U.S. and Canadian Economic Outlook: Growth to Strengthen ...

U.S. and Canadian Economic Outlook: Growth to Strengthen as Downside Risks Ease

ECONOMICS I RESEARCH

Paul Ferley (416) 974-7231 Assistant Chief Economist [email protected] June 27, 2014

Presentation to the MEARIE Conference 2014

ECONOMICS I RESEARCH 2

Advanced Economies are Expected to Take the Lead in Boosting Global Growth

Global Economic Outlook:


The recovery in the U.S. is expected to boost activity among both advanced and emerging economies.

1

2

3

4

5

6

7

8

Advanced Economies Emerging Economies Global Economy

2010 2011 2012 2013 2014f 2015f% change, year-over-yearGDP growth

Source: International Monetary Fund, RBC Economics Research


Strengthening activity among emerging economies to be restrained by moderating growth in China.

2

4

6

8

10

12

China India Brazil Mexico

2010 2011 2012 2013 2014f 2015f

% change, year-over-yearEmerging Economies



Strengthening growth among advanced economies in 2014 is expected to be relatively broad based though with Japan being an exception

-1

1

2

3

4

5

Canada U.S. U.K. Euro-area Japan

2010 2011 2012 2013 2014f 2015f% change, year-over-yearAdvanced Economies



Growth to Strengthen as Budgetary Uncertainties Ease and Stimulative Monetary

Conditions Prevail

U.S. Economic Outlook:

ECONOMICS I RESEARCH 7 7

Though U.S. growth declined in Q1, it largely reflected the transitory effect of the severe winter weather with activity expected to rebound in Q2.

-10

-8

-6

-4

-2

0

2

4

6

8

10

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Quarter-over-quarter annualized % change

Year-over-year % change

Source: Bureau of Economics Analysis, RBC Economics Research

U.S real GDP growthQuarter-over-quarter annualized % change


With progress in both the U.S. Congress and the Euro-area to address fiscal issues, the tone in financial markets remains positive despite varied problems among a number of emerging economies both political (e.g. Ukraine, Middle East) and economic (e.g. stalling growth in China).

40

80

120

160

200

240

280

320

360

400

2007 2008 2009 2010 2011 2012 2013 2014

U.S

Eurozone

3 month Libor-OIS / Euribor-EONIA spread in basis points

Short term funding spreads

Source: Bloomberg, RBC Economics Research

Weekly observation

600700800

9001000110012001300

1400150016001700

180019002000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: Bloomberg, RBC Economics Research

Level

S&P 500 composite index


Employment growth sank the end of last year, likely related to extreme winter conditions, though this has started to reverse as we move into 2014.

-1000

-800

-600

-400

-200

0

200

400

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

*Excludes the impact of the Verizon strike in August 2011

Source: Bureau of Labor Statistics, RBC Economics Research

Private sector employment growth*: U.S. Change from previous month (Thous.)


Though the adverse weather weighed on Q1 growth, an easing in fiscal restraint and still highly stimulative monetary conditions are expected to result in a modest strengthening in U.S. growth this year and next on an average annual basis.

-10

-8

-6

-4

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Source: Bureau of Economic Analysis, RBC Economics Research

U.S. real GDP Quarter-over-quarter annualized % change

Annual Growth Rates

20122.8Real GDP

20131.9

2014f2.3

Forecast:

2015f3.2


This growth outlook will provide further modest downward pressure on the unemployment rate though it is expected to remain above pre-recession lows.

2

3

4

5

6

7

8

9

10

11

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


%

Unemployment rate: U.S.

Forecast


The slack in the labour markets is expected to keep inflation quiescent.

1

2

3

4

5

6

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

% change, year-over-yearCore inflation : U.S.

ForecastAnnual Rate

20122.1

2015f1.9

2014f1.8Core inflation

20131.8



Low inflation will result in Fed funds holding steady at current highly stimulative levels until the fourth quarter of 2015 though strengthening growth will result in a cessation of “quantitative easing” by the end of 2014.

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Federal Reserve Board, RBC Economics Research

Forecast

%Fed Funds Rate


The prospect of asset purchases being scaled back through 2014 has started to put, and is expected to continue to apply, upward pressure on bond yields that will be sustained next year once Fed tightening commences.

0

1

2

3

4

5

6

7

8

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

%

10 year bond yield: U.S.

Source: Bank of Canada, RBC Economics Research

Forecast


Canadian Economic Outlook: A Strengthening U.S. Economy Along With

the Recent Depreciation of the Canadian Dollar Will Provide Greater Support to

Exports


Fourth quarter growth last year finished at a strong 2.9% though the extreme winter weather temporarily pushed Q1 growth down to 1.2%.

