Recent developments in the canadian economy dec2011

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Recent Developments in the Canadian Economy December 2011 Bank of Canada Dr. Farid Novin

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Farid Novin: Bank of Canada - Speaker Series Breakfast. — at Coast Inn Of The North Hotel.

Transcript of Recent developments in the canadian economy dec2011

Page 1: Recent developments in the canadian economy   dec2011

Recent Developments in the Canadian EconomyDecember 2011

Bank of Canada

Dr. Farid Novin

Page 2: Recent developments in the canadian economy   dec2011

Outline

World Economy

The United States

Canada and BC

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The World Economy

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2007 2008 2009 2010 201130

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Balance of opin-ion

Global economic growth has weakened considerably in recent months

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World manufacturing purchasing managers’ index

Sources: JP Morgan and Markit

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Emerging economies continue to lead global growth

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Real GDP (y/y % change)

Source: IMF

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

0

2

4

6

8

10

12

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China India

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The recovery among major economies continues to be uneven

Real GDP Q/Q % at annual rate

Source: IMF, Stats Canada

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-15

-10

-5

0

5

10

UK USA Japan Germany Canada

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The euro area is projected to enter a mild recession at the end of 2011, followed by a modest recovery in mid-2012

-2 -1 0 1 2 3 4 5 69095100105110115120125130135

Min Current cycle Dateline Series7

IndexChart 12:

Start of the recession

Years after the start of the recession

Years before thestart of the reces-sion

Euro-area real GDP across economic cycles; start of recession = 100

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2008 2009 2010 20110.00.51.01.52.02.53.03.54.04.5

Canada United States Euro area Japan

%Chart 7:

Policy rates remain at or near historic lows in most advanced economies

Source: Bank of Canada, US Federal Reserve, European Central Bank, Bank of Japan

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Large deficits remain a problem for many countries...

Canad

a

Italy

Japa

n

USAG

reec

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Irelan

d

Portu

gal

Spain

-30

-20

-10

0

2008 2009 2010

Deficit as a % of GDP, all levels of government

Source: IMF

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Euro-area sovereigns, even some larger core countries, are facing rising funding costs10-year sovereign yield spreads over German bonds, basis points

2008 2009 2010 20110

400

800

1200

1600

2000

2400

0200400600800100012001400

Greece (left scale) Ireland Portugal Spain Italy France

Basis points

Chart 10:

Last observation: 21 October 2011Source: Bloomberg

Basis points

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US economy

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-6

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-2

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1990

1991

1992

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1995

1996

1997

1998

1999

2000

2001

2002

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2004

2005

2006

2007

2008

2009

2010

2011

GDP Final Domestic Demand

US GDP and Final Domestic Demand

(volume, y/y % change)

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U.S. real GDP growth is projected to remain modest, consistent with the historical experience after financial crises

U.S. real GDP across economic cycles; start of recession = 100, quarterly data

-2 -1 0 1 2 3 4 5 69095100105110115120125130135

Min U.S. current cycle Dateline Series7

IndexChart 13:

Start of the recession

Years after the start of the recession

Years before the start of the recession

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2008 2009 2010 20110

1000000

2000000

3000000

TALF Swaps CP loan facility TAC

MBS Other Treasury's

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Quantitative easing has led to an increase in the Federal Reserve’s balance sheet

Federal Reserve Assets, Trillions of US$

2008 2009 20100

1000000

2000000

3000000

othersGADepository InstitutionsSFAReverse RepoFederal Reserve notes

Federal Reserve Liabilities, Trillions of US$

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Canada and B.C.

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Canadian GDP and Final Domestic Demand

16Source: Statistics Canada

(volume, y/y % change)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-6

-4

-2

0

2

4

6

GDP FDD

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Growth in Canadian real GDP stalled in the second quarter as net exports plunged

Contributions to real GDP growth

2006 2007 2008 2009 2010 2011-10-8-6-4-202468

Real gross domestic product Real final domestic demand Net exports

%Chart 15:

Source: Statistics Canada

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Real GDP growth is expected to pick up through 2012, resulting in a gradual absorption of excess supply

2007 2008 2009 2010 2011 2012 2013-9

-6

-3

0

3

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Quarter-over-quarter percentage change in real GDP, at annual ratesBase-case projectionBase-case projection

%Chart 24:

Sources: Statistics Canada and Bank of Canada projections

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Domestic demand is projected to remain the primary driver of growth

2009 2010 2011 2012 2013-6

-4

-2

0

2

4

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Inventories Net exports Government Business fixed investment HousingConsumption GDP

Percentage points

Chart 25:

Sources: Statistics Canada and Bank of Canada calculations and projections

Contributions to real GDP growth

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Business fixed investment is projected to remain robust

Comparison of real business fixed investment across economic cycles; quarter before the downturn in real GDP = 100, quarterly data

-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 207580859095100105110115

Current cycle 1990-92 cycle 1981-82 cycle

Index

Chart 29:

Sources: Statistics Canada and Bank of Canada calculations and projections

Years before the downturn in real GDP

Years after the downturn

Years be-fore the

downturn

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Private and Public Sector Investment20

00

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

* -20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

BC Canada

Source: Stats Canada

* Intentions

(y/y % change)

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Employment has nearly returned to pre-recession levels in B.C.

