APRIL 18, 2019 ECONOMIC & FINANCIAL OUTLOOK Serious Doubts Remain despite Encouraging Signs #1 BEST OVERALL FORECASTER - CANADA HIGHLIGHTS ff The global economy and the volume of trade both remain fragile, but the situation is beginning to stabilize in several regions. The indicators released in the euro zone are still pointing to low growth. In the United Kingdom, the unresolved issue of Brexit has monopolized the news, but postponing its deadline until the fall should calm things down in the short term. In China, real GDP growth stabilized in the first quarter of 2019 and the outlook is positive for the spring. ff In the United States, most of the economic indicators are showing signs of stability after recent difficulties. The rise in real GDP in the first quarter should be somewhat higher than anticipated previously. The growth in real consumption will remain very weak, but it will be partially offset by an upturn in net exports, inventories and public spending. Real GDP is still expected to rebound in the spring. ff In, real GDP growth by industry exceeded our expectations in January after rising %. The widespread increases in various sectors suggest that s economy is gaining strength after several difficult months. That said, the adjustments in domestic demand due to higher interest rates are clearly not over. Furthermore, the oil sector s problems should be felt in early 2019. ff In, annualized economic growth slowed to % in the last quarter of. Consumer spending is losing steam and investments are down. Given that was spared by the adjustment of the residential real estate market and the difficulties of the oil sector, its growth will surpass that of the entire country once again this year. Nonetheless, the economic slowdown will continue in 2019 and 2020. ff In, the fourth quarter of ended with real GDP up % (annualized). A return to slightly faster growth is nevertheless anticipated as of the beginning of 2019. Our scenario has barely changed for the other provinces. continues to feel the effects of the energy sector s difficulties, and British Columbia remains hampered by the adjustments in the housing market. ff Central banks will remain prudent, and key rates in North America should remain unchanged until mid 2020. The loonie is expected to maintain its holding pattern around US$5. MAIN CHANGES ff In the United States, the downgrade from % to % of annualized real GDP growth in the fourth quarter of led to a lower carryover for 2019. Therefore, the forecast for the current year fell slightly from % to %. In, real GDP growth forecast for the first quarter of 2019 rose a little following January s positive results. As a result, the forecast for all of 2019 increased from % to %. 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 escalating protectionism is also intensifying the uncertainty felt around the globe. Yet the new trade agreement between, the United States and Mexico (CUSMA) significantly lowered the risks in, although its ratification by the political decision-making bodies is not guaranteed. 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. A new deadline for Brexit was granted, but the uncertainty surrounding its outcome could prove to have a negative impact on the economy and the markets. In the United States, the policies of the Trump administration could see the situation deviate from our scenarios positively or negatively. The political uncertainty, fed by doubts about the administration s integrity, partisan divisions in Congress and pressures of the President on the Federal Reserve, could also affect the markets. The negative sentiment that washed over the markets in late could return 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 concerns linked to high household debt are still present. The signs of overvaluation in the residential real estate market are strong in Toronto and Vancouver. Montreal and Ottawa are overheated, making these markets more vulnerable to a potential correction. If they 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 4.3 1 0.1 IN % Advanced economies REAL GDP GROWTH 6 26.9 6.4 18.3 7.0 7.2 Other countries 1 1 South Africa 4.8 100.0 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 Initially, the Federal Reserve s (Fed) almost neutral stance and the announcement at the March 20 meeting that the normalization of its balance sheet would gradually end seemed to