Jump-Starting Canadian Growth Aron Gampel, Scotiabank Economics March 15, 216
Persistent Headwinds To Stronger Global Growth Insufficient Aggregate Demand Reinforced By Structural And Cyclical Factors Debt and deleveraging Structural economic adjustments in EMEs Oversupply conditions Banking sector oversight and profitability Financial market volatility and risk aversion Low inflation and deflation Geopolitical risks 2
Markets And The Economy Go Hand In Hand On The Upside
And On The Downside
Heightened Financial Market Volatility And Stress Levels Equity Markets High-Yield Bond Market 4 % index 22 16 % 35 S&P 5 2 14 3 18 12 Energy 25 16 8 2 VIX 14 6 15 12 4 Non-Energy 11 12 13 14 15 16 2 14 15 16 Source: Bloomberg, Moody s, Scotiabank Economics.
Global Interest Rates Plumb Historic Lows, And Even Below Zero! -Year Government Bond Yields 6 % 5 Value of Bonds Outstanding* With Negative Yields US$ trillions 8 7 4 3 U.K. U.S. 6 5 4 2 Germany 3 1 Japan Canada 2 1-1 7 8 9 11 12 13 14 15 16 89 94 99 4 9 14 * All outstanding maturities included in Bloomberg Global Developed Sovereign Bond Index. Source: Bloomberg, Scotiabank Economics.
Economic Divergence Is Triggering Monetary Policy Divergence 6 Central Bank Rates % U.S. Inflation y/y % change 3.5 5 3. 4 forecast 2.5 3 forecast Core PCE 2. U.S. 1.5 2 Euro zone 1. 1 Canada U.K. Headline PCE.5 7 8 9 11 12 13 14 15 16 17 11 12 13 14 15 16 17. Source: Bank of Canada, U.S. Federal Reserve, Bloomberg, Scotiabank Economics.
Economic Divergence Is Triggering Monetary Policy Divergence 6 Central Bank Rates % U.S. Inflation Expectations % 3.5 5 3.3 3.1 4 2.9 3 2 Euro zone forecast U.S. 5Y5Y USD Inflation Swap 2.7 2.5 2.3 1 Canada U.K. 2.1 1.9 7 8 9 11 12 13 14 15 16 17 11 12 13 14 15 16 17 1.7 Source: Bank of Canada, U.S. Federal Reserve, Bloomberg, Scotiabank Economics.
September, October, December, January, March,. 9
US$ Strength, Other Currency Weakness Currencies vs. U.S. Dollar Currencies vs. U.S. Dollar 13 12 1 exchange rate vs. US$ index, 2Q1 = Renminbi Euro forecast exchange rate vs. US$ index, 2Q1 = Australian Dollar forecast 13 12 1 9 Canadian Dollar 9 8 8 7 Yen Mexican Peso 7 6 11 12 13 14 15 16 17 11 12 13 14 15 16 17 6 Source: Bloomberg, Scotiabank Economics.
Global Growth Trends Have Moderated World Real GDP Real GDP 6 annual % change 6 y/y % change 5 4 2-7 average 4.5% 2-15 average 3.8% 216-17 forecast 3.4% 5 4 Emerging Markets 3 2 3 World 1 2 1 Developed Nations forecast forecast -1 2 4 6 8 12 14 16 12 14 16 Source: IMF, Scotiabank Economics.
Sub-Par Economic Performances Persist Around The World Real GDP annual % change 8 6 Advanced Countries Emerging Market Countries 4 2-2 215e 216f 217f 2-7 average -4 U.S. Canada U.K. Euro zone Japan World India China Mexico South Korea Brazil Source: Bloomberg, IMF, Scotiabank Economics.
China s Economic Transition Is Aggravating Demand/Supply Conditions China Real GDP y/y % change 35 Commodity Prices index January 24= 9 8 Services 3 25 2 Energy Metals & Minerals 7 Total 15 Agriculture 6 Goods 5 Forestry 5 12 13 14 15 4 6 8 12 14 16
World Trade Is Still Low And Slow Little Traction In World Trade Exports And Imports Need A Boost 22 y/y % change 22 y/y % change 18 18 14 14 6 World Trade Volumes 6 Exports 2 2-2 11 12 13 14 15 Imports -2 11 12 13 14 15 Source: CPB Netherlands Bureau For Economic Policy Analysis, Scotiabank Economics.
