The Economic & Financial Outlook James Marple Director & Senior Economist TD Economics May 3, 2018
Global Economies Break Pattern Of Serial Disappointment 4.0 World GDP, Year/Year % Change 3.9 3.8 3.7 3.6 3.5 3.4 2018 (April) 2017 3.3 3.2 2016 3.1 3.0 2015 2016 2017 2018 2019 2020 2021 Source: IMF World Economic Outlook, TD Economics
Economic Growth Has Exceeded Potential 3.5 Real GDP growth; 2017 Q4/Q4 % change 3.0 2.5 2.9 2.6 2.8 Average growth Range for trend growth 2.0 2.1 1.5 1.0 0.5 0.0 Canada U.S. Eurozone Japan Source: National Statistical Agencies via Haver Analytics, TD Economics
Broad-Based Improvement Evident Across Metrics 1.4 Unemployment Rate Gap with Natural Rate of Unemployment, Percentage Points 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8 Current Gap 4-Quarters Prior Gap Japan UK U.S. Canada Euro Area Source: National Statistical Agencies via Haver Analytics, TD Economics.
G7 Inflation Showing Signs Of Trending Higher 3.0 Average Core Inflation*, Year-on-Year % Change. Target 2.0 1.0 0.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Central banks via Haver Analytics, TD Economics. *Average of the central banks' preferred measures of core inflation in the Eurozone, U.S., Japan and Canada.
"The Great Unwind": Central Banks Stepping Back From Emergency-Level Policies 80 Basis Point Increase in Policy Rate Federal Reserve Bank of Canada Bank of England European Central Bank 70 60 Forecast 50 40 30 20 10 0 2016 2017 2018 2019 Source: TD Economics
U.S. Fiscal Policy Is Adding Fuel to the Fire 2.9 Median Bloomberg Forecast for 2018 Real GDP Growth, % Budget = $300 bn 2.8 2.7 2.6 Tax bill signed into law = $1.5 trn President asks for tax bill on his desk by Christmas 2.5 2.4 2.3 2.2 2.1 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 Source: Bloomberg, TD Economics
Economic Growth Getting Close to the 3% Mark 3.5 3.0 2.5 2.0 Real GDP growth; fourth-quarter to fourth quarter % change 2.8 2.7 0.3 0.4 0.2 0.3 Residual upgrade + Budget spending TCJA Pre-Stimulus forecast Mar-18 forecast 1.8 1.5 1.0 2.5 2.1 1.9 1.9 0.5 0.0-0.1-0.5 2017 2018F 2019F 2020F Source: Bureau of Economic Analysis, TD Economics
Large Deficits Near Full Employment Lacks Precedent 4 2 0 Deficit, % of GDP* Federal Surpls/Deficit as % of GDP (left axis) Unemployment Rate (right axis) Unemployment Rate (%), Inverted Fcst. 2 4-2 6-4 -6 8-8 -10 10-12 12 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 *Four-quarter moving average. Source: U.S. Treasury, BLS, TD Economics
Population Aging Means Difficult Budget Choices Ahead 20 Contribution to change in U.S. population growth; millions Projection 15 10 5 0 <25 25-54 55-64 65+ -5 1983-88 1988-93 1993-98 1998-03 2003-08 2008-13 2013-18 2018-23 2023-28 Source: U.S. Census Bureau, TD Economics
Rising Mandatory Spending + Net Interest Costs Leave Little Room For Much Else 30 25 20 Federal Revenues/Outlays, % of GDP 1.4 Net interest Mandatory Discretionary Revenues 3.1 15 13.1 15.2 10 5 6.3 5.4 0 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Source: CBO, TD Economics.
4 2 Setting Up A Future Fiscal Cliff? Budget Deficit/Surplus, % of Fiscal Year GDP CBO June 17 baseline with TCJA With TCJA + Budget deal CBO/TD Economics Projection 0-2 -4-6 -8 1981 Tax cut 1986 Tax reform -10 1975 1982 1989 1996 2003 2010 2017 2024 Source: CBO, Haver Analytics, TD Economics.
