil HH NatGas Copper Zinc Iron Ore Gold 26 Copper Deficits Expected Going Forward As Mine Pipeline Empties Index,1 = f 22f 222f Sources: Scotiabank Economics, Bloomberg kt kt f 222f Balance (RHS) F'cast Bal (RHS) Supply (LHS) Demand (LHS) Sources: Scotiabank Economics, Scotiabank GBM, Wood Mackenzie. 26

28 Oil Prices Firm Oil Price Collapse OPEC+ Deal Oil Market was Already Tight Before the US Withdrew from the Iran Deal OPEC+ Production Cuts Expected to Ease to Satisfy Global Demand 5 MMbpd MMbpd MMbpd Dec-13 Dec-15 Dec-17 Dec-19 Balance (RHS) Oil Demand (LHS) Forecast (RHS) Oil Supply (LHS) Sources: Scotiabank Economics, Scotiabank GBM, IEA, EIA, JODI, OPEC OPEC+ cuts expected to ease from 18 to 9 kbpd OPEC+ Prod Vienna Target Sources: Scotiabank Economics, OPEC, OMI. 27

29 WCS Discount Set to Remain Wide Oil Spreads Telling Tale of US Pipeline Bottleneck Midland- Cushing WTI WTI- Brent -14 USD/bbl Sources: Scotiabank Economics, Bloomberg Western Canadian Oil Supply Outpacing Takeaway Capacity 1. W. Cdn Refineries 5. Keystone 2. Rangeland/Milk River 6. Mainline 3. Trans Mountain 7. Line 3 4. Express WCSB Supply Keystone at reduced capacity CAPP W Cdn Prod F'cast.5 Sturgeon refinery enters service. MMbpd Sources: Scotiabank Economics, NEB, CAPP, RBN

30 NAFTA: Five Points of Contention Take Revisions into 219 Extreme US demands: Automobile rules of origin Sunset clause Dispute settlement mechanisms Canadian agricultural supply management Government procurement Talks concluded in 9 of 32 total NAFTA areas Little work yet on intellectual property issues What s next: 1 June: US steel, aluminum, tariffs and responses Ratification unlikely before 219 with new US Congress 29

31 NAFTA: It Matters Less than It Used to for Canada Share of US Imports under NAFTA Import Preferences % of total imports From Mexico (LHS) Weighted Avg. MFN Tariff Rate (RHS) % 45. From Canada (LHS) Sources: Scotiabank Economics, US ITC, WITS Share of US Transportation Imports under NAFTA Import Preferences % of total transportation imports From Mexico From Canada Sources: Scotiabank Economics, US ITC, WITS. 3

32 US Needs NAFTA as Much as Canada & Mexico Do Imports Across NAFTA Partners by MFN Tariff Rates 1 % of imports in USD* tariff range: 1.% % % %.-2.5%.% Imports from Imports from Imports from Imports from US to CA CA to US US to MX MX to US Source: Scotiabank Economics, World Bank WITS. *216 data for Canadian and Mexican imports, 215 data for US imports. 31

33 Steel & Aluminum Tariffs Likely to Be Temporary Others 22% US Steel Imports by Origin (217, % share) Canada 16% 7 6 The US Relies on Aluminum Imports, Mainly from Canada % of total volume % of domestic consumption 7 6 India 2% Germany 3% Taiwan 4% Japan 5% Brazil 13% S. Korea 1% Turkey 7% Russia Mexico 9% 9% Sources: Scotiabank Economics, US Commerce Department imports from Canada (LHS) imports from other (LHS) net import reliance (RHS) imports from Russia (LHS) Sources: Scotiabank Economics, US Census Bureau, USGS

