ECONOMIC STUDIES I JUNE 7, 2017 Looking Ahead Together Conference Mistissini, Quebec Economic outlook Jimmy Jean, Senior Economist Desjardins Group
PRESENTATION OUTLINE 2 Global economic context: A brief overview Theme: The protectionist threat U.S. economic context Canadian economic context Quebec and regional economic context
GLOBAL ECONOMIC CONTEXT The economy is getting back on track 3
GLOBAL ECONOMIC CONTEXT Political uncertainty abounds, but markets are fairly calm 4 Index 300 200 100 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Global index of economic uncertainties (left) VIX S&P 500 implied volatility index (right) Index 60 50 40 30 20 10 0 Sources: Datastream and Desjardins, Economic Studies
GLOBAL ECONOMIC CONTEXT Household and business confidence have strengthened, the hard data is following suit Index 100.5 100.0 99.5 99.0 Confidence in OECD members and the six main emerging countries*, and global export volumes Annual variation in % Consumer confidence (left) Business confidence (left) Global export volumes (right) 98.5 2012 2013 2014 2015 2016 2017 * Brazil, China, India, Indonesia, Russia and South Africa. Sources: OECD, CPB Netherlands and Desjardins, Economic Studies 5 5 4 3 2 1 0-1
GLOBAL ECONOMIC CONTEXT 2017 and 2018 forecasts Annual change in real GDP 2017 and 2018 Canada 2.4% & 2.0% Ontario 2.6% & 2.2% Quebec 2.0% & 1.5% United States 2.2% & 2.4% Latin America 0.8% & 1.5% United Kingdom 1.7% & 1.4% Euro zone 1.7% & 1.4% India 6.9% & 7.3% Eastern Europe 2.1% & 2.4% China 6.5% & 6.1% Japan 1.1% & 0.8% Southern Asia 4.6% & 4.5% 6 World: 3.3% & 3.5% (5.7% in 2007) Advanced economies: 1.9% & 1.9% (2.5% in 2007) Emerging economies: 4.2% & 4.4% (8.6% in 2007) Sources: Consensus Forecasts and Desjardins, Economic Studies
PRESIDENT TRUMP S PROTECTIONIST DOCTRINE A major source of uncertainty 7 From this day forward, it is going to be only America first! Donald Trump
PROTECTIONISM Up until April, Trump targeted mostly Mexico 8 In US$ 50 40 30 20 10 0-10 46.55 Hourly labour cost in the automobile industry 41.06 We have a very outstanding trade relationship with Canada. We ll be tweaking it. We ll be doing certain things that will benefit both of our countries. Donald Trump, February 13, 2017 8.19 United States Canada Mexico Sources: Conference Board and Desjardins, Economic Studies
PROTECTIONISM but the rhetoric has hardened towards Canada 9 RULES OF ORIGIN BUY AMERICAN FOREIGN OWNERSHIP RESTRICTIONS LIKELY AMERICAN REQUESTS IMPACTING CANADA DISPUTE RESOLUTION SYSTEM CANADIAN PROCUREMENT SUPPLY MANAGEMENT IN AGRICULTURE CANADA ADVANTAGES AND DISADVANTAGES - Pro-trade advisors within Trump s circles - U.S. scandals could delay the renegotiation agenda - Deeply integrated manufacturing industries - Little bargaining power against the world s largest economy - Canada s protectionism track record is not entirely immaculate Canada will likely need to make important concessions in some industries. Canada could extract some concessions elsewhere but still low clarity on the likely net outcome Depending on details, some U.S. requests, such as pertaining to rules of origin, could be beneficial to Canada.
