The Economic & Financial Outlook Beata Caranci SVP & Chief Economist TD Economics September 217 Key Themes Synchronized global economic acceleration has put monetary policy normalization in focus Canada leads the pack; Bank of Canada responds swiftly But, headwinds evident Ontario housing market adjusting faster and deeper than B.C. experience Trade/manufacturing shows signs of cooling How long can the consumer sugar-rush last? U.S. economic growth evolving as expected Key segments of economy look solid: employment, consumer spending, investment Government policy remains source of uncertainty Hurricane events don t cause recessions 2
Stable Tracking Of Global Growth 4. Global Real GDP, Annual % Change As of August Forecast As of June 3.5 3. 2. 1. 216 217 218 219 Source: TD Economics. 3 Canada Tops The Leader Board 4. 3.5 3. 2. 1..5 Average Annual Growth %, 16Q3-17Q2 Real GDP Growth Underlying Trend Growth. Canada U.S. Eurozone UK Japan Source: Haver Analytics, TD Economic 4
Broad Strength Evident Across Provinces Real GDP*, Y/Y % Change. Alberta British Columbia Canada Quebec Ontario 218F 217F Manitoba Saskatchewan Atlantic..5 1. 2. 3. 3.5 4. 4.5 5. Source: Forecast by TD Economics as of September 11, 217. *Please note that the forecast is preliminary and subject to change. 5 Canadian Economic Forecasts Steadily Revised Higher 3.1 217 GDP Forecast, Y/Y % Change 2.9 2.7 TD Economics Consensus 2.3 2.1 1.9 1.7 January February March April May June July August Source: Consensus Economics, TD Economics. TD Tracking 217: 3.1 (May: ) 218: 2. (May: 1.9) Bank of Canada 217: 2.8 (April: 2.6) 218: 2. (April: 1.9) 6
Bank Of Canada Sees Enough To Scratch Seven-Year Itch Overnight Rate, % Forecast 2. Current Forecast* June Forecast 1..5. 212 213 214 215 216 217 218 219 Source: Haver Analytics. * Forecast by TD Economics as of September 217. 7 Canadian Yields Cross Above U.S. Counterparts 3. % Canada 2-Year Government Bond Yield Forecast US 2-Year Government Bond Yield 2. 1..5. 215 216 217 218 219 Source: TD Economics, Haver Analytics. 8
1% 8% 6% Strengthening CAD Offers Tighter Financial Conditions % Change since U.S. Election Trade-weighted CAD* USDCAD CADUSD Current* 1.21.82 Q4 217 1.2.83 Q4 218 1.22.82 4% 2% % -2% Housing risk gain market attention BoC hikes rates BoC communication -4% change Nov16 Dec16 Jan17 Feb17 Mar17 Apr17 May17 Jun17 Jul17 Aug17 Sep17 Source: TD Economics, FRB, BoC. *US$ (76.1%), Euro (9.3%), Yen (5.3%), Yuan (3.3%), Peso (3.3%), Pound (2.7%). Current: as of September 11, 217. 9 BoC Outlook Survey Becomes Important Guide To Policy Decisions 7 Balance of Opinion, Next 12-month Outlook, % 6 5 Improvement in sales Plans to increase employment 4 3 2 1 Historic Average (Expansions) Average When BoC Cut In 215 217Q2 Source: Bank of Canada, TD Economics 1
Upside Strength Coming From Consumer Spending & Business Investment 4.5 Contribution to Growth, Q1-Q2 217 Average, % 4. 3.5 3. 2. Others Business Investment Residential Investment Consumption 1..5. May 217 Actual Data Source: Statistics Canada, TD Economics. 11 Income Growth Has Supported Consumer Spending 12 Average Change, C$ 27 Billions. 215Q4-216Q2 216Q3-217Q2 11 Average Change, C$ 27 Billions. 1 9 1 8 9 8 7 6 Other Recreation 6 4 5 6 5 4 3 Autos Furnishings 2 2 1 Household spending Source: Statistics Canada, TD Economics. Disposable Income 215Q4-216Q2 Source: Statistics Canada, TD Economics. 216Q3-217Q2 12
Provincial Employment Generally Strong Employment, 217 Year-To-Date % Change British Columbia Prince Edward Island Quebec Canada Ontario Manitoba Alberta Saskatchewan Atlantic ex. PEI -2. -1.. 1. 2. 3. 4. Source: Statistics Canada, TD Economics, Haver Analytics. 13 Residential Investment Goosed Ontario, Putting Into Question Sustainability 4. 3.5 Ontario Real GDP Growth; Y/Y % Change Residential Investment GDP (ex. Residential Investment) GDP 3. 2. 1..5. -.5 21 211 212 213 214 215 216 217Q1 Source: Statistics Canada, OMF, TD Economics 14