Moderate Global Growth Is Pressuring Commodities And The C$ WTI Oil & The Canadian Dollar Commodity Prices 15 13 US dollars per barrel US cents 1.2 1. 2 18 16 index, 27Q1 = 1 9 Canadian Dollar 1. 14 12 Copper.9 7 8 WTI Oil 5.8 6 3 WTI Oil 2 4 6 8 12 14 16.7.6 4 2 Natural Gas 27 8 9 11 12 13 14 15 16f Source: Bloomberg, Scotiabank Economics.
Oh No Canada!!! 16
Slip Sliding Away!!! 17
Oil Market Fundamentals Are Slow To Turn Supply/Demand Fundamentals Global Oil Fundamentals 6 4 y/y % change Global Oil Demand 16 12 y/y % change U.S. Crude Oil Production y/y % change 28 21 2 8 14-2 Global Oil Supply forecast 4 Global Oil Stocks 7-4 8 9 11 12 13 14 15 16-4 12 13 14 15 16-7 Source: Bloomberg, International Energy Agency.
Canada s Highly Imbalanced Economic Performance 1 8 Canadian Real GDP index: Jan 213 =, 3-mma Non-Energy Commodity- Related Industries 15 5 Canadian Consumption & Business Investment annual % change, constant dollars forecast 6 Consumption 4-5 2 Rest of the Economy - -15 Business Investment Oil & Gas Related Industries -2 98 13 14 15 16-25 7 8 9 11 12 13 14 15 16 17 Source: Bank of Canada, Scotiabank Economics. 19
Orders Are Still Soft Around The World, But U.S. Prospects Improving Awaiting More Global Orders U.S. Orders No Signs Of Lift-Off 6 58 index 6 month annualized % change 14 12 3 2 y/y % change 56 54 52 5 Global New Orders (LHS) Global Industrial Production (RHS) 48-2 11 12 13 14 15 16 8 6 4 2 - -2-3 Six-Month Trend Capital Goods Orders Excluding Aircraft & Defense -4 7 8 9 11 12 13 14 15 16 * Source: U.S. Census Bureau, CPB Netherlands Bureau For Economic Policy Analysis, Scotiabank Economics. 2
U.S. Employment And Domestic Demand Is Relatively Strong U.S. Labour Market U.S. Consumer Purchases 14 12 cumulative job gains, s Unemployment Rate (RHS) % 11 9 Motor Vehicle Sales 1 9 8 8 8 7 7 6 4 6 5 Home Sales Housing Starts 6 5 2 Job Gains (LHS) 12 14 16 4 3 index, 27Q1 = 7 8 9 11 12 13 14 15 16 4 3 Source: Statistics Canada, Census Bureau, BEA, NAR, Scotiabank Economics. 21
U.S. Employment And Domestic Demand Is Relatively Strong U.S. Labour Market U.S. Demand & Canadian Exports 14 12 cumulative job gains, s Unemployment Rate (RHS) % 11 9 15 5 y/y % change U.S. Domestic Demand 8 6 8 7 6-5 - Canadian Exports 4 5-15 2 Job Gains (LHS) 12 14 16 4 3-2 -25 2 4 6 8 12 14 16 Source: Statistics Canada, Census Bureau, BEA, NAR, Scotiabank Economics. 22
Canadian Exports Are Gaining Increased Momentum 15 14 13 12 1 Canadian Export Volumes index, Jan. 2 = Energy Non-Energy Exchange Rate Sensitive Broad-Based And FX-Sensitive Exports Consumer Goods Energy Products Industrial Machinery Forest Products Chemicals & Plastics Electronics Aircraft & Parts Autos & Parts Metals & Minerals 9 11 12 13 14 15 16 Agricultural Products 215 % change -2 2 4 6 8 Source: Statistics Canada, Bank of Canada, Scotiabank Economics.
