ECONOMIC RESEARCH AND STRATEGY ECONOMIC RESEARCH AND STRATEGY Fall 2015 Long-term Economic Outlook for Quebec Régime de rentes du Québec Triennial Seminar Sébastien Lavoie Assistant Chief Economist Indicators Trends Forecasts @vmbleconomie
Quebec: Weak Acceleration of Growth Despite Favourable Cyclical Factors Annual Growth of Real GDP in Quebec Source: Statistics Canada, ISQ, LBS Economic Research and Strategy 2 2
Quebec: Can we Hope for 2% Growth? Breakdown of 20 main industries in Quebec s economy according to their annual rate of growth in % Declining sectors Sectors showing modest growth (0-2%) Sectors showing strong growth (2%+) Sources: Institut de la Statistique du Québec, LBS Economic Research and Strategy 3 3
The Labour Force is Stagnating in Quebec Labour Force in Quebec (in thousands) 4 4
Start of the Third Great Wave BC: Pax Romana : 25% of global GDP 1870: Pax Britannica Globalization and trade: 1870 to 1913 (WWI) United States and UK: each accounted for 18% of global GDP in 1913 1940: WWII; U.S. sole leader with 20% of global GDP 1950: start of Cold War, tensions 1960-1990: another wave of international trade 1990-2008: U.S. dominance, hyper-globalization 2014 +: digital revolution, moving towards Asian dominance, return of geopolitical tensions 5 5
Significant Potential for Robotics in Quebec s Labour Force Number of Industrial Robots in Operation per 10,000 Employees in the Manufacturing Sector Around the World China Spain Canada U.S. Germany Japan South Korea Source: International Federation of Robotics, LBS Economic Research and Strategy 6
Intensive Growth: Best Allocation of Resources and Capital Number of Industrial Robots in Operation Around the World, in Thousands Source: LBS, WSJ and International Federation of Robotics 7
Various Sectors of the Quebec Economy will be Affected Value of Robot Sales Around the World in Billions of $, in 2013 Industrial Robots Robots Delivering Professional Services Robots Delivering Personal Services Source: International Federation of Robotics, LBS 8
Risk: Close to 1M Jobs Could Ultimately be Automated in the Long Term in Quebec Quebec Proportion of Occupations at Risk of Automation and Robotization Low Moderate High 9 Source: Statistics Canada, LBS Economic Research and Strategy 9
Technological Unemployment: Hindrance to Unemployment Rate and Temporary Downturn in Employment are Possible Unemployment Rate in Quebec 10 10
Quebec Playing Catch-up with ROC in Dealing with the Digital Revolution Portion of Highly Skilled Employment Quebec Canada Ontario Source: ISQ, Statistics Canada, LBS Economic Research and Strategy 11 11
Education: Quebec in a Less Favourable Position to Deal with the Digital Revolution Percentage of Working-Age Population with University Degree Source: Statistics Canada, LBS Economic Research and Strategy 12 12
Can we Expect an Even Wider Gap Between Participation Rates for Men and Women? Percentage of Working-Age Population in Quebec with a University Degree Women Men Source: Statistics Canada, LBS Economic Research and Strategy 13 13
Technological Unemployment: Do Men and Women Adapt at Different Rates? Portion of Employment that is Highly Skilled Quebec Men Women Source: ISQ, Statistics Canada, LBS Economic Research and Strategy 14 14
Currency and Delocalization of Economic Activity Canada: Real Effective Rate of Change Spot 10-Year Mov. Av. Standardized to 100; Source: BIS, LBS Economic Research and Strategy 15 15
Relocation and Automation: Impediments to Job Creation in the Manufacturing Sector Quebec GDP and Employment in the Manufacturing Sector Real GDP Employment Source: ISQ, LBS Economic Research and Strategy 16 16
Robotization: Contributing Towards the Greater Increase in Capital Expenses; Productivity Gains Portion of Fixed Capital Investment in Quebec s GDP Investments in Machinery and Equipment Source: ISQ, LBS Economic Research 17 17
