ECONOMICS I RESEARCH North American Economic Outlook: Gradual Though Sustained Recovery Presentation to the Canadian Association of Movers Paul Ferley (416) 974-7231 Assistant Chief Economist paul.ferley@rbc.com November 16, 21
U.S. Economic Outlook: Strengthening Employment Growth Key to Sustaining the U.S. Recovery
The U.S. recovery has slowed after initially rebounding strongly from the severe financial market shock 1 8 6 4 2-2 -4-6 U.S real GDP growth -8 97 98 99 1 2 3 4 5 6 7 8 9 1 Quarter-over-quarter annualized % change Year-over-year % change Source: Bureau of Economics Analysis, RBC Economics Research ECONOMICS I RESEARCH 3
As fiscal policy support subsides and inventory building ends, private spending will need to kick in 6 U.S. fiscal and inventory support Percentage points, quarterly annualized rate 4 2-2 -4-6 Inventory Build Stimulus Impact Overall GDP Growth 9 1 11 Source: RBC Economics Research, Macroeconomic Advisers ECONOMICS I RESEARCH 4
What is needed to sustain the U.S. recovery? ECONOMICS I RESEARCH 5
The uncertainty as to who was holding U.S. subprime mortgages weighed on financial markets though these pressures have reversed Weekly observation 16 Level S&P 5 composite index Basis points Three-month TED spread* 15 14 13 12 11 1 9 8 4 3 2 1 7 6 22 23 24 25 26 27 28 29 21 Source: Bloomberg, RBC Economics Research 22 23 24 25 26 27 28 29 21 *Three-month LIBOR rate minus Three-month T-bill Source: Federal Reserve Board, RBC Economics Research ECONOMICS I RESEARCH 6
U.S. commercial banks have ceased tightening lending standards 1 NSA, % Bal Federal reserves senior loans officer survey 75 Large/mid-sized firms Small firms 5 Tightening 25 Easing -25 99 1 2 3 4 5 6 7 8 9 1 Source: Federal Reserve Board, RBC Economics Research ECONOMICS I RESEARCH 7
which augurs well for the improving trend in lending to continue U.S. C&I loans at commercial banks 4 % 3 2 y/y % change 3m moving average of m/m % change annualized 1-1 -2-3 9 92 94 96 98 2 4 6 8 1 Source: Federal Reserve Board, RBC Economics Research ECONOMICS I RESEARCH 8
Private sector hiring needs to continue to improve Private sector employment growth 4 change from previous month (Thous.) 2-2 -4-6 -8-1 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Source: Bureau of Labor Statistics, RBC Economics Research ECONOMICS I RESEARCH 9
To help facilitate this, the Fed is poised to embark on another round of Quantitative Easing 24 SA, Bil. $ Reserves held by the Fed 2 Monetary base Total reserves 16 12 8 4 1 2 3 4 5 6 7 8 9 1 Source: Federal Reserve Board, RBC Economics Research ECONOMICS I RESEARCH 1
Our forecast assumes that this private sector support along with policy actions will sustain the recovery U.S. real GDP 1 8 6 4 2-2 -4-6 -8 Annualized % change, quarter-over-quarter Annual growth rates 28 29 21f 211f. -2.6 2.7 2.8 Forecast 1 2 3 4 5 6 7 8 9 1 11 Source: Bureau of Economic Analysis, RBC Economics Research ECONOMICS I RESEARCH 11 11
Canadian Economic Outlook: Less Damaged by the U.S. Recession -Though Still Dependant on Sustained U.S. Recovery ECONOMICS I RESEARCH 12
Canada has weathered the U.S. downturn helped by an aggressive easing in policy 7 % Bank of Canada overnight rate 6 5 4 3 2 1 2 3 4 5 6 7 8 9 1 Source: Bank of Canada, RBC Economics Research ECONOMICS I RESEARCH 13
with the impact of the U.S. recession also tempered by three additional factors: less upward pressure on the cost of capital commodity prices, though trading lower, remained at historically high levels which helped boost export revenues the Canadian housing market avoided the freefall in activity evident in the U.S. ECONOMICS I RESEARCH 14
The rise in the cost-of-capital was more muted in Canada 4 36 32 28 24 2 16 12 8 4 Basis points Short-term funding spreads 3 month LIBOR vs. OIS Canada U.S U.K. Eurozone 7 8 9 1 Source: Bloomberg, RBC Economics Research ECONOMICS I RESEARCH 15
Oil prices have generally remained, and are expected to continue to remain, historically high 14 12 1 US$/barrel Oil price forecast Forecast 8 6 4 2 1999 21 23 25 27 29 211 Source: Wall Street Journal, Bloomberg, RBC Economics ECONOMICS I RESEARCH 16
