Economic Outlook May 2017 Derek Burleton VP & Deputy Chief Economist TD Economics
Key Questions Global Economy 1. Does the global economic upswing have further room to run? 2. What are the imminent risks to keep an eye on? U.S. Economy 3. Can the U.S. economy hit 3% growth? 4. What scope is there for tax reform? 5. What's the Fed path look like? 6. What are the key Trump-related economic risks? Canadian Economy 7. Will housing embark on a soft landing? 8. What's next for the Bank of Canada? 2
International
Synchronous Global Pickup Underway Since Mid-2016 58.0 Global composite PMIs 17Q2 Snapshot 56.0 54.0 52.0 50.0 Expansion Contraction 48.0 Global Advanced Economies Emerging Economies 46.0 2014 2015 2016 2017 Source: Composite PMIs from JP Morgan and Markit via Bloomberg. Last Observation: April 2017. 4
Canada Has Led the Growth Parade Within the G-7 3.5 3.0 2.5 Average annual growth %, 16Q3-17Q1* Real GDP Growth Underlying Trend Growth 2.0 1.5 1.0 0.5 0.0 Canada U.S. UK Eurozone Japan Source: Haver Analytics, TD Economics. 5
Still Divergence in Underlying Inflation 2.5 Core Inflation, % 2.0 1.5 1.0 0.5 0.0-0.5-1.0 US Canada Eurozone Japan -1.5-2.0 2010 2011 2012 2013 2014 2015 2016 2017 Source: Haver Analytics, TD Economics. Last Observation: 2017Q1. 6
And Central Bank Policy Rates 2.5 2.0 1.5 1.0 0.5 Presentation 0.0 Title Here -0.5 Central bank policy rates, % U.S. Canada Japan Eurozone -1.0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Source: TD Economics 2017 2018 7
Ongoing U.S. Yield Premium Hides Broader Global Rise 0.0 Spreads with U.S. 10Y Treasury Canada Germany Japan -0.5 Forecast -1.0-1.5 Presentation -2.0 Title Here -2.5-3.0 2014 2015 2016 2017 2018 Source: Haver Analytics, Forecasted by TD Economics as of May 2017. 8
USD Close to a Peak But Will Remain in Favour 130.0 128.0 U.S. nominal trade-weighted dollar Forecast 126.0 124.0 122.0 120.0 118.0 116.0 114.0 2016 2017 2018 Source: Haver Analytics, TD Economics. 9
United States
Unusual Gap Between "Soft" and "Hard" Data 60 TD U.S. Soft Data Index U.S. GDP Growth, % Q/Q Annualized 6.0 55 Soft Data Index* (LHS) Quarterly GDP Growth (RHS) 5.0 4.0 3.0 50 2.0 1.0 45 0.0-1.0 40 2014 2015 2016 2017-2.0 Source: BEA, NFIB, FRB Philadelphia, FRB New York, FRB Kansas City, FRB Richmond, Institute of Supply Management, University of Michigan via Haver Analytics, TD Economics. 11
Softness in Q1 U.S. GDP Becoming the Norm 4.0 Real GDP, % 2010-2016 Average 2017* 3.5 3.4 3.0 2.5 2.5 2.5 2.6 2.3 2.0 1.8 1.5 Presentation 1.1 Title Here 1.0 0.5 0.7 0.0 Q1 Q2 Q3 Q4 Source: Haver Analytics, *2017Q2, Q3, Q4 Forecast by TD Economics as of May 2017. 12
U.S. Consumer Still Rests on a Strong Foundation 140.0 Household Debt-Income Ratio, %. 130.0 120.0 110.0 100.0 90.0 80.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Haver Analytics, TD Economics. 13
Why 2% is the New 3% Real business output; annual average % change 5 Labor productivity Forecast 4 3.6 Labor hours 3.3 3.0 3 2.6 2 1.7 2.2 0.6 2.0 3.1 2.4 1.3 1.5 2.0 1.5 1.0 0.5 0.6 0.5 1 0 1951-71 1971-91 1991-11 2011-16 2016-21 LT Source: Bureau of Labor Statistics, forecast by TD Economics 14
Trump's Tax Plan Would Make Bad Fiscal Situation Worse Federal Deficit as a % of GDP 0% -1% -2% -3% -4% -5% -6% -7% -8% CBO CBO Trump n In order for Trump's estimated $5.5 trillion in tax cuts to be revenue neutral, real GDP would need to grow by roughly 4.5% per year, for the next 10 years. n Economic studies have shown that deficitfinanced tax cuts only pay for a fraction of their cost. n "Revenue Neutrality" also does nothing toward fixing the existing structural budget deficit that is set to worsen in the years ahead. 2017 2027 Source: CBO, CFRB, TD Economics 15
