Economic Outlook. Ottawa Chamber of Commerce/ Ottawa Business Journal: Mayor s Breakfast Series Ottawa, Ontario 27 April PDF Free Download

Economic Outlook Ottawa Chamber of Commerce/ Ottawa Business Journal: Mayor s Breakfast Series Ottawa, Ontario 27 April 2012 Mark Carney Mark Carney Governor

Agenda Three global forces The consequences for Canada The current outlook What must be done? 2

Global Forces: The Rise of Emerging-Market Economies 3

Very robust growth in emerging markets Real GDP, Index 2007Q1=100, 100, quarterly data Index 160 150 140 130 120 110 100 90 2007 2008 2009 2010 2011 Index 160 150 140 130 120 110 100 90 China Emerging market and developing economies Note: Emerging market and developing economies is calculated using annual growth rate from IMF 2012 April WEO. Source: Statistics Canada, Bureau of Economic Analysis, China National Bureau of Statistics, IMF 2012 April WEO, Bank of Canada. Last observation: 2011Q4 4

Very robust growth in emerging markets Real GDP, Index 2007Q1=100, 100, quarterly data Index 160 150 140 130 120 110 100 90 2007 2008 2009 2010 2011 Index 160 150 140 130 120 110 100 90 U.S. Canada China Emerging market and developing economies Note: Emerging market and developing economies is calculated using annual growth rate from IMF 2012 April WEO. Source: Statistics Canada, Bureau of Economic Analysis, China National Bureau of Statistics, IMF 2012 April WEO, Bank of Canada. Last observation: 2011Q4 5

Emerging markets now account for bulk of growth Contribution to global growth Percentage contributions to global real GDP growth, annual data % 100 80 60 40 20 2000 2011 0 Advanced economies Emerging and developing economies Source: International Monetary Fund World Economic Outlook, Bank of Canada calculations Last observation: 2011 6

Massive, rapid urbanization Change in urbanized population Millions of people 600 500 400 300 200 100 1970-1990 1990-2010 2010-2030 f 0 More developed regions India & China Note: f denotes forecast Source: United Nations - World Urbanization Prospects 7

Global Forces: Elevated Commodity Prices 8

Non-agriculture commodity prices up10-fold since WWII Real commodity prices in the post-war period 1946 = 100 Index 600 500 Average industrial metals and energy prices (2002-2011, right axis) Index 1600 1400 1200 400 300 200 100 Average industrial metals and energy prices (1971-2001, right axis) 1000 800 600 400 200 0 0-200 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 Industrial Metals (left axis) Agriculture (left axis) Energy (right axis) Source: Bank of Canada, U.S. Bureau of Labor Statistics Last observation: 2011 9

Commodity prices remain elevated Bank of Canada commodity price index (rebased to January 2009 = 100) Index 200 180 160 140 120 100 2009 2010 2011 2012 80 All commodities (US$) Non-energy commodities (US$) Energy commodities (US$) Note: April 2012 figures are calculated based on the average of daily spot prices up to 20 April 2012. Source: Bank of Canada Last observation: April 2012 10

Large gap between Canadian and global oil prices Daily data US$/Barrel 10 0-10 -20-30 -40-50 May-2008 May-2009 May-2010 May-2011 Western Canadian Select minus West Texas Intermediate West Texas Intermediate minus Brent Western Canadian Select minus Brent Note: Values in April 2012 are estimates based on the average daily spot prices up to 13 April 2012. For Brent crude oil prices, front-month futures prices are used. Sources: Bank of Canada and Bloomberg -60 Last observation: April 2012 11

Global Forces: The Great Deleveraging 12

Sharp increase in debt across developed world Changes in household, corporate and net government debt as percentages of nominal GDP from 1980 to 2010 Percentage points 250 200 150 100 50 Canada Germany Australia United France United Japan Greece Spain Italy Portugal States Kingdom 0 Note: Some figures refer to change from 1980 to 2009. Source: Cecchetti, Mohanty and Zampolli (2011) 13