as demand from emerging markets, though slowing, did not collapse and has started to rebound 14 12 1 8 6 4 2-2 -4-6 -8-1 Major emerging economies % change in real GDP 9.7 8.7 8.8 6.7 8.1 8. 7.7 4.5 5. 4.6 4.3 3.2 -.2 -.6 29 21 211-6.5 China India Brazil Mexico World Source: IMF, RBC Emergin Markets Research, RBC Economics Research ECONOMICS I RESEARCH 17
More prudent mortgage lending in Canada with less involvement in subprime mortgages 4 Percentage of mortgage in arrears % 35 3 25 2 15 1 5 Subprime Canada Prime Canada Subprime U.S. Prime U.S. 4 5 6 7 8 9 Source: Bank of Canada, Mortgage Bankers Association, RBC Economics Research ECONOMICS I RESEARCH 18
limited the extent of declines in residential investment in Canada relative to the U.S. 17 % change, year-over-year Residential investments 12 7 2-3 -8-13 -18-23 Canada U.S. -28 2 3 4 5 6 7 8 9 1 * Forecast Source: Statistics Canada, Bureau of Economic Analysis, Office for National Statistics, RBC Economics Research * ECONOMICS I RESEARCH 19
There was concern that a housing market bubble might be emerging with an earlier sharp rise in house prices 25 Canadian house prices % change, year-over-year 2 15 1 5-5 -1-15 99 1 2 3 4 5 6 7 8 9 1 Source: CREA, RBC Economics Research ECONOMICS I RESEARCH 2
however, those increases largely reversed earlier weakness with greater stability emerging Canadian house prices 35 Average price ($) 325 3 275 25 225 2 175 15 99 1 2 3 4 5 6 7 8 9 1 Source: CREA, RBC Economics Research ECONOMICS I RESEARCH 21
RBC s Housing Affordability measure is not flagging any major imbalances similar to the early 199s Housing affordability 6 % of household income taken by ownership cost 5 4 3 2 Two-storey Bungalows Townhouses Condos 1 85 86 87 88 89 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 Source: Statistics Canada, Royal LePage, RBC Economics Research ECONOMICS I RESEARCH 22
The financial market turmoil has hit household net worth though conditions are improving 16 14 12 1 8 6 4 2-2 -4-6 -8 Household net worth % change, year-over-year 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 23
However, the hit to balance sheets will keep the recovery in housing subdued going forward 35 3 25 SAAR, Thous. units Housing starts Annual(s) 28 29 21f 211f 212 149 194 188 Forecast 2 15 1 5 1 2 3 4 5 6 7 8 9 1 11 Source: CMHC, RBC Economics Research ECONOMICS I RESEARCH 24
Similarly following an initial bounce from recession lows, growth will slow for both housing sales Housing resales 3 25 2 15 1 5-5 -1-15 -2 % change, year-over-year level % change, year-over-year ( LHS) Level (RHS) Forecast Annual Growth Rates 28 29 21f 211f -17.1 7.7-1.7.2 2 21 22 23 24 25 26 27 28 29 21 211 55 5 45 4 35 3 25 2 15 Source: CREA, RBC Economics Research ECONOMICS I RESEARCH 25
and housing prices Housing prices 24 22 2 18 16 14 12 1 8 6 4 2-2 -4-6 -8-1 % change, year-over-year level Annual Growth Rates Forecast 28 29 21f 211f 4.9 -.8 8. 1.4 % change, year-over-year ( LHS) Level (RHS) 2 21 22 23 24 25 26 27 28 29 21 211 35, 33, 31, 29, 27, 25, 23, 21, 19, 17, 15, Source: Royal LePage, RBC Economics Research ECONOMICS I RESEARCH 26
Easing credit conditions, stimulative policy, and U.S. recovery should allow Canada to sustain positive growth Canada's real GDP 8 Annualized % change, quarter-over-quarter 6 Forecast 4 2-2 -4-6 Annual growth rates 28 29 21f 211f.5-2.5 3.1 2.9-8 1 2 3 4 5 6 7 8 9 1 11 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 27
The modest rebound will keep the pace of improvement in the unemployment rate gradual 1. 9.5 9. 8.5 8. 7.5 7. 6.5 6. % Canadian unemployment Inflation-safe range Forecast 5.5 1 2 3 4 5 6 7 8 9 1 11 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 28
This slack in the economy will also keep inflation below target near term 4. % change, year-over-year Canadian core inflation Forecast 3. 2. BoC inflation target 1.. 9 91 92 93 94 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 29