-10

-8

-6

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

quarter-over-quarter, annualized rate year-over-year

Source: Statistics Canada, RBC Economics Research

Canada's real GDP % change


Export growth has under-performed relative to U.S. growth though the recent depreciation of the Canadian dollar is expected to help close that gap.

70

80

90

100

110

120

130

140

150

1998 2000 2002 2004 2006 2008 2010 2012 2014

BoC U.S. Activity Index

Canada Exports

U.S. GDP

Index 2009=100Canadian exports and U.S. activity

Source: Statistics Canada, Bureau of Economics Analysis, Bank of Canada, RBC Economics Research

Forecast


The closing of this gap is expected to be reflected in strengthening export growth over the forecast.

-20

-15

-10

-5

5

10

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Year-over-year % changeCanadian Exports and GDP


GDP (YoY)

Forecast

Exports

Annual Growth Rates

20121.5

2015f7.9

2014f3.9

20132.2


Canadian exports globally will also be helped by continuing and, in most cases strengthening, growth among emerging economies.

6.6

2.7

4.0 3.9

7.7

4.7

1.0

3.9

3.2

4.4

2.3

3.0

1.8

3.6

2.7

3.53.9

9.3

1.1

7.7

3.0

5.4

7.5

6.4

7.3

1

2

3

4

5

6

7

8

9

10

China India Brazil Mexico World

2011 2012 2013 2014f 2015f

% change in real GDPMajor emerging economics

Source: International Monetary Fund, RBC Emerging Markets Research, RBC Economics Research


As well, continuing strong demand among emerging economies is expected to keep commodity prices historically high.

75

150

225

300

375

450

525

1994 1999 2004 2009

75

100

125

150

175

200

225Energy products sub-index (LHS)

Non-energy commodity price index (RHS)

Average value post-recession

Index: January 1994=100

RBC Commodity Price Indices

Source: RBC Economics Research

Index: January 1994=100


Continuing demand for natural resources and strong business balance sheets are expected to contribute to a strengthening in business investment.

-30

-25

-20

-15

-10

-5

5

10

15

20

25

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Non-residential investment in Canada

Forecast

Annual Growth Rates

Non-residential


Year-over-year % change

GDP (YoY)

20126.2

2015f5.2

2014f2.0

20131.3


High levels of Canadian household debt as a share of income are expected to weigh on consumer spending…

70

80

90

100

110

120

130

140

150

160

170

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014


Credit market debt as a % of personal disposable incomeHousehold debt-to-income ratio: Canada


…though debt-servicing costs remain historically low.

6

7

8

9

10

11

12

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Mortgage & nonmortgage interest payments as a % of PDIHousehold debt service ratio: Canada



Thus we are assuming that these balancesheet constraints will limit, though not prevent, continued modest growth in consumer spending

-6

-4

-2

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

PCE

Quarter-over-quarter % change, annualized

Consumer expenditures in Canada


Annual Growth Rates

20121.9

2015f2.3

20132.4

Forecast

GDP (YoY)

2014f2.3


High debt levels are expected to keep demand for new housing starts subdued with the prospects of higher rates and announced mortgage rules changes having advanced some activity to 2012 at the expense of activity in 2013 to 2015.

188 182174

0

50

100

150

200

250

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Source: Canada Mortgage and Housing Corporation, RBC Economics Research

SAAR, thousands of units

Housing starts: CanadaForecast:


The payback for some of the overstated strength in housing in 2012 will contribute to modestly declining residential investment continuing this year and next.

-30

-20

-10

10

20

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Residential investment in Canada

Forecast

Annual Growth Rates

20126.1

2015f-0.5

2014f-1.0Residential

2013-0.3


Quarter-over-quarter % change, annualized rate

GDP (QoQ)


RBC’s housing affordability measure, though indicative of poor affordability historically, is not flagging any marked deterioration.

20

40

60

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Two-storey

Condo

Bungalow

Ownership costs as % of household income

RBC Housing Affordability Measures - Canada

Source: Statistics Canada, Royal LePage, RBC Economics Research


Though the colder-than-usual winter weather weighed on Q1 growth, rising exports and modest increases in business investment will help ensure growth strengthens on an annual average basis this year and next.