U.S. non-financial debt near levels of Great Depression U.S. non-financial debt-to-gdp to ratio Percent of GDP % 300 250 200 150 1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 100 Source: U.S. Census Bureau data from 1916 to 1953, U.S. Flow of Funds data from 1954 to 2011, Bureau of Economic Analysis Last observation: 2011Q4 14

Weakest U.S. recovery since Great Depression U.S. Real GDP across economic cycles Start of recession = 100, quarterly data Start of the recession Index 145 135 125 115 105 95 Years before the start t of the recession Years after the start of fthe recession 85 75-2 -1 0 1 2 3 4 5 6 7 65 Range of past recession (1948 onward) U.S. current cycle Base-case projection Note: The Big Five modern financial crises are Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). Sources: U.S. Bureau of Economic Analysis, Organisation for Economic Co-operation and Development and Bank of Canada projections 15

Weakest U.S. recovery since Great Depression U.S. Real GDP across economic cycles Start of recession = 100, quarterly data Start of the recession Index 145 135 125 115 105 95 Years before the start t of the recession Years after the start of fthe recession 85 75-2 -1 0 1 2 3 4 5 6 7 Range of past recession (1948 onward) The Big Five modern financial i crises U.S. current cycle Base-case projection 65 Note: The Big Five modern financial crises are Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). Sources: U.S. Bureau of Economic Analysis, Organisation for Economic Co-operation and Development and Bank of Canada projections 16

Weakest U.S. recovery since Great Depression U.S. Real GDP across economic cycles Start of recession = 100, quarterly data Start of the recession Index 145 135 125 115 105 95 Years before the start t of the recession Years after the start of fthe recession 85 75-2 -1 0 1 2 3 4 5 6 7 Range of past recession (1948 onward) The Big Five modern financial crises U.S. current cycle Great Depression Base-case projection 65 Note: The Big Five modern financial crises are Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). Sources: U.S. Bureau of Economic Analysis, Organisation for Economic Co-operation and Development and Bank of Canada projections 17

Rebuilding U.S. wealth will take a long time Household net worth to disposable income Ratio 6.5 6.3 6.1 5.9 5.7 5.5 5.3 5.1 4.9 4.7 US$ billions 9000 8000 7000 6000 5000 4000 3000 2000 1000 1990 1993 1996 1999 2002 2005 2008 2011 20-year average 4.5 Wealth lost since 2007 peak Level of savings in 2011 0 Sources: U.S. Bureau of Economic Analysis, Federal Reserve Board and Bank of Canada calculations Last observation: 2011Q4 18

Euro-area recovery was weak, is over Euro area real GDP across economic cycles Start of recession = 100, quarterly data Index 115 Start of the recession 110 105 100 Years before the start of the recession Years after the start of the recession -2-1 0 1 2 3 4 5 6 95 90 Range of past recessions (1980 onward) The Big Five modern financial crises Current cycle Base-case projection Note: The Big Five modern financial crises include Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). Sources: Eurostat and Organisation for Economic Co-Operation and Development 20

European tensions still elevated Yields on 10-year sovereign bonds, daily data % 8 7 6 5 4 3 2 1 2009 2010 2011 2012 0 Germany France Italy Spain Source: Bloomberg Last observation: 25 April 2012 21

A balance of payments problem Unit labour cost, annual data, 2000=100 Index 150 140 130 120 110 100 90 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Germany France Portugal Ireland Italy Spain Sources: Deutsche Bundesbank, Institut national de la statistique et des études économiques, Instituto Nacional de Estatistica, Central Statistics Office, Istituto Nazionale di Statistica and Instituto Nacional de Estadistica Last observation: 2011 22

