FEBRUARY 20, 2019 ECONOMIC & FINANCIAL OUTLOOK Markets Bounce Back, but Doubts Remain as to the Strength of the Economy #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff Clouds continue to build over the global economy. The release of several fairly weak real GDP figures for the fourth quarter of, particularly in Europe, is a new source of disappointment. Italy is now in a recession, which Germany narrowly avoided. The British economy struggled at the very end of, as the uncertainty around Brexit continues. Global real GDP growth should be % in 2019 and % in 2020, compared with the % estimated for. ff In the, the improvement in some indicators, such as the January ISM manufacturing index and the February consumer confidence index, is encouraging. The stock market recovery, the creation of 304,000 jobs in January, the end of the shutdown and progress in trade talks with China are also good news. However, other indicators paint a decidedly gloomier picture, prompting, among other things, a downgrade in the growth forecast. Real GDP growth is expected to reach % in, % in 2019 and % in 2020. ff In, the challenges expected in late and early 2019 are becoming increasingly evident. Moreover, manufacturing, wholesale and retail sales have been disappointing over the past few months. The carryover is rather low for the fourth quarter, which should end with an annualized increase in real GDP of around %. This weakness in the Canadian economy is expected to continue through the first quarter of 2019 due to adjustments in the oil sector. The economy could pick up slightly as of spring. ff and are especially hard hit by the cooldown in existing home sales. The slower housing market will curb real GDP growth in both these provinces in the coming quarters. Furthermore, recent difficulties in the oil sector should have significant negative consequences for and, to a lesser extent,. ff In, consumer and business confidence recovered after being rattled by the financial market upheaval at the end of. Annualized growth in real GDP is expected to be between % and % in the fourth quarter. The economic slowdown already underway will continue with projected growth of % this year, and then % in 2020. The labour market, however, will remain tight and unemployment rate will drop below %. MAIN CHANGES ff The real GDP growth forecast was again adjusted downwards for some euro zone countries. This is coupled with the revised forecasts for U.S. real GDP from % to % for 2019. Therefore, global real GDP growth predicted for 2019 goes from % to %. ff The Federal Reserve s very cautious tone and some disappointing economic data suggest an even more gradual, limited rise in North American interest rates. CONTENTS Highlights and Main Changes... 1 Risks Inherent in our Scenarios... 2 Financial Forecasts... 3 François Dupuis, Vice-President and Chief Economist Mathieu D Anjou, Deputy Chief Economist Hélène Bégin, Senior Economist Benoit P. Durocher, Senior Economist Francis Généreux, Senior Economist Hendrix Vachon, Senior Economist Desjardins, Economic Studies: 514 281 2336 or 1 866 866 7000, ext. 5552336 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 2019, Desjardins Group. All rights reserved.
RISKS INHERENT IN OUR SCENARIOS A number of factors could cause a faster and more serious reversal of the economic situation than anticipated. The recent revival of optimism on the markets could quickly evaporate if worries about the robustness of the global economy intensify or if central banks begin to signal a tightening of monetary policy again. The escalating protectionism is also intensifying the uncertainty felt around the globe. However, for, the new trade agreement with the and Mexico (CUSMA) has significantly reduced the risks. Geopolitical issues continue to weigh on the global economy. Financial imbalances are still a consideration in a number of regions, especially in Europe and in emerging economies like China. Brexit remains