More Leaders, But Western And Eastern Laggards Are A National Issue 3. Real GDP, annual % change 2.5 2. 1.5 1..5. -.5-1. -1.5 215 216f 217f -2. B.C. Alberta Sask. Manitoba Ontario Quebec Atlantic Canada Source: Statistics Canada, Scotiabank Economics. Canada
Canada s Three-Speed Housing Market 14 Canadian MLS Home Sales Index January 214 = 7 Housing Starts % share of total 12 B.C. and Ontario 6 5 Single-detached Rest of Canada 4 8 Alberta, Saskatchewan and Newfoundland & Labrador 3 2 Apartments Semi-detached & Row 6 14 15 16 2 4 6 8 12 14 Source: CREA, Scotiabank Economics. Source: CMHC, Scotiabank Economics. 25
Canadian Household Finances The Not So Good And The Good 19 18 17 16 Household Debt Burden household credit liabilities as % of disposable income Canada: 165% Net Worth & Delinquency Rates: 9+ days 1.9 1.8 1.7 1.6 % Household Net Worth yr/yr % change 15 15 1.5 5 14 1.4 13 12 United States: 139% 1.3 1.2 1 Canada*: 154% 1.1 1. Canadian Delinquency Rate -5 9 2 4 6 8 12 14.9 7 8 9 11 12 13 14 15 - *Adjusted to match US methodology. Source: Statistics Canada, US Federal Reserve, Scotiabank Economics. 26
Moderate Employment And Wage Gains In Canada Canadian Employment Real Canadian Disposable Income 4 average monthly job gain, s 6 annual % change 3 2 24-15 average: 16k jobs/month forecast 5 4 forecast 3 24-15 average: 3% - 2-2 1-3 4 6 8 12 14 16 4 6 8 12 14 16 Source: Statistics Canada, Government of Canada, Scotiabank Economics. 27
The Pump Is Being Primed For Stronger Canadian and Global Growth Low oil prices Low interest rates Currency realignments Improving U.S. growth Incremental fiscal stimulus Trade agreements 28
Back To The Future 29
An Increasing Focus On Fiscal Policy 3
A Greener And More Costly Future 31
Canada s Changing Fiscal Outlook Canada s Federal Budget Balance Net Debt 3 $ billions 8 % of GDP 2 7 - -2 forecast 6 5 4 Federal Accumulated Deficit forecast -3 3-4 -5 2 Aggregate Provincial Net Debt -6 2 4 6 8 12 14 16 9 92 94 96 98 2 4 6 8 12 14 16 32
Fiscal Policy Moves To The Forefront Government Spending Fiscal Position 7 6 5 y/y % change Canada 2 % of GDP Canada Gov t Balance % of GDP 1 4 19 3 forecast -1 2 forecast -2 1 OECD 18-3 -1-2 8 12 14 16 17 OECD Gov t Spending 8 12 14 16-4 Source: Statistics Canada, OECD, Scotiabank Economics.
Global Forecasts ECONOMIC OUTLOOK 14 15 16f 17f MARKET OUTLOOK 14 15 16f 17f REAL GDP, annual average CURRENCY, end of period U.S. 2.4 2.4 2.2 2.7 Canadian Dollar (USDCAD) 1.16 1.38 1.39 1.26 Canada 2.5 1.2 1.3 2.5 Brazilian Real (USDBRL) 2.66 3.96 4.3 4.5 U.K. 2.8 2.2 1.9 1.9 Euro (EURUSD) 1.21 1.9.95 1.12 Euro zone.9 1.5 1.6 1.7 Mexican Peso (USDMXN) 14.75 17.21 17.9 17.22 Brazil.1-4. -3.6.8 Chinese Renminbi (USDCNY) 6.21 6.49 6.7 6.65 Mexico 2.3 2.5 2.5 3.5 China 7.3 6.9 6.4 6.2 3-MONTH T-BILLS, end of period India 7.1 7.3 7.4 7.5 Canada.92.51.5 1. U.S..4.16 1.4 2.5 INFLATION, end of period U.S. 1.2.4 2.2 2.3 -YEAR BONDS, end of period Canada 1.9 1.3 2. 2.2 Canada 1.79 1.39 1.7 2.5 U.K..5.2.8 1.5 U.S. 2.17 2.27 2.5 3.35 Euro zone -.2.2.9 1.6 Brazil 6.4.7 7.5 5.5 COMMODITIES, annual average Mexico 4.1 2.1 3.9 3.9 WTI Oil (US$/bbl) 93 49 35-4 4-45 China 1.5 1.6 2.1 2.3 NYMEX Natural Gas (US$/mmbtu) 4.28 2.63 2.37 2.62 India 9.5 5.6 6. 5.8 Gold, London PM Fix (US$/oz) 1,266 1,16 1,15 1,25 Source: Scotiabank Economics, Bloomberg.
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