PROTECTIONISM The United States is Canada s biggest trading partner, by far 10 In % 80 60 40 20 0 76.4 U.S. Relative size of Canadian goods exports in 2016 4.4 4.1 3.3 2.1 1.5 0.8 European Union without U.K. 7.6 China U.K. Japan Mexico India Other Sources: Industry Canada and Desjardins, Economic Studies
PROTECTIONISM The national cost of protectionism 11 Expectations of an improved trade balance push up currency values Hurt exports Diminish the intended effect of tariffs or import limits Tariffs drive prices higher for importers Higher input prices Potential investment pullback, due to the cost of imported equipment Higher consumer prices Reduce real disposable income Reduce monetary policy flexibility Reduced cost effectiveness Reduces productivity Reduces potential economic growth Possibility of recurrences and trade wars
PROTECTIONISM Impact of a Border Adjustment Tax (BAT) on Canada 12 Competitive shock in various sectors Automotive Metals Machines Professional services Agriculture Commodities Depreciation of the Canadian dollar In principle, when markets are competitive and efficient, higher average prices for U.S. imports should favour the greenback and push down the loonie Could mitigate or even wipe out the shock of a BAT Upside pressures on consumer prices Less expensive imported goods (without currency adjustment) Drag on economic activity Could potentially incite the Bank of Canada to lower its rates Possibility of retaliation Even greater negative impact on Canada s economy
U.S. ECONOMIC CONTEXT 13
U.S. ECONOMIC CONTEXT The U.S. jobless rate reached the low point of the previous cycle 14 In % 10 Unemployment rate 8 6 4 2 2000 2002 2004 2006 2008 2010 2012 2014 2016 Sources: Bureau of Labor Statistics and Desjardins, Economic Studies
U.S. ECONOMIC CONTEXT Small business confidence has soared 15 Index 110 105 100 95 90 85 NFIB small business index 80 2000 2002 2004 2006 2008 2010 2012 2014 2016 Sources: National Federation of Independent Business and Desjardins, Economic Studies
U.S. ECONOMIC CONTEXT Firmer household confidence in the U.S. struggles to ignite consumer spending 16 Index Annual variation in % 110 5 100 4 90 3 80 2 70 1 60 50 0 40 Conference Board index Expectations (left) -1 30 Real consumption (right) -2 20-3 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: Conference Board, Bureau of Economic Analysis and Desjardins, Economic Studies
U.S. ECONOMIC CONTEXT Improvements in 2017, but far from the Trump government s 3% target Quarterly annualized variation in % 6 4 Real GDP Annual average 2015 2.6% 2016 1.6% 2017f 2.2% 2018f 2.4% 17 2 0-2 2014 2015 2016 2017 2018 f: forecasts Sources: Bureau of Economic Analysis and Desjardins, Economic Studies Desjardins forecasts
U.S. ECONOMIC CONTEXT The Federal Reserve executes its normalization plan less hesitantly but some market skepticism remains In % 2.25 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0.00 Fed funds futures Desjardins forecast Federal funds rate 2015 2016 2017 2018 2019 Sources: Bloomberg and Desjardins, Economic Studies 18
CANADIAN ECONOMIC CONTEXT 19
CANADIAN ECONOMIC CONTEXT Canadian economic growth was very solid in the first quarter 20 Quarterly annualized variation in % 4.5 United States Canada Real GDP 3.0 1.5 0.0-1.5 Q1 2016 Q2 Q3 Q4 Q1 2017 Sources: Statistics Canada and Desjardins, Economic Studies
CANADIAN ECONOMIC CONTEXT Job markets in provinces hard hit by the oil shock are now recovering In thousands 3,120 3,100 3,080 3,060 Employment* 3,040 2014 2015 2016 2017 Oil-producing provinces (left) Rest of Canada (right) * 3-month moving average. Sources: Datastream and Desjardins, Economic Studies 21 Annual variation in % 15,300 15,200 15,100 15,000 14,900 14,800 14,700 14,600