unresolved, and the risks associated with a no-deal exit persist. In the, the policies of the Trump administration could see the situation deviate from our scenarios positively or negatively. Political uncertainty fed by doubts about the administration s integrity and partisan divisions in Congress could also affect the markets. The financial difficulties of emerging countries could worsen and have an extremely adverse impact on North American markets. The negative sentiment that washed over the markets in late could return with a vengeance and lead to tighter financial conditions. Inflation that is stronger or weaker than forecast would have major consequences, especially for the bond market. The outbreak of a major conflict in the Middle East could drive international oil prices even higher. In, the rise in interest rates is intensifying concerns over high household debt. The signs of overvaluation in the real estate market are present in Toronto and Vancouver. Montreal and Ottawa are overheated, making these markets more vulnerable to a potential correction. If these signs persist, some provinces could feel the effects of the difficulties in the Canadian oil sector more sharply than others. TABLE 1 World GDP growth (adjusted for PPP) and inflation rate WEIGHT* 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 INFLATION RATE 38.3 1 1 0.2 6 26.9 6.4 18.3 7.4 6.2 IN % Advanced economies REAL GDP GROWTH 7.4 Other countries 1 1 9.5 South Africa 10 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 2
FINANCIAL FORECASTS Confidence has continued to return to financial markets in recent weeks, giving the S&P 500 and the S&P/TSX their best January in over 30 years. After some hesitation at the beginning of February, stock indexes resumed their uptrend, as a second shutdown of the U.S. government was avoided and the trade truce between the and China may extend beyond March 1st from the looks of things. The upswing in investor confidence is due largely to the commitment made by major central banks to be cautious and flexible going forward. The Federal Reserve even removed references to further gradual key rate increases from its most recent statement. It is also expected to announce soon that the size of its balance sheet will remain quite large. In this context, bond yields are still very low, despite a more positive sentiment on markets. The pause in U.S. and Canadian monetary tightening should last several more months, and interest rate increases promise to be even more gradual and limited than previously anticipated. The renewed investor optimism has also benefited the loonie and commodity prices, but disappointing economic data and political tensions in Europe are hurting the euro. TABLE 2 Summary of the financial forecasts END OF PERIOD IN % (EXCEPT IF INDICATED) Key interest rate Euro zone United Kingdom 2019 2020 Q3 Q4 5 0 5 0 5 5 0 5 5 0 5 5 5 5 5 5 0 5 0 0 5 0 0 5 5 0 0 5 0.25 5 5 0 0.25 5 Federal bonds 2-year 5-year 10-year 30-year 2-year 5-year 10-year 30-year 2 5 6 1 1 9 9 2 5 0 5 5 5 0 0 0 0 0 0 5 0 0 5 5 5 5 0 0 0 0 0 1 3 2 1 6 8 6 8 5 0 0 5 5 0 0 5 5 5 5 0 0 5 0 5 0 5 5 5 5 5 0 0 5 5 5 0 0 0 0 0 Currency market Canadian dollar (USD/CAD) Canadian dollar (CAD/USD) Euro (EUR/USD) British pound (GBP/USD) Yen (USD/JPY) 9 7 6 0 114 6 3 4 7 110 3 5 1 8 110 2 6 1 8 110 1 7 3 1 112 0 7 5 2 113 9 8 7 4 112 8 8 8 5 111 0 7 0 8 108 2 6 9 7 105 Stock markets (level and growth)* S&P 500 S&P/TSX Commodities (annual average) WTI oil (US$/barrel) Gold (US$/ounce) 2,507 14,323 Target: 2,800 (+1%) Target: 16,0 (+1%) Target: 2,660 (-%) Target: 15,600 (-%) 65 (52*) 1,270 (1,225*) 59 (65*) 1,245 (1,220*) 59 (48*) 1,210 (1,230*) f: forecasts; WTI: West Texas Intermediate; * End of year. Sources: Datastream and Desjardins, Economic Studies 3