Private deleveraging, public leveraging Household and government debt Percentage point change, 2007 to 2011 40 30 20 10 0-10 -20 Spain United Kingdom United States -30 Debt/disposable income General government gross debt (% GDP) Note: Figures for debt/disposable income refer to percentage point change from peak to trough. Latest available data for household debt is 2011 Q3 for Spain, 2011Q4 for others. 2011 forecast figures are used for government debt. Source: Bank for International Settlements, International Monetary Fund Fiscal Monitor April 2012, national statistics agencies

Consequences for Canada 25

Canada: First G-7 country to recover to pre-recession GDP Real GDP; 2007Q1 = 100, quarterly data Index 106 104 102 100 98 96 94 92 2007 2008 2009 2010 2011 90 Canada United States Euro area Japan Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, and Japan Statistics Bureau Last observation: 2011Q4 26

Canada has more than recovered all jobs lost Total employment; index: 2007Q1 = 100, quarterly data Index 106 104 102 100 98 96 94 2007 2008 2009 2010 2011 2012 Canada United States Euro area Japan 92 Note: Employment data for Japan in 2012Q1 is the average of January and February data. Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, and Japan Statistics Bureau Last observations: 2011Q4 and 2012Q1 27

Weakest post-war export recovery Comparison of real exports across economic cycles; quarter before the downturn in real GDP = 100, quarterly data Quarterly peak in GDP before the downturn Index 170 160 Years before the downturn Years after the downturn 150 140 130 120 110 100 90-1 0 1 2 3 4 5 6 80 Range of previous cycles (since 1951) Average of previous cycles (since 1951) Current cycle Base-case scenario Sources: Statistics Canada and Bank of Canada calculations and projections 28

Canada s export performance second worst in G-20 % change in share of world exports, 2000 to 2010 U.K. Canada France Japan U.S. Mexico Italy Germany Indonesia South Africa Argentina Korea Saudi Arabia Australia Brazil Russia Turkey India China -50 0 50 100 150 200 % Source: International Monetary Fund 29

Canadian firms are losing competitiveness Contribution of various factors to the change in Canada's relative unit labour costs vis-à-vis those in the United States, quarterly data 2005 2006 2007 2008 2009 2010 2011 % 45 40 35 30 25 20 15 10 5 0-5 Canadian dollar vis-à-vis the U.S. dollar Relative wages Relative productivity Percentage change in relative unit labour costs vis-à-vis the United States Sources: Statistics Canada, U.S. Bureau of Economic Analysis and Bank of Canada calculations Last observation: 2011Q4 30

Canada s trade directed toward slow growing economies Average growth rates 2000-2010, 2010 annual data 8% of exports % 12 85% of exports 10 8 6 4 2 0 *This country is not one of Canada's top 15 trading partners. Note: Export shares in 2010 are reported. Sources: International Monetary Fund World Economic Outlook, Industry Canada, Bank of Canada calculations Last observation: 2010 31

Canada has relied on domestic demand Evolution of real private domestic demand since pre-recessionrecession peak Index, peak of real GDP =100, quarterly data Index 110 105 100 95 90 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Quarters Canada (April MPR) United States Japan United Kingdom Euro area Note: Private domestic demand includes consumer, business and residential investment, except for the Euro area and United Kingdom, which also includes government investment. Sources: Bank of Canada, Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, Japan Cabinet Office, and the U.K. Office for National Statistics via Haver Last observation: 2012Q3 for Canada, 2011Q4 for all others 32

Borrowing costs remain at exceptionally low levels Weekly data % 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2008 2009 2010 2011 2012 2.5 Effective business interest rate Effective household interest rate Source: Bank of Canada calculations Last observation: 13 April 2012 33

Share of household expenditures in GDP now high Quarterly data Ratio 0.68 0.66 0.64 0.62 0.60 0.58 1975 1980 1985 1990 1995 2000 2005 2010 0.56 Nominal consumption and residential investment to nominal GDP Average from 1975Q1 to present Note: Dotted line indicates a projection. Sources: Statistics Canada and Bank of Canada calculations 34