CANADIAN ECONOMIC CONTEXT Consumers pick up the pace 22 Annual variation in % 6 5 4 3 2-1 01-2 -3 Value of retail sales 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Canada Quebec Sources: Statistics Canada and Desjardins, Economic Studies
CANADIAN ECONOMIC CONTEXT Fiscal relief has played an important part in boosting disposable income In % 8 6 4 2 0-2 Contributions to quarterly disposable income growth Q1 2016 Q2 Q3 Q4 Primary income Net transfers to public administrations Total 23 Sources: Statistics Canada and Desjardins, Economic Studies
CANADIAN ECONOMIC CONTEXT No shortage of government attempts at safeguarding the housing market (1) 24 October 2008 Reduce the maximum amortization period for new insured mortgages to 35 years (from 40 years) Require a minimum down payment of 5% for new insured mortgages (no previous minimum) April 2010 All borrowers required to meet the standards for a 5-year fixed-rate mortgage, even if they choose one with a lower interest rate and shorter term March 2011 Reduce the maximum amortization period to 30 years (from 35 years) for insured mortgages with LTV ratio >80% July 2012 Reduce the maximum amortization period to 25 years (from 30 years) for insured mortgages with LTV ratio >80% Limit availability of mortgage insurance to homes with a value February 2016 Increase the minimum down payment for insured mortgages to 10% (from 5%) for the portion of a house price >C$500,000
CANADIAN ECONOMIC CONTEXT No shortage of government attempts at safeguarding the housing market (2) 25 July 2016 (B.C.) Apply a 15% tax on foreign buyers Apply a tax on empty homes (effective Jan 1, 2017) October 2016 Apply a mortgage stress test that all insured borrowers must qualify for mortgage insurance at an interest rate that is the greater of the Bank of Canada s conventional 5-year posted rate or the rate on the mortgage contract Foreign buyers no longer exempted from capital gains taxation upon the sale of a principal residence April 2017 (Ont.) Apply a 15% non-resident speculation tax on property prices in the Greater Golden Horseshoe region Legislative measures allowing the city of Toronto and other municipalities to impose a tax on vacant properties
CANADIAN ECONOMIC CONTEXT Canada s housing market excesses are limited to Ontario 26 Annual variation in %* 25 20 15 10 5 0-5 Average house price Ont. P.E.I. Man. N.S. Que. N.B. Alta. Sask. N.L. B.C. * As of April 2017. Sources: Statistics Canada and Desjardins, Economic Studies
CANADIAN ECONOMIC CONTEXT The overall backdrop is solid 27 Quarterly annualized variation in % Real GDP Annual average 2015 0.9% 5 2016 1.5 4 2017f 2.6 3 2018f 2.0 2 1 0-1 -2 2014 2015 2016 2017 2018 f: forecasts Sources: Statistics Canada and Desjardins, Economic Studies Desjardins forecasts
CANADIAN ECONOMIC CONTEXT The Bank of Canada will exert more patience than the Federal Reserve In % 6 5 4 3 2 1 United States Canada 0 2005 2007 2009 2011 2013 2015 2017 28 Desjardins forecasts Sources: Datastream and Desjardins, Economic Studies
CANADIAN ECONOMIC CONTEXT The loonie will stop depreciating but remain weak nonetheless 29 Canadian dollar and Canada U.S. 2-year bond yield spread* USD/CAD In basis points 60 0.85 Desjardins forecasts 40 20 0.80 0-20 0.75-40 -60 0.70-80 -100 0.65-120 2015 2016 2017 2018 2019 CAD (left) 2-yr spread (right) * Canada minus U.S. yield. Sources: Datastream and Desjardins, Economic Studies
QUEBEC AND REGIONAL ECONOMIC CONTEXT 30
QUEBEC AND REGIONAL ECONOMIC CONTEXT Quebec posts best growth in six years 31 Annual variation in % 2.5 2.1 2.0 1.9 Real GDP 2.0 2.0 Desjardins forecasts 1.5 1.0 1.0 1.4 1.3 1.2 1.5 0.5 2010 2011 2012 2013 2014 2015 2016 2017 2018 Sources: Institut de la Statistique du Québec and Desjardins, Economic Studies
QUEBEC AND REGIONAL ECONOMIC CONTEXT Full-time job creation has accelerated recently 32 Annual variation in % 3 Full-time employment 2 1 0-1 -2 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Sources: Statistics Canada and Desjardins, Economic Studies