TABLE 3 : Major economic indicators QUARTERLY ANNUALIZED VARIATION IN % (EXCEPT IF INDICATED) Real GDP (2012 US$) Personal consumption expenditures Residential construction Business fixed investment Inventory change (US$B) Public expenditures Employment according to establishments Total inflation rate* Core inflation rate*3 2019 ANNUAL AVERAGE Q3-89.8-9.3-6 5.4 2 4.6 3 28.7 1,234 1,253 1,295 1,308 1,318 1,327 1,208 1,266 1,312 1,287 f: forecasts; * Annual change; 1 Annualized basis; 2 Before taxes; 3 Excluding food and energy. Sources: Datastream and Desjardins, Economic Studies TABLE 4 : Major economic indicators 2019 ANNUAL AVERAGE QUARTERLY ANNUALIZED VARIATION IN % (EXCEPT IF INDICATED) Q3 Real GDP (2012 $) 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 (2012 $B) Employment Total inflation rate* Core inflation rate*3 - - - - - -9.8 - - - - - - - - - - - - - - -7.8 8.0-7.5 17.6 1 197 217 205 201 196 192 220 213 198 195 f: forecasts; * Annual change; 1 Annualized basis; 2 Before taxes; 3 Excluding food and energy. Sources: Datastream and Desjardins, Economic Studies 4
TABLE 5 : Major economic indicators ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) 2016 Real GDP (2012 $) 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 (2012 $B) Real disposable personal income Weekly earnings Employment Personal saving rate (%) Retail sales Total inflation rate - - - -1-1 8.9 - - 8 1,688 3,023 4,000 4,000 38.9 4 46.9 4 f: forecasts; 1 Annualized basis. Sources: Statistics, Institut de la statistique du Québec, Mortgage and Housing Corporation and Desjardins, Economic Studies TABLE 6 : Major economic indicators ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) 2016 Real GDP (2012 $) 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 (2012 $B) Real disposable personal income Weekly earnings Employment Personal saving rate (%) Retail sales Total inflation rate* 0.2 7.5-7.9 - - - 7.9-8.3 8.8 8.3 - - 1,214 9,329 4,666 4,738 2,050 0,3 6.9 7 0,1 79.1 0.1 78.7 7 7 f: forecasts; * Annual change; 1 Annualized basis. Sources: Statistics, 's Ministry of Finance, Mortgage and Housing Corporation and Desjardins, Economic Studies 5
TABLE 7 : Major economic indicators by provinces ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) Real GDP growth 2016 - - Employment growth - - - - -0.2-0.2 7.0 9.9 8.1 9.7 5.4 7.8 9.1 8.6 8.5 Retail sales growth 6.9-6.2 7.8 9.3-0.2 197.9 7.6 38.9 7 2 4 219.8 8.6 4 79.1 7.5 29.5 4 21 9.3 46.9 78.7 7.4 2 4 198.4 9.1 4 7 7.2 2 37.5 19 8.9 7 28.0 3 Total inflation rate Housing starts (thousands of units) f: forecasts Sources: Statistics, Institut de la statistique du Québec, 's Ministry of Finance, Mortgage and Housing Corporation and Desjardins, Economic Studies 6
TABLE 8 Medium-term major economic and financial indicators ANNUAL AVERAGE AVERAGES 2021f 2022f 2023f 2013 2023f 19.4 0 0 5 3 9 51 1,258-6.2 0 0 7 1 1 65 1,269 1 5 5 5 5 5 59 1,245-5 5 0 5 59 1,210 0 0 5 0 5 43 1,250 1 0 0 0 0 0 51 1,250 8.0 5 5 5 5 58 1,2 1 7 7 0.28 3 2 67 1,269 3 3 2 9 56 1,244 337 220 7 0 0 6 6 9 9 7 8 8 241 213-1 7 0 1 7 6 7 9 5 8 6 270 198 1 6 0 0 0 0 5 0 0 0 5 180 195-7 5 5 5 0 0 5 0 0 5 0.2 30 180 5 0 0 5 5 0 0 0 0 0 131 6.4 195 1 8 5 5 5 5. 0 5 0 0 0 187 210 7.0 0 5 5 5 0 5 5 5 0 196 198 4 7 8 4 2 7 3 1 0 173 199 7 9 9 1 0 8 9 5 6 2-0.26-5 -1-0 -3-5 -0-5 -0-0 -5-0 -5-0 -5-0 -0-0 -0-5 -0 4-3 -2-4 -3-8 Employment (var. in %) Employment (thousands) Retail sales (var. in %) Housing starts (thousands of units) 90 46 39 47 35 43 20 0 35 15 38 25 43 7.2 22 Employment (var. in %) Employment (thousands) Retail sales (var. in %) Housing starts (thousands of units) 128 79 114 79 105 82 72 0.1 7 68 59 6.2 75 76 85 69 IN % (EXCEPT IF INDICATED) 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$/ounce) Employment (var. in %) Employment (thousands) Housing starts (thousands of units) S&P/TSX index (var. in %)1 Exchange rate (US$/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 ( ) 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, Institut de la statistique du Québec, 's Ministry of Finance, Mortgage and Housing Corporation and Desjardins, Economic Studies 7