Meanwhile, Forecast Upgrade = Higher Policy Rates 3.5 3.0 2.5 Fed Fund Rate Target, Upper Bound, % March 2018 December 2017 Forecast 2.0 1.5 1.0 0.5 0.0 2016 2017 2018 2019 Source: TD Economics
Bonds Pricing in Higher Inflation Risk 2.9 Inflation compensation*; percent Term premium on 10-year bond; percent 1.7 2.7 Inflation compensation (lhs) Term premium (rhs) 1.2 2.5 2.3 0.7 2.1 0.2 1.9 1.7-0.3 1.5 1.3-0.8 1.1 2014 2015 2016 2017 2018-1.3 *Five-year five-year forward inflation rate. Source: Federal Reserve Board, FRB New York, TD Economics.
Vulnerability to Global Trade War Global Trade And Growth At Risk Of Rising Protectionism Export Relative Share of Domestic Nominal GDP, % 2.0 South Korea 1.5 1.0 Mexico 0.5 UK Canada 0.0 Australia -0.5 India Japan Euro Area -1.0 China Brazil -1.5-1.5-1 -0.5 0 0.5 1 1.5 2 Relative Share of U.S. Total Trade (Exports + Imports), % Vulnerability to U.S. Focused Trade War Source: National Statistical Agencies via Haver Analytics, TD Economics. Normalized trade shares calculated from 4-qtr moving average of latest available data as of March 12, 2018.
Economic Expansion Coming On the Longest on Record 140 120 Length of economic expansion (in months); horizontal axis shows last month July 2019 100 80 60 40 20 0 Mar 2018 Dec 2007 Mar 2001 Jul 1990 Jul 1981 Jan 1980 Nov 1973 Dec 1969 Apr 1960 Aug 1957 Jul 1953 Nov 1948 Feb 1945 May 1937 Aug 1929 Oct 1926 May 1923 Jan 1920 Aug 1918 Jan 1913 Jan 1910 May 1907 Sep 1902 June 1899 Dec 1895 Jan 1893 Jul 1890 Mar 1887 Mar 1882 Oct 1873 Jun 1869 Apr 1865 Oct 1860 Jun 1857 Source: National Bureau of Economic Research
Flattening Yield Curve Signals a Maturing Business Cycle 5 Yield Curve Slope, % 10y-2y Excluding-QE 10y-2y 4 3 2 1 0-1 -2-3 1983 1985 1988 1990 1993 1995 1998 2000 2003 2005 2008 2010 2013 2015 2018 Source: Bloomberg, Federal Reserve Board, TD Economics Notes: Grey shaded areas represent NBER defined recessions.
Heralding A Return of Financial Volatility Financial Stress Index 8 Lehman 7 6 5 4 3 2 1 Bear Stearns Euro Area Crisis 60% Probability of Recession 35% Probability of Recession 2018 Sell- Off 0 20% Probability of Recession -1-2 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: TD Economics
Housing Still Has Room To Grow 6 Investment in New Residential Structures as a Share of GDP, % 5 4 +1 Standard Deviation Average 3-1 Standard Deviation 2 1 1960 1966 1973 1979 1986 1992 1999 2005 2012 2018 Source: Bureau of Economic Analysis, NBER, TD Economics.
8% Lots of Ground For Investment to Make Up Net Domestic Investment as a Share of GDP 6% 4% 2% 0% -2% 1980 1985 1990 1995 2000 2005 2010 2015 Source: BEA, Haver Analytics, TD Economics.
Likely Still Some Room for Labor Market to Run Nationally 86 84 Core labor force participation rate; percent of population (25 to 54 year olds) Fcst. 82 80 78 76 74 Employment rate Labor force participation rate 72 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 Source: Bureau of Labor Statistics. Forecast by TD Economics
Less So In New England 10 9 8 7 Unemployment rate; % United States New Hampshire Massachusetts 6 5 4 3 2 2001 2003 2005 2007 2009 2011 2013 2015 2017 Sources: Bureau of Labor Statistics, TD Economics
Demographics Will Remain A Growth Headwind 9 Share of total population 2016; percent 8 7 United States New Hampshire 6 5 4 3 2 1 0 Source: U.S. Census Bureau
Attracting Migrants Will Be the Key to Success Contribution to change in New Hampshire population growth; thousands 140 120 100 80 60 40 20 0 Natural increase Net migration Projection -20 1983-88 1988-93 1993-98 1998-03 2003-08 2008-13 2013-18 2018-23 2023-28 Source: U.S. Census Bureau, Moody's Analytics, TD Economics
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