34 For more information Scotiabank Economics: Web: Brett House: NAFTA research: 33

35 Contact Brett House Vice-President & Deputy Chief Economist Scotiabank Economics Scotiabank Economics 4 King Street West, 63 rd Floor Toronto, Ontario, Canada M5H 1H1 This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor any of its officers, directors, partners, employees or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. These reports are provided to you for informational purposes only. This report is not, and is not constructed as, an offer to sell or solicitation of any offer to buy any financial instrument, nor shall this report be construed as an opinion as to whether you should enter into any swap or trading strategy involving a swap or any other transaction. The information contained in this report is not intended to be, and does not constitute, a recommendation of a swap or trading strategy involving a swap within the meaning of U.S. Commodity Futures Trading Commission Regulation and Appendix A thereto. This material is not intended to be individually tailored to your needs or characteristics and should not be viewed as a call to action or suggestion that you enter into a swap or trading strategy involving a swap or any other transaction. Scotiabank may engage in transactions in a manner inconsistent with the views discussed this report and may have positions, or be in the process of acquiring or disposing of positions, referred to in this report. Scotiabank, its affiliates and any of their respective officers, directors and employees may from time to time take positions in currencies, act as managers, co-managers or underwriters of a public offering or act as principals or agents, deal in, own or act as market makers or advisors, brokers or commercial and/or investment bankers in relation to securities or related derivatives. As a result of these actions, Scotiabank may receive remuneration. All Scotiabank products and services are subject to the terms of applicable agreements and local regulations. Officers, directors and employees of Scotiabank and its affiliates may serve as directors of corporations. Any securities discussed in this report may not be suitable for all investors. Scotiabank recommends that investors independently evaluate any issuer and security discussed in this report, and consult with any advisors they deem necessary prior to making any investment. This report and all information, opinions and conclusions contained in it are protected by copyright. This information may not be reproduced without the prior express written consent of Scotiabank. Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank, together with Global Banking and Markets, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including, Scotiabanc Inc.; Citadel Hill Advisors L.L.C.; The Bank of Nova Scotia Trust Company of New York; Scotiabank Europe plc; Scotiabank (Ireland) Limited; Scotiabank Inverlat S.A., Institución de Banca Múltiple, Scotia Inverlat Casa de Bolsa S.A. de C.V., Scotia Inverlat Derivados S.A. de C.V. all members of the Scotiabank group and authorized users of the Scotiabank mark. The Bank of Nova Scotia is incorporated in Canada with limited liability and is authorised and regulated by the Office of the Superintendent of Financial Institutions Canada. The Bank of Nova Scotia is authorised by the UK Prudential Regulation Authority and is subject to regulation by the UK Financial Conduct Authority and limited regulation by the UK Prudential Regulation Authority. Details about the extent of The Bank of Nova Scotia's regulation by the UK Prudential Regulation Authority are available from us on request. Scotiabank Europe plc is authorised by the UK Prudential Regulation Authority and regulated by the UK Financial Conduct Authority and the UK Prudential Regulation Authority. Scotiabank Inverlat, S.A., Scotia Inverlat Casa de Bolsa, S.A. de C.V., and Scotia Derivados, S.A. de C.V., are each authorized and regulated by the Mexican financial authorities. Not all products and services are offered in all jurisdictions. Services described are available in jurisdictions where permitted by law. 34

36 Scotiabank Economics Forecasts as of 3 May f 219f f 219f Real GDP (annual % change) World (based on purchasing power parity) Consumer Prices (y/y % change, year-end) Canada United States Mexico United Kingdom Eurozone Germany France China India Japan South Korea Australia Thailand Brazil Colombia Peru Chile

37 Scotiabank Economics Forecasts as of 3 May f 219f f 219f Canada (annual % change, unless noted) United States (annual % change, unless noted) Real GDP Consumer spending Residential investment Business investment Government Exports Imports Nominal GDP GDP deflator Consumer price index (CPI) CPI ex. food & energy Pre-tax corporate profits Employment Unemployment rate (%) Current account balance (CAD, USD bn) Merchandise trade balance (CAD, USD bn) Federal budget balance* (FY, CAD, USD bn) percent of GDP Housing starts (s, mn) Motor vehicle sales (s, mn) 1,657 1,949 2,41 2, 1, Industrial production

38 Scotiabank Economics Forecasts as of 3 May 217 Central Bank Rates Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f Americas Bank of Canada US Federal Reserve (upper bound) Bank of Mexico Europe European Central Bank Bank of England Currencies and Interest Rates Americas Canadian dollar (USDCAD) Canadian dollar (CADUSD) Mexican peso (USDMXN) Europe Euro (EURUSD) UK pound (GBPUSD) Canada (Yields, %) 3-month T-bill year Canada year Canada year Canada year Canada United States (Yields, %) 218 (%, end of period) (end of period) 3-month T-bill year Treasury year Treasury year Treasury year Treasury