Low inflation and high unemployment rate will keep the pace of Bank of Canada tightening gradual 7 6 % Bank of Canada overnight rate Forecast 5 4 3 2 1 2 3 4 5 6 7 8 9 1 11 Source: Bank of Canada, RBC Economics Research ECONOMICS I RESEARCH 3
Bond yields will rise modestly as the central bank tightens 9. % Canadian 1-year bond yield 8. 7. 6. 5. 4. 3. 2. 1. Forecast. 95 96 97 98 99 1 2 3 4 5 6 7 8 9 1 11 Source: Bank of Canada, RBC Economics Research ECONOMICS I RESEARCH 31
The Canadian dollar to mirror growing optimism about the global recovery and attendant rise in commodity prices 1.1 Canadian dollar forecast U.S dollar per Canadian dollar Forecast 1..9.8.7.6 81 83 85 87 89 91 93 95 97 99 1 3 5 7 9 11 Source: Bank of Canada, RBC Economics Research ECONOMICS I RESEARCH 32
Fiscal policy will need to tighten though more over the medium rather than near term Federal government budgetary balance 3 2 1 Billions of dollars 19.9 8. 6.6 9.1 1.5 13.2 13.8 9.6 Fed budget projection 2.6-1 -5.8-2 -2-3 -4 Department of Finance Parliamentary Budget Office -12-16 -21-21 -27-3 -12-5 -6-45 -47-53 -56-7 2 1 21 2 22 3 23 4 24 5 25 6 26 7 27 8 28 9 29 1 21-11 211-12 212-13 213-14 214-15 215-16 Source: Department of Finance, Parliamentary Budget Office, RBC Economics Research ECONOMICS I RESEARCH 33
Regional Outlook: The Recovery in Ontario is Very Much Dependant on Sustained U.S. Growth ECONOMICS I RESEARCH 34
Employment growth in Ontario is bouncing back after sizeable declines through the recession 6 % change, year-over-year Ontario employment 4 2-2 -4 2 21 22 23 24 25 26 27 28 29 21 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 35
However, the recent job gains have only resulted in a modest retracement of the earlier deterioration in the unemployment rate 1 % Ontario unemployment rate 9 8 7 6 5 2 21 22 23 24 25 26 27 28 29 21 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 36
The recovery in jobs has been helped by a return to growth in manufacturing 3 Ontario manufacturing % change, year-over-year 2 1-1 -2-3 2 21 22 23 24 25 26 27 28 29 21 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 37
The weakness in manufacturing resulted from Ontario feeling the full brunt of slumping U.S. demand in 29, particularly for autos... 22 Mil. Units U.S. auto sales 2 18 16 14 12 1 8 98 99 1 2 3 4 5 6 7 8 9 1 Source: BEA, RBC Economics Research ECONOMICS I RESEARCH 38
resulting in Ontario declining more last year than the country as a whole MAN. P.E.I N.S. N.B. QUE. B.C. CANADA ONT. SASK. ALTA. N.& L. Provincial real GDP growth Annual % change, ranked by 29 growth. 2. 29 -.1 21 2. -.1 1.7 -.3 2. -.3 2.7-1.8 3.1-2.5 3.1-3.6 3.3-3.9-4.5 3.3-1.2 3.3 6.1-1 -1-1 -9-8 -7-6 -5-4 -3-2 -1 1 2 3 4 5 6 7 8 2 1 Sources: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 39
However, as the U.S. recovers so should the Ontario economy 1 % change, year-over-year Real GDP growth 8 Forecast 6 4 2-2 -4-6 99 1 2 3 4 5 6 7 8 9 1 11 Ontario U.S. Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 4
High commodity prices will have a varying impact among the provinces SASK. ALTA. MAN. N.& L. CANADA ONT. B.C. QUE. P.E.I N.B. N.S. Provincial real GDP growth Annual % change, ranked by 211 growth 2. 2. 2.2 2. 1.9 1.7 1.5 3.3 3.3 3.1 3.1 2.9 3.3 2.8 3.1 2.8 2.7 2.6 1 2 3 4 5 6 7 3.8 Sources: Statistics Canada, RBC Economics Research 4. 4.6 6.1 21 211 ECONOMICS I RESEARCH 41
The impact of high commodity prices will likely reinforce the recent pattern of intra-provincial outflows from Ontario and Quebec 1 NSA, Persons Inter-provincial migration 8 Ontario 6 Quebec 4 2-2 -4-6 -8-1 2 21 22 23 24 25 26 27 28 29 21 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 42
into Saskatchewan, Alberta, and B.C. 18 16 14 12 1 8 6 4 2-2 -4-6 -8 NSA, Persons Inter-provincial migration Saskatchewan Alberta British Columbia 2 21 22 23 24 25 26 27 28 29 21 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 43
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