How Did Reagan Manage to Lower Taxes in the 1980s? 80 70 60 Presentation 50 Title Here 40 30 20 10 TRA 1986-5-Year Revenue Change Estimates ($ Billions) Tax rate reductions Individual -207 Corporate -117 Non-rate changes (base broadeners) Individual 85 Corporate 237 Total Individual -122 Total Corporate 120 Source: Tax Foundation 2005 Highest marginal tax rates, % 0 1970 1978 1986 1994 2002 2010 Source: IRS/Haver Analytics 1981 Tax Cut 1986 Tax Reform Personal Corporations n Reagan enacted massive tax cuts in 1981, then revenue-neutral tax reform in 1986 (TRA 1986) n To achieve revenue neutrality tax rate cuts in 1986 were offset by the repeal and limit of various deductions and credits. Because of this necessity the overall economic impact was fairly limited Micro impacts were still desirable, it minimized the reward to tax-driven economic activity (tax shelters) The share of income tax paid by higher income households rose strongly after the reforms n 1986 tax reform did not solve the underlying deficit problem n Rate cuts didn't last, top personal rate was increased 4 years later 16
Significant Fiscal Stimulus at this Stage of the Cycle Could Ultimately Be Recessionary 6 % NBER Recessions Real Effective Fed Funds Rate R* Forecast 4 2 0-2 -4-6 1989 1991 1994 1996 1999 2001 2004 2006 2009 2011 2014 2016 Source: TD Economics, BLS, FRB. R* is the natural real rate of interest using long run growth and inflation. 17
Canada
Canadian Dollar to Remain on its Back Foot this Year 1.10 1.00 USD per CAD Forecast 0.90 0.80 0.70 0.60 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bank of Canada, Bloomberg. Forecast by TD Economics as of April 2017. 19
Canada's Economic Expansion Has Broadened Recently 50% 45% Weighted net share of expanding industries, 3mma. Dispersion 40% 35% 30% Trend 25% 20% Presentation 15% Title Here 10% 5% 0% Oct-2014 Feb-2015 Jun-2015 Oct-2015 Feb-2016 Jun-2016 Oct-2016 Feb-2017 Source: Statistics Canada, TD Economics. 20
Impact of Booming Housing Market Can't Be Understated 200% Share of real GDP growth, 6mma. 150% 100% Post-2014 Average: 40% 50% 0% -50% -100% 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: Statistics Canada, TD Economics. Note that real estate is defined as residential construction plus real estate services. 21
Lack of Wage Growth in Canada Points to Ongoing Slack 9.0 %, 3mma %, 3mma 6.0 8.0 Unemployment Rate (lhs) 7.0 Wage Growth (rhs) 4.0 6.0 5.0 2.0 4.0 3.0 2.0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 0.0-2.0 Source: TD Economics, Haver Analytics. 22
Oil Prices to Rise Back to US$50-60 Range 2.5 2.0 Index Supply-Demand Balance (lhs) Oil Price (rhs) Forecast US$/barrel 60.0 50.0 1.5 1.0 40.0 0.5 0.0 30.0-0.5 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 20.0 Source: Haver Analytics, Bloomberg. Forecast by TD Economics as of May 2017. 23
Recent Measures, Declining Affordability to Slow Housing Juggernaut 20.0 Existing Home Prices, Y/Y % Chg. 2015 2016 15.0 2017F 2018F 10.0 5.0 0.0-5.0-10.0 Toronto Vancouver Canada Source: CREA, forecast by TD Economics as of May 2017. 24
Housing Slowdown to Dent But Not Derail Canadian Growth 4.0 3.5 Q/Q Annualized Real GDP Growth, % Forecast 3.5 3.2 3.0 2.5 2.0 1.5 1.0 0.7 0.5 0.4 1.7 0.0 2015 H1 2016 H2 2016 Q1 2017 e* Q2 2017 to Q4 2018 Source: Statistics Canada, Haver Analytics. Forecast by TD Economics as of May 2017. *Estimate 25
Return to Broader-based Expansion Regionally Alberta Ontario British Columbia Canada Quebec Manitoba Saskatchewan Atlantic 2017-18 Real GDP, Y/Y % Chg. 0.0 0.5 1.0 1.5 2.0 2.5 3.0 Source: Haver Analytics, Statistics Canada. Forecast by TD Economics as at April 2017. 26
Rising U.S. Protectionism a Major Risk 12 10 % of Real GDP Machinery Motor Vehicle Energy* Wood Dairy 8 6 4 2 Dairy 0 2006 2011 2016 Source: Haver Analytics, TD Economics. * Energy: Oil, Gas Extraction & Support Activities. 27
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