-10

-8

-6

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Statistics Canada, RBC Economics Research Forecasts

Canada's real GDP Quarter-over-quarter % change, annualized rate

Annual Growth Rates20121.7Real GDP

20132.0

2014f2.4

2015f2.7

Forecast:


Economic growth is expected to be sufficiently strong to put further downward pressure on the unemployment rate through the forecast

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Unemployment rate: Canada


%

Inflation-safe range

ForecastAnnual Rates

20127.2

2014f6.9Unemployment rate

20137.1

2015f6.6


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

BoC inflation target

(2.0%)

Annual Rate

20121.7

2014f1.6Core inflation

20131.3


% change, year-over-yearCore inflation: Canada

Forecast

2015f1.9

Though the unemployment rate has moved lower, there remains sufficient slack in the economy to keep core inflation below target this year and next though returning to 2% by the end of 2015


To sustain growth, and in the absence of inflationary pressures, the Bank of Canada is expected to maintain the overnight rate at 1.00% until the second quarter of 2015 before rising gradually to 1.75% by the end of 2015.

0

1

2

3

4

5

6

7

02 03 04 05 06 07 08 09 10 11 12 13 14 15


Bank of Canada overnight rate%

Forecast


Bond yields are projected to rise as financial markets anticipate eventual central bank tightening in both Canada and the U.S. though to levels that remain historically low.

0

1

2

3

4

5

6

7

8

9

10

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

%

10 year bond yield: Canada


Forecast


The Canadian dollar to remain historically high, supported by still strong commodity prices, though on a depreciating trend reflecting the recent weakness in export growth.

0.60

0.70

0.80

0.90

1.00

1.10

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Forecast

Source: Bank of Canada, RBC Economics Research Forecasts

Parity

Canadian dollar forecastUS$/C$

End of period rates20130.94

20121.00US$/C$

2014f0.87

2015f0.85


Ontario Economic Outlook:

Ontario to Benefit From a Strengthening U.S. Economy


Continuing historically strong commodity prices will have a varying impact among the provinces though with Alberta clearly benefitting

3.7

2.4

2.3

2.2

2.1

2.1

1.9

1.4

1.4

1.0

2.7

2.2

2.8

2.8

1.8

3.0

0.6

3.5

2.8

1.2

1.4

1.4

0 1 2 3 4 5 6 7

ALTA.

CANADA

ONT.

N.S.

MAN.

B.C.

QUE.

SASK.

P.E.I

N.B.

N.& L.

2014

2015

Sources: Statistics Canada, RBC Economics Research

Provincial real GDP growthAnnual % change, ranked by 2014 growth


Ontario’s growth will be much more driven by a strengthening U.S. economy

-4

-3

-2

-1

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ontario U.S.

% change, year-over-yearReal GDP: U.S. and Ontario

* U.S. GDP for 2013 is actual data.

Source: Statistics Canada, Bureau of Economic Analysis, RBC Economics Research

Forecast

Annual Growth Rates20121.32.8

2015f2.83.2

2014f2.32.3

OntarioU.S.

2013f1.31.9*


The subdued recovery will allow for only a modest improvement in the unemployment rate in Ontario

2

4

6

8

10

12

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15


Canada

Ontario

%, Seasonally adjusted

Unemployment rate: Ontario and Canada

Forecast

Annual Rate2012 2015f2014f7.2 6.66.97.8 6.9 7.3Ontario

Canada20137.17.5


The modest recovery has resulted in limited pricing imbalances in the Ontario housing market though affordability has continued to gradually deteriorate coming out of the last recession

10

20

30

40

50

60

70

76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Std. two-storey Det. bungalow Std. condo

% of household income taken up by ownership costs

Housing affordability index: Ontario



The modest pace of growth in Ontario, rising interest rates and the advancing of housing activity into 2012 will contribute to a lower level of new residential construction through the forecast.

61 59 58

0

10

20

30

40

50

60

70

80

90

100

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Source: Canada Mortgage and Housing Corporation, RBC Economics Research

SAAR, Thousands of unitsHousing starts: Ontario

Forecasted Values:


Deteriorating housing affordability is expected to apply modest downward pressure on housing resales in Ontario …

-0.7 -1.6

0.6

-20

-15

-10

-5

0

5

10

15

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0

50

100

150

200

250

% Unit sales actual (LHS) Unit sales actual (RHS)

Year-over-year % changeHousing resales: Ontario

Level, Thousands

Forecast

Source: CREA, RBC Economics Research


… and an eventual flattening out in housing prices in 2015.

0.2

3.8 4.1

-2

0

2

4

6

8

10

12

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

0

70

140

210

280

350

420

490% Average price (LHS) Average price (RHS)

Year-over-year % changeHousing prices: Ontario

Level, Thousands of dollars

Forecast

Source: Royal LePage, Statistics Canada, RBC Economics Research


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U.S. and Canadian Economic Outlook: Growth to Strengthen ...

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