QUEBEC AND REGIONAL ECONOMIC CONTEXT Consumer confidence has solidified measurably 33 2014 = 100 150 140 130 Historical average 120 110 100 90 80 70 60 50 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Sources: Conference Board of Canada and Desjardins, Economic Studies
QUEBEC AND REGIONAL ECONOMIC CONTEXT Housing market showing signs of life 34 In $k Average prices Annual variation in % 295 Variation (right) Level (left) 5 290 4 285 280 3 275 270 2 265 260 1 255 2012 2013 2014 2015 2016 2017 0 Sources: Canadian Real Estate Association and Desjardins, Economic Studies
QUEBEC AND REGIONAL ECONOMIC CONTEXT Capital spending relies heavily on the public sector 35 Investment intentions 2017 Annual variation in % 15 13.5 Private Public Total 10 5 0 4.9 0.8 4.9 1.6 7.0 4.0-5 -1.6-3.7 Canada Quebec Ontario Sources: Statistics Canada and Desjardins, Economic Studies
Nord-du-Québec 36
QUEBEC AND REGIONAL ECONOMIC CONTEXT Investment should reach $1.6B in 2016 37 In $M 3,000 Nord-du-Québec Investments Total Private Public 2,000 1,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016f f: Institut de la statistique du Québec forecast Sources: Institut de la statistique du Québec and Desjardins, Economic Studies
QUEBEC AND REGIONAL ECONOMIC CONTEXT Current projects in Nord-du-Québec 38 Nemaska Lithium Whabouchi Project lithium mine $200.0M from 2016 to 2018 Ministère des Transports Airport and roadwork in Nord-du-Québec $100.8M from 2017 to 2019 Hydro-Québec Renovation of a transformer substation in Radisson $50.0M from 2016 to 2018 Rehabilitation of the Robert-Bourassa generating station in Baie-James $20.0M from 2016 to 2017 Sources: Commission de la construction du Québec and Desjardins, Economic Studies
QUEBEC AND REGIONAL ECONOMIC CONTEXT 2017 economic outlook for Nord-du-Québec 39 The economy in Nord-du-Québec will expand in 2017 Base metal prices could rise slightly in 2017, but they ll still be lower than 2014 prices Development projects in the pipeline: Osisko s Lac Windfall gold mine east of Lebel-sur- Quévillon, Critical Elements Corporation s Rose lithium-tantalum mine in Baie-James and Nemaska Lithium s Whabouchi Project The tourism industry will continue its development Baie-James and Eeyou Istchee tourism: new 2016-2018 marketing plan Cree Outfitting and Tourism Association: exploration project to analyze the potential for developing tourism products Source: Desjardins, Economic Studies
QUEBEC AND REGIONAL ECONOMIC CONTEXT Demographic growth in the region should be faster than in Quebec between 2016 and 2021 40 Quebec overall 2016f/2011 Nord-du-Québec 2021f/2016f Jamésie Kativik Eeyou Istchee -4-2 0 2 4 6 8 10 12 Variation in % f: Institut de la statistique du Québec projections based on the 2014 benchmark scenario Sources: Institut de la statistique du Québec and Desjardins, Economic Studies
QUEBEC AND REGIONAL ECONOMIC CONTEXT Personal disposable income in Nord-du-Québec increasing at a brisk pace 41 REGION PERSONAL DISPOSABLE INCOME ANNUAL AVERAGE GROWTH RATE 2010 2015 Nord-du-Québec $24,085 3.1% Eeyou Istchee $23,256 2.8% Kativik $19,734 3.1% Jamésie $29,189 3.9% Quebec overall $26,857 2.5% Sources: Institut de la statistique du Québec and Desjardins, Economic Studies
QUEBEC AND REGIONAL ECONOMIC CONTEXT Key development issues for Nord-du-Québec 42 Keeping a close eye on developments in the forestry industry as concerns linger, including negotiations on lumber, high wood fibre costs, and supply issues Kick-starting and expanding searches for mining projects, given that prospecting expenses have fallen sharply since 2012 Striving to improve the region s economic diversification Retaining, attracting and training the next generation of workers, with retirements set to rise in the next few years Source: Desjardins, Economic Studies