heighten fears of an economic slowdown. This caused stock markets to fall and a marked pullback in bond yields. However, a more positive sentiment returned to the markets at the end of March thanks to more encouraging economic data, especially out of China. In addition, the geopolitical risks continue to evolve in a fairly positive manner, as the trade negotiations between China and the United States appear to be progressing and the deadline for Brexit has been postponed until the fall. Under these circumstances, the stock markets quickly trended up again, and the S&P 500 is quickly moving toward the historical peak it reached last September. The rise in oil prices also continued, as global demand for black gold appears to be resilient and concerns persist about the supply from Iran, Venezuela and Libya, among others. Rising gasoline prices and dwindling fears of a recession caused bond yields to increase slightly, while nothing seems to suggest that a drop in key rates will be necessary. Central banks will continue to be extremely prudent, and we still expect North American key rates to remain unchanged until mid 2020. The loonie is expected to remain around US$5, as the rise in commodity prices offsets the challenges faced by the Canadian economy. TABLE 2 Summary of the financial forecasts END OF PERIOD IN % (EXCEPT IF INDICATED) Key interest rate Euro zone United Kingdom 2019 2020 Q3 Q4 Q1 Q1f 5 0 5 0 5 5 0 5 5 0 5 5 0 5 5 0 5 5 0 5 5 5 5 5 5 0 0.05 0 0 0 0.05 0 Federal bonds 2-year 5-year 10-year 30-year 2-year 5-year 10-year 30-year 2 5 6 1 1 9 9 2 9 3 1 2 5 5 5 0 0 0 0 5 0 5 0 0 0 0 5 0 5 5 0 5 5 0 5 0 5 5 5 1 3 2 1 6 8 6 8 5 2 2 0 5 5 5 5 0 0 0 0 5 0 0 0 5 5 0 5 5 0 5 0 5 0 0 5 0 5 5 0 Currency market Canadian dollar (USD/CAD) Canadian dollar (CAD/USD) Euro (EUR/USD) British pound (GBP/USD) Yen (USD/JPY) 9 7 6 0 114 6 3 4 7 110 3 5 2 0 111 3 5 3 1 111 2 6 3 1 112 2 6 4 3 113 2 6 5 5 113 2 6 5 6 112 1 7 7 8 110 2 6 8 0 108 Stock markets (level and growth)* S&P 500 S&P/TSX Commodities (annual average) WTI oil (US$/barrel) Gold (US$/ounce) 2,507 14,323 Target: 2,900 (+1%) Target: 16,600 (+1%) Target: 3,050 (+%) Target: 17,400 (+4.8%) 65 (45*) 1,269 (1,280*) 61 (63*) 1,300 (1,280*) 60 (58*) 1,240 (1,220*) f: forecasts; WTI: West Texas Intermediate; * End of year. Sources: Datastream and Desjardins, Economic Studies 3
TABLE 3 : Major economic indicators QUARTERLY ANNUALIZED VARIATION IN % (EXCEPT IF INDICATED) Real GDP (2012 US$) 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 Q4 Q1f - 89.8-9.3-96.8 107.5-8.2 8 8.4 80.0 80.0 2-0.1-6.9 4 88.1 60.0 1,234 1,185 1,228 1,292 1,313 1,317 1,208 1,249 1,288 1,323 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 Q4 Q1f 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*3-6.7-1 - - -8.0-1 - -1-1 -4.8 2-1 - - 10.0 - - - - - - - - - -8.6-1 - - - 2-2 2 2 17.6 1 2 2 197-217 187 192 191 220 213 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 - -0.1 - - -1 7.3-4.8 1 6.8-8.7 - - -0.1-874 1,688 2,661 3,500 3,000 38.9 4 46.9 4 40.0 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* - 7.5-7.9 - - - 7.9 - - 8.6 8.0 - - 1,214 9,329 6,520 7,488 6,150 0,3 6.9 7 0,1 79.1 0,2 78.7 6 6 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 - - - - - 7.0 9.9 8.1 9.7 7.8 9.1 8.6 6.8 Retail sales growth 6.9-6.2 7.8 9.3-197.9 7.6 38.9 7 4.8 2 4 219.8 8.6 4 79.1 7.5 29.5 4 21 9.3 46.9 78.7 2 4 19 4 6 7.2 2 36.2 189.5 40.0 6 27.5 37.0 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 2014 2019 2023f 19.4 0 0 5 3 9 51 1,258-6.2 0 0 7 1 1 65 1,269 1 0 0 5 5 61 1,300 5 0 0 60 1,240-8.0 0 0 0 0 46 1,250 10.0 5 5 0 5 0 45 1,275 7.0 5 5 0 0 5 53 1,270 6.7 0 0 6 5 6 60 1,240 4.3 7 7 8 8 1 53 1,267 337 220 7 0 0 6 6 9 9 7 8 8 241 213-1 7 0 1 7 6 7 9 5 8 6 302 1 5 5 5 0 0 5 5 5 0 5 194 4.8 6 5 5 0 5 5 0 5 0 5 156 188-1 4 5 5 5 5 5 0 0 5 0 49 185 10.0 5 5 5 0 0 0 0 5 0 5 192 200 9.0 6 0 0 0 5 5 0 5 0 0 193 203 0 7 8 8 4.85 0 5 4 1 1 179 5 8 8 1 7 4 5 4 1 1-6 -5-1 -0-3 -5-0 -5-0 -0-0 -5-5 -5-5 0 5-5 -5-0 -5 0.13-4 -5-4 -7-0 Employment (var. in %) Employment (thousands) Retail sales (var. in %) Housing starts (thousands of units) 90 46 39 47 35 45 20 40 15 38 0.1 5 35 20 40 40 6.8 42 19 39 Employment (var. in %) Employment (thousands) Retail sales (var. in %) Housing starts (thousands of units) 128 79 114 79 140 67 86 66 37 64 60 67 76 72 84 6.4 72 80 67 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