Canada In a Messy World By Avery Shenfeld, Chief Economist & Managing Director November 2011
Canadian Growth Resumes After Disruptions in Autos and Energy 108 Monthly GDP Index 107 106 105 104 103 102 101 100 99 98 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Canada US 2
Slack Keeps Fed On Hold Through 2013; Fed Extending Term to Anchor Long Rates 6 % decline in non-farm payrolls from peak 4 2 0-2 -4-6 -8-24 -18-12 -6 0 6 12 2008-11 recession /recovery Months from Employment Trough 1948 1953 1958 2007-3
Global Growth Disappointments A Drag on Canada s Exports, Commodity Prices 5.5 World GDP, % chg (at purchasing power parity) 5.0 45 4.5 4.0 3.5 3.0 2010A 2011F 2012F Actual/CIBC Forecast Source: IMF, CIBC *Assumes US extends payroll tax cut and extended jobless benefits IMF Forecast (June '11) 4
Emerging Markets Now the Drivers For Commodities Rallies 60% BIC (Brazil, India, C hina) Share of Total C onsumption 40% 20% 0% 1990's Today Pe etroleum Refined Copper Coal Primary Nickel Note: latest coal data as of 2009; petroleum data as of 2010; nickel and copper data as of 2011 Q2, copper data excludes Brazil Source: EIA, CRU, WBMS 5
Commodities Drive C$ Softer Global Growth Keeps Loonie in Check US$/bbl US /C$ 120 108 110 100 104 90 100 80 70 60 Arrows denote BoC rate hikes Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 96 92 Crude Oil (WTI) Canadian Dollar 6
The Continental Divide 4 2 0-2 -4-6 -8-10 % Output Gap 01 03 05 07 09 11 Employment/ Population Ratio 65 % 64 63 62 61 60 59 58 57 56 55 01 03 05 07 09 11 Canada US Canada US 7
Canada Sees 2% Growth in 2012 But it Will Take Low Rates to Get There GDP growth (s.a.a.r.) Forecast % 6.0% 5.0 4.0% 2.0% 00% 0.0% -2.0% -4.0% -6.0% -8.0% Q1-07 Q1-08 Q1-09 Q1-10 Q1-11 Q1-12? 4.0 3.0 2.0 1.0 0.0 Real GDP Growth (L) Overnight Interest Rate (R) 8
Bond Yields To Drift Higher; Remain Low By Historical Standards 6 10-yr bond yields (%) Canada US Forecast 5 4 3 2 1 Dec00 Dec04 Dec08 Dec12 9
Consumers Reduced Debt Appetite Slows Retail Sales: Low Rates Needed for Longer 10% y/y chg y/y 20% 16% 6% 12% 8% 2% 4% 0% -2% -4% -8% -6% -12% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Real Retail Consumption (L) Consumer Credit (R) 10
11 10 9 8 7 6 5 Debt Service Costs Unthreatening If Overnight Rates Contained to 2% or less % of personal disposable income Q4-91 Q4-93 Q4-95 Q4-97 Q4-99 Q4-01 Q4-03 Q4-05 Q4-07 Q4-09 Q4-11 Q4-13 11 Q Q4-89 Q
Gasoline and Food Inflation Should Ease Giving Lift to Consumer Spending Power 2005=100 1982-84=100 210 135 190 170 150 130 110 90 70 50 130 125 120 115 110 105 100 05 06 07 08 09 10 11 World Commodity Price Index: Food (L) Cdn CPI: Food (R) Source: Bureau of Labour Statistics, Statistics Canada, CIBC 12
Housing Starts Easing But Not Crashing 260 '000 units, SAAR 240 220 200 180 160 140 120 100 80 193 190 191 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011F 2012F 13