The Shock of the Major Civilizations BC: Pax Romana : 25% of global GDP 1870: Pax Britannica Globalization and trade: 1870 to 1913 (WWI) United States and UK: each accounted for 18% of global GDP in 1913 1940: WWII; U.S. sole leader with 20% of global GDP 1950: start of Cold War, tensions 1960-1990: another wave of international trade 1990-2008: U.S. dominance, hyper-globalization 2014 +: digital revolution, moving towards Asian dominance, return of geopolitical tensions 18 18
Global Production in 1960 Source: www.worldmapper.org 19 19
Global Production in 2014 Source: www.worldmapper.org Source: www.worldmapper.org 20 20
The Contribution of Asian Economies will Continue; a Multipolar World? Economic Centre of Gravity Source: United Nations, IMF, Credit Suisse 21
Today s Global Economy Other non-oecd Countries India China Other OECD Countries Euro Zone U.S. Japan 22 Source: OECD, LBS Economic Research and Strategy 22
The Global Economy in 2060 India and China Bigger than OECD Countries Pax China/India? Other non-oecd Countries India Other OECD Countries Euro Zone China Japan U.S. 23 Source: OECD, LBS Economic Research and Strategy 23
The Percentage of the GDP Accounted for by Exports has Reached a Point of Maturity Portion of International Trade in Quebec s GDP Exports of Goods and Services Imports of Goods and Services Source: ISQ, LBS Economic Research 24 24
Signs of a World Less Centred on Globalization Global economic growth is lower Global supply chains in China less significant Under-performance of major multinational corporations in relation to small-cap securities Protectionism: Close to 1000 trade-restricting measures adopted by G20 countries since 2008 Tensions around foreign currencies Immigration challenges Gaps: income inequality and standard of living Increased geopolitical conflict and tensions 25 25
Global Production in 2012 US$85 Billion 26 26
Global Production in 2050 US$450 Billion+ Source: CED-Q estimates 27
Intensive Growth of Industrialized Countries Extensive Growth of Emerging Economies China: Urbanization Rate Source: CEIC, RBA, UN, LBS Economic Research and Strategy 28 28
Quebec Cannot Rely on Globalization as Much as it Did in the Past Norway Japan Australia Canada U.S. Spain Italy Netherlands U.K. France Switzerland Germany Bilateral Investment Treaties Signed by Various Advanced Economies Signed with Advanced Economies Signed with Emerging Economies Source: UNCTAD, Credit Suisse, LBS Economic Research and Strategy 29 29
Quebec: The Portion of the GDP Accounted for by Exports has Reached a Point of Maturity (Excluding Currency) Quebec: Exports as % of the Real GDP (in real terms) 30 30
More Multipolar World: Quebec s Growth will be Tied more to Ontario and the U.S. Long-term projections of major trading partners favourable to Quebec exports: HSBC by 2050 (2011): U.S.: 1.8%, Canada: 2.4% Gvt of Ontario by 2030 (2010): Ontario: 2.6% PwC by 2050 (2014): U.S.: 2.4%, Canada: 2.1% OECD by 2060 (2012): U.S.: 2.1%, Canada: 2.2% Blue Chip Consensus by 2025: U.S.: 2.3% CBO by 2025: U.S.: 2.2% 31 31
Renewable Energy will Account for Nearly 50% of New Global Energy Capacity Energy Production Capacity 2013-2040 (Gigawatts) Withdrawals Additions Source: NBER, LBS Economic Research and Strategy Source: OECD, IEA, 2014 32
Leaving Favourable External Conditions Aside, What About Domestic Conditions? Leveraging Household Debt 33 33
Quebec Households: Less Debt, but Fewer Assets DGI (%) Debt to Gross Income (DGI) and % of Owner-Occupied Households with Mortgages B.C. Owner-Occupied Households with Mortgages (%) Source: Bank of Canada / Ipsos Reid, Statistics Canada, LBS Economic Research and Strategy 34 34
Quebec Households: Less Debt, but Fewer Assets Average Net Worth of Households in 2014 (Assets Minus Debts, in Thousands $) 35 35
Formation of Households and Housing Construction: an Inevitable Trajectory Formation of Households* and Housing Starts in Quebec (Annual Average in Thousands, Based on a 5-year Period) Household Formation Housing Starts Source: Statistics Canada; *2011-2061 Forecasts from ISQ, CMHC **2011-16 Forecasts from LBS Economic Research and Strategy 36 36
Limits to Household and Government Debt Quebec Government: Net Debt ($ million) 37 37