Canadians now more indebted than Americans and British Aggregate debt-to-income to ratio Ratio 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 Canada United States United Kingdom Source: Statistics Canada, U.S. Federal Reserve, U.K. Bureau for National Statistics Last observation: 2011Q4 35

The Current Outlook 36

Projection for economic growth (per cent) 2002-2007 average 2011 2012 2013 2014 United States 2.6 1.7 2.3 2.5 3.6 Euro area 2.0 1.5-0.6 0.8 1.4 Japan 1.6-0.7 1.9 1.6 1.6 China 11.2 9.2 8.1 8.0 8.0 Rest of the world 5.1 4.3 3.4 3.5 3.7 World 4.4 3.8 3.2 3.4 3.8 Canada 2.7 2.5 2.4 2.4 2.2 a. GDP shares are based on International Monetary Fund (IMF) estimates of the purchasing-power-parity (PPP) valuation of country GDPs for 2010. Sources: IMF World Economic Outlook, September 2011, Bank of Canada 37

Private domestic demand to continue driving growth Contributions to real GDP growth Percentage points 6 4 2 0-2 -4 2009 2010 2011 2012 2013 2014-6 Net exports and government Private domestic demand GDP Sources: Statistics Canada and Bank of Canada calculations and projections 38

Some slack remains in labour market Monthly data, 3-month moving average % 9 % 30 8 28 26 7 24 6 22 5 2008 2009 2010 2011 2012 20 Unemployment rate (left scale) Involuntary part-time ti workers* (right scale) *Expressed as a percentage of total part-time employment, unadjusted, 12-month moving average Source: Statistics Canada Last observation: March 2012 39

Robust business investment to continue Comparison of real business fixed investment across economic cycles; quarter before the downturn in real GDP = 100, quarterly data Quarterly peak before the downturn in real GDP Index 120 115 Years before the downturn Years after the downturn 110 105 100 95 90 85 80-1 0 1 2 3 4 5 6 75 Note: Dotted line indicates base-case scenario from April 2012 Report. Sources: Statistics Canada and Bank of Canada calculations and projections Current cycle 1990-92 cycle 1981-82 cycle 40

Business more optimistic about future sales Balance of opinion*: Over the next 12 months, is your firm's sales volume expected to increase at a greater, lesser or the same rate as over the past 12 months? % 60 50 40 30 20 10 0-10 -20-30 -40 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Greater: 58% Same:19% Lesser: 23% *Percentage of firms expecting faster growth minus percentage expecting slower growth. Source: Spring 2012 Business Outlook Survey 41

Total and core inflation in Canada expected to be around 2 % Year-over-year percentage change, quarterly data % 4 3 2 1 0-1 2007 2008 2009 2010 2011 2012 2013 2014-2 Control range Total CPI Core CPI* Target Note: Dotted lines indicate projections. *CPI excluding eight of the most volatile components and the effect of changes in indirect taxes on the remaining components Sources: Statistics Canada and Bank of Canada calculations and projections 42

What Must Be Done 43

Global Maintain open trade and capital markets Implement financial reforms Fiscal sustainability limits stimulus options Structural reforms across advanced economies 44

Europe Implement: Bank recapitalization - more new capital, fewer asset sales Sizeable sovereign firewall Buy time to re-found European Monetary Union Fiscal and structural adjustment across the crisis economies New economic governance 45

Canada Maintain price stability through flexible inflation targeting Keep financial markets liquid id and operating Apply lessons of American and European crises Importance of fiscal sustainability Value of flexible exchange rates Risks of excessive household debt Imperative to use cheap foreign capital to maximum effect Canadian businesses to refocus, retool and retrain 46

Economic Outlook. Ottawa Chamber of Commerce/ Ottawa Business Journal: Mayor s Breakfast Series Ottawa, Ontario 27 April 2012.