Source: Statistics Canada

Index 2006Q1=100

2006 2007 2008 2009 2010 201194

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98

100

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108

110

B.C. Canada

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Commodity prices

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Source: Bank of Canada

Index 2006=100

2006 2007 2008 2009 2010 20110

50

100

150

200

250

Oil Copper Lumber Nat. Gas

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BC’s forestry industry has been severely affected by the US housing recession

Source: BC Stats

Exports ($millions)

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

YT

D

0

2,000

4,000

6,000

8,000

10,000

12,000

Wood products Pulp & paper products

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However, efforts to grow Chinese demand for BC’s softwood lumber have been very successful

Share of BC softwood lumber exports by value (%)

Growth in value of softwood lumber exports to China (y/y% change)

Source: BC Stats25

2006

2007

2008

2009

2010

2011

YT

D

0

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40

60

80

100

120

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40

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80

United States JapanChina

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Capacity pressures have eased in recent months

2006 2007 2008 2009 2010 20110

10203040506070

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-2

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Some and significant difficulty* (left scale)Labour shortages** (left scale)Conventional measure of the output gap*** (right scale)

% %Chart 16:

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Share of realglobal GDPa

(per cent)

Projected growth (per cent)b

2010 2011 2012 2013

United States 20 3.0 (2.9) 1.7 (2.4) 1.7 (3.2) 3.3 (3.3)

Euro Area 15 1.7 (1.7) 1.5 (2.0) 0.2 (1.6) 1.5 (1.9)

Japan 6 4.0 (4.0) -0.6 (-0.6) 2.0 (2.9) 2.5 (3.0)

China 13 10.4 (10.3) 9.1 (9.3) 8.2 (8.6) 8.2 (8.1)

Rest of the world 46 5.7 (5.5) 4.3 (4.2) 3.3 (3.8) 3.4 (3.6)

World 100 5.1 (5.0) 3.8 (3.9) 3.1 (4.0) 3.7 (3.9)

a. GDP shares are based on IMF estimates of the purchasing-power-parity (PPP) valuation of country GDPs for 2010.Source: IMF, WEO, September 2011b. Numbers in parentheses are projections used for the July 2011 Monetary Policy Report. Source: Bank of Canada

Table 1: Projection for global economic growth

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2010 2011 2012 2013

Consumption 2.0 (2.0) 1.0 (1.3) 1.2 (1.6) 1.4 (1.1)

Housing 0.7 (0.7) 0.1 (0.1) 0.0 (0.0) 0.1 (0.0)

Government 1.2 (1.2) 0.3 (-0.1) -0.1 (-0.3) 0.3 (0.2)

Business fixed investment 0.8 (0.8) 1.4 (1.6) 0.7 (1.1) 1.0 (0.7)

Subtotal: Final domestic demand 4.7 (4.7) 2.8 (2.9) 1.8 (2.4) 2.8 (2.0)

Exports 1.8 (1.8) 1.2 (1.3) 0.9 (1.1) 1.1 (1.1)

Imports -4.0 (-4.0) -2.1 (-1.7) -0.7 (-0.8) -1.0 (-1.0)

Subtotal: Net exports -2.1 (-2.1) -0.9 (-0.4) 0.2 (0.3) 0.1 (0.1)

Inventories 0.6 (0.6) 0.2 (0.3) -0.1 (-0.1) 0.0 (0.0)

GDP 3.2 (3.2) 2.1 (2.8) 1.9 (2.6) 2.9 (2.1)

Memo items:Potential output 1.6 (1.6) 1.6 (1.8) 2.0 (2.0) 2.1 (2.1)

Real gross domestic income (GDI) 5.0 (5.0) 2.8 (4.1) 1.1 (2.9) 3.6 (2.2)

a. Figures in parentheses are from the base-case projection in the July 2011 Monetary Policy Report.Those for potential output are from Technical Box 2 in this Report.

Table 2: Contributions to average annual real GDP growthPercentage pointsa

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2010 2011 2012 2013

Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Real GDP(quarter-over-quarterpercentage changeat annual rates)

3.1 3.6 -0.4 2.0 0.8 1.9 2.5 3.0 3.0 3.0 3.0 3.0 3.0

(3.1) (3.9) (1.5) (2.8) (2.9) (2.9) (2.6) (2.5) (2.1) (2.1) (2.1) (2.1) (2.1)

Real GDP(year-over-yearpercentage change)

3.3 2.9 2.2 2.1 1.5 1.1 1.8 2.1 2.6 2.9 3.0 3.0 2.9

(3.3) (2.9) (2.7) (2.8) (2.8) (2.5) (2.8) (2.7) (2.5) (2.3) (2.1) (2.1) (2.1)

Core inflation(year-over-yearpercentage change)

1.6 1.3 1.6 1.9 2.0 1.8 1.7 1.7 1.6 1.8 1.9 1.9 2.0

(1.6) (1.3) (1.7) (1.9) (2.0) (2.1) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0)

Total CPI(year-over-yearpercentage change)

2.3 2.6 3.4 3.0 2.7 1.9 1.0 1.2 1.5 1.8 1.9 1.9 2.0

(2.3) (2.6) (3.4) (2.8) (2.6) (2.3) (1.9) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0)

Total CPI excludingthe effect of theHST and changes inother indirect taxes(year-over-yearpercentage change)

1.9 2.1 2.9 3.0 2.6 1.9 1.0 1.2 1.5 1.8 1.9 1.9 2.0

(1.9) (2.1) (2.9) (2.8) (2.5) (2.3) (1.9) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0)

WTIb

(level)85 94 103 90 85 87 87 87 88 88 88 88 88

(85) (94) (103) (97) (98) (100) (101) (102) (102) (103) (103) (103) (103)

a. Figures in parentheses are from the base-case projection in the July Monetary Policy Report.b. Assumptions for the price of West Texas Intermediate crude oil (US$ per barrel), based on an average of futures contracts over the two weeks ending 21 October

2011

Table 3: Summary of the base-case projection for Canadaa