Data Since Ontario's Fair Housing Plan Harder Landing Than B.C. Experience 25, Existing Home Sales, Units Ontario 2, 15, 1, Canada (ex. Ont. & B.C.) 5, B.C. 23 25 27 29 211 213 215 217 Source: CREA, TD Economics 15 Demand-Supply Dynamics In The West 12 Sales-to-New Listings Ratio, Y/Y % Change. 1 8 Saskatchewan British Columbia Alberta 6 4 2 26 27 28 29 21 211 212 213 214 215 216 217 Source: TD Economics, Haver Analytics. 16
Mortgage Holders Have Room To Absorb Higher Rates 2, National Aggregate, Mil of C$ 18, 16, 14, 12, Principal Portion Interest Portion 1, 8, 6, 4, 2, 199 1995 2 25 21 215 Source: Statistics Canada, TD Economics 17 145 14 135 Canadian Dollar May Slow Exports As A Growth Drivers Index, (Jan-212 = 1) FX sensitive Non FX sensitive 13 125 12 115 11 15 1 95 9 Jan-12 Oct-12 Jul-13 Apr-14 Jan-15 Oct-15 Jul-16 Apr-17 Sources: Statistics Canada, Bank of Canada, TD Economics. Note: 3-month moving average of exports are expressed in nominal terms. 18
Waiting For Capacity Pressures To Fuel Investment 95 9 85 Capacity Utilization, %. Furniture Food, Chemicals 8 75 7 65 Total Manufacturing 6 28 29 21 211 212 213 214 215 216 217 Source: Statistics Canada, TD Economics 19 U.S. Economy: The Steady-Eddie Of The Pack 3. 2. Real GDP Forecast, Y/Y % Change 2.3 2.1 2.2 2.1 Consensus Economics Jan-17 Consensus Economics Jul-17 TD - Dec forecast TD - latest 2.4 2.4 2. 2.2 1..5. 217 218 Source: Consensus Economics Forecast, TD Economics 2
Rebound In Drilling Activity Lends A Helping Hand 3. 2. Real GDP, Y/Y % Change Mining, Oil & Gas GDP (ex. Mining, Oil & Gas) GDP 1..5. -.5 21-13 214 215 216 217YTD Source: BEA, TD Economics 21 Better Global Growth Momentum Lifts U.S. Exports 6 Real Goods and Services Exports, Y/Y % Change Global Composite PMIs 56 5 4 Exports - left axis Global PMI - right axis 55 3 54 2 1 53 52-1 -2 51-3 214 215 216 217 5 Source: BEA/Haver Analytics, TD Economics 22
Business Investment Optimism Remains In Tact 4 35 3 % Planning Capital Expenditures next 3 to 6 Months * Reporting Now is a Good Time To Expand 25 2 15 1 5 22 25 28 211 214 217 Source: NFIB Survey, TD Economics. *3-month Moving Average 23 A Good Case For Lower U.S. Corporate Tax Rates 45 4 35 3 25 Corporate Tax Rate, % 216 2 2 15 1 5 35. 34.4 27.5 23.4 2. 15.8 15. United States France Italy Japan United Kingdom Germany Canada Source: OECD, TD Economics. 24
Housing Maintains Significant Growth Potential 2,5 Thousands Share of Single Family - right axis Housing Starts - left axis Forecast % 1 2, Fundamental Demand - left axis 9 1,5 8 1, 7 5 199 1993 1996 1999 22 25 28 211 214 217 22 Note: Forecast of fundamental demand assumes age group headship rates remain constant. Source: Census Bureau, TD Economics 6 25 15 1 Some Areas Have Topped Out: Tighter Credit Standards Have Slowed Subprime Auto Loans 5 Outstanding balances, Y/Y % Change Delinquency Rate - Subprime - right axis Subprime - left axis All other credit qualities - left axis % 13 12 11-5 -1-15 1 9-2 27 28 29 21 211 212 213 214 215 216 217 Source: Equifax, TD Economics. Note: *Subprime ERS< 62, other credit ERS 62-8+ 8 26
Federal Reserve Not Done Raising Rates 3. % 2.8 2.6 2.4 2.2 TD Forecast (midpoint) US OIS Curve FOMC Median Projections 2. 1.8 1.6 1.4 1.2 1. 217 218 219 Source: Bloomberg, Haver Analytics, TD Economics 27 Change In Inflation Dynamics Risks Policy Error.3 Percentage Point Response in Core Inflation.25.2.15.1.5 198-216 21-216. -.5 -.1 t= t=1 t=2 t=3 t=4 t=5 t=6 t=7 t=8 t=9 Source: FRB, TD Economics. *Rolling estimates until 216Q4 of a 2 standard deviation shock to the output gap on core CPI 28
Are Bond Yields Poised To Pop Higher? Term Premium Risks 6 5 4 3 2 1-1 % -2 1965 1969 1973 1977 1981 1985 1989 1993 1997 21 25 29 213 217 Source: FRB, FRBNY, TD Economics. 29 Caution Required On Policy Normalization 6 % NBER Recessions Real Effective Fed Funds Rate R* Forecast 4 2-2 -4-6 1989 1991 1993 1995 1997 1999 21 23 25 27 29 211 213 215 217 Source: TD Economics, BLS, FRB. R* is the natural real rate of interest using long run growth and inflation. 3
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