Monetary Policy: 2% Inflation Target? Catch me if you can Inflation Projections by the Bank of Canada Return to 2% Inflation April 2010 MPR Late 2011 April 2011 MPR Mid-2012 April 2012 MPR Mid-2013 April 2013 MPR Mid-2015 April 2014 MPR Early 2016 October 2014 MPR Late 2016 January 2015 MPR Late 2016 July 2015 MPR Early 2017 Source: Bank of Canada, LBS Economic Research and Strategy 38 38
A New Inflation Environment: Lowflation? Inflation in Canada (as Measured by the CPI) 39 39
Macroeconomic Objectives are Not Always Compatible with the Financial Stability Objectives of the Central Banks Duration of Expansions in the U.S. (Since 1854) Median Average Nov. 82 March 91 Nov. 01 June 09 Source: NBER, LBS Economic Research and Strategy 40 40
Macroeconomic Objectives are Not Always Compatible with the Financial Stability Objectives of the Central Banks Debt to Nominal GDP Ratio at the Global Level Emerging Economies Industrialized Countries Source: Bank for International Settlements (BIS), LBS Economic Research and Strategy 41 41
Sources of Inflation: Multiple and Complex Energy Field Energy Resources Pollution Labour Risk Capital Labour Capital Marketing, Distribution & Sales R & D Logistics & Transport Trade Barriers Legal, Taxes & Administration Source: Laurentian Bank Securities 42 42
Productivity Gains Arise from Lower Inflation, Not Necessarily Higher Wages %, Year over Year Quebec: Average Weekly Earnings Nominal Real Source: ISQ, LBS Economic Research and Strategy 43 43
EBITDAL: Labour Being Left Out of the Equation Because of Low Capital Costs is Nothing New Work Compensation and Business Profits as a % of the U.S. GDP (%) Profits (Right Scale) Work Comp. (Left Scale) 44 44
Case in Point: Ultimately, Lower Wages in Alberta are Tied to Technological Advancements in the Shale Oil Sector in the U.S. Weekly Compensation Rate (in $) 45
Digital Revolution: Lower Transportation Costs Drones Identified by Pilots in the U.S. Feb. 2014 Dec. 2014 Jan. 2015 - July 2015 Source: US Fed. Aviation Adm., LBS Economic Research and Strategy 46
Less Inflationary Pressure from the Energy and Oil Sectors Short-term perspective: uncertainty and consolidation in the oil sector: rebound in oil prices to US$80 within a year. The world, and the U.S. in particular, still relies on fossil fuels but Technology: other, less costly energy sources; substitution possible. Global energy demand to increase by 50% by 2040. However, owing to energy efficiency, the portion of spending that goes towards energy should decrease. The inflationary effect should therefore diminish. 47
OPEC Cuts Needed? To Bring Inventories to a Suitable Level OPEC Oil Production (Thousands of Barrels a Day) 32.134 tb/d mb/j juin June 2015 Source: LBS Economic Research and Strategy, Bloomberg 48
Median Age in Quebec in 25 years: 45 Current Median Ages in Japan and Germany Median Age and Proportion Aged 65 and Over Median Age (Years) Proportion Aged 65 and over (%) 2013 2038 Change 2013 2038 Change Canada 40.2 43.9 3.7 15 24 9 Nfld./L. 44.2 53.3 9.1 17 35 17 P.E.I. 43.1 47.7 4.6 17 28 11 N.S. 43.8 49.6 5.8 18 31 13 N.B. 43.9 49.8 5.9 18 31 14 Quebec 41.5 45.2 3.7 17 25 9 Ontario 40.3 44.3 4.0 15 25 10 Manitoba 37.7 40.6 2.9 14 21 6 Sask. 37.1 41.1 4.0 14 21 7 Alberta 36.0 39.7 3.7 11 19 7 B.C. 41.7 44.9 3.2 16 25 9 Source: Statistics Canada, LBS Eco. Res. * Moderate Growth Scenario M1 49 49
Demographics, Devaluation and Deflation: the Japanese Experience does Not Necessarily Apply to Quebec Nikkei Stock Index (Left Scale) Yen/US$ (Right Scale) 50 50
Outlook on Market Returns: the Risk of Another Missing GDP Real U.S. GDP ($CST 2009) 51 51
Summary A new revolution will make labour costs even lower, with corresponding impacts on unemployment and labour force participation in Quebec, among other things. Multipolar world: economic integration of Quebec with the U.S. and the ROC, and to a lesser extent Asia. Domestic players more likely to impede growth of real GDP in Quebec over the long term. Productivity gains, which are difficult to calculate, will not necessarily bring higher wages. Because of a number of global factors, it is increasingly likely that inflation will remain lower and that the central banks will need to set other objectives. 52