Canadian Housing Market Still Balanced 0.9 0.8 Unit Sales as a share of New Listings Sellers' Mkt 0.7 0.6 0.5 Balanced Market 0.4 03 0.3 0.2 Buyers' Mkt 00 01 02 03 04 05 06 07 08 09 10 11 Source: CREA, CIBC 14
Mortgages Outstanding Still Growing Faster Than Incomes 14 12 y/y % chg 10 8 6 4 2 0 00 01 02 03 04 05 06 07 08 09 10 11 Source: Bank of Canada, CIBC 15
House Price Inflation Cooling We Hope 25 y/y % chg Unweighted 20 15 Weighted 10 5 0-5 -10-15 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Source: CREA, CIBC 16
Mortgage Arrears Very Low Canada as a % of 070 0.70 total portfolio 0.60 0.50 0.40 0.30 0.20 0.10 91 95 99 03 07 11 By Province 0.85 as of August 2011 0.80 0.75 0.70 065 0.65 0.60 0.55 0.50 0.45 0.40 0.35 030 0.30 0.25 0.20 BC Ma an/ Sa ask Alta Canada Ont Que Atl Source: CBA, CIBC 17
Number of Stretched Households on the Rise But Not to Troubling Levels Yet 6.5 8.0 % % 60 6.0 7.5 5.5 5.0 7.0 45 4.5 4.0 6.5 3.5 6.0 30 3.0 2.5 5.5 2.0 5.0 03 04 05 06 07 08 09 10 11 Effective Mortgage Interest Rates (L) Share of Households with >40% service ratios (R) Source: The Financial Monitor, CIBC 18
Optimism On Investment Spending A Plus for Industrial Properties 40 30 20 10 0-10 -20-30 -40 Equipment Spending Plans, Balance of Opinion (%-pts) 98:Q3 99:Q2 00:Q1 00:Q4 01:Q3 02:Q2 03:Q1 03:Q4 04:Q3 05:Q2 06:Q1 06:Q4 07:Q3 08:Q2 09:Q1 09:Q4 10:Q3 11:Q2 Source: Bank of Canada Business Outlook Survey 19
Private Construction A Needed Offset to Government Infrastructure Pullback 160 bns 2002C $ Forecast 140 120 100 80 60 40 20 0 Gov't C apital Spending Business Investment: Non-Res Structures Business Investment: Machinery 03 3:1 03 3:4 04 4:3 05 5:2 06 6:1 06 6:4 07 7:3 08 8:2 09 9:1 09 9:4 10 0:3 11 1:2 12: :1F 12: :4F 13: :3F 20
Fiscal Credentials: Canada s Earlier Hard Work Paid Dividends 250 General Government Debt, % (2011) Gross 200 Net 150 100 50 128 101 79 75 72 55 35 0 JPN ITA FRA UK US GER CAN 175 150 General Government Net Debt, % of GDP Fcst 125 100 75 50 25 0 1990 95 00 05 10 15 CAN US UK FRA GER JPN ITA 21
West is Best in 2012 4.0 Real GDP Growth, Y/Y % Chg 3.5 3.0 2011 2012 2.5 2.0 1.5 1.0 0.5 0.0 BC A lta Sask Man Ont Qué NB NS PEI N&L 22
TSX Forward PE Low by Historical Standards, Matching US 17 16 15 14 13 12 11 10 9 8 Jan-07 May-10 Valuation gap closed TSX Composite S&P 500 23
Analysts Cutting 2012 Earnings Expectations 9 Ratio of Downgrades to Upgrades 8 7 6 5 4 3 Normal = 1.5:1 2 1 0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 24
Quality Dividend Stocks Should Outperform 105 Total Return, April 5=100 100 + -1% 95 90-11% 85 *S&P/TSX Canadian Dividend Aristocrat s 80 5-Apr 3-May 31-May 28-Jun 26-Jul 23-Aug 20-Sep 18-Oct High Quality Dividend Stocks* TSX Composite 25
Canadian REITs Helped by Low Bond Yields; Vacancies Peaked at Low Levels 18% Vacancy Rate US Office Vacancy Rate (REIS) 16% 14% 12% US Industrial Vacancy Rate (Colliers) 10% 8% C dn Office 6% C dn Industrial 4% 2% 0% Q4/01 Q2/03 Q4/04 Q2/06 Q4/07 Q2/09 Q4/10 26