The Economic Outlook: Prospects Rising Glen Hodgson Senior Vice-President and Chief Economist, The Conference Board of Canada

conferenceboard.ca

Global Outlook • Global growth building into 2015 • Sustained albeit slower growth in emerging markets

– China stabilizing in 7-8 per cent range – Mexico undertaking market-opening policy changes – Growth in India, Brazil has slipped – reforms required – Russia on verge of recession • U.S. private sector recovery picking up after negative Q1 • Can Japan restore growth through structural reform – third element of Abenomics? • EU emerging from recession, but uneven recovery with serious structural issues 2

Uneven Growth in Global Economy. Per cent change, real GDP .

7.0

2013

2014

2015

6.0 5.0 4.0 3.0 2.0 1.0 0.0

-1.0 Japan

EU

North America Latin America

Asia Pacific

Asia Pacific (excl Japan)

Source: Consensus Economics 3

Growth Emerging in Western Europe per cent change, 2014, real GDP 3.0

2.0

1.0

0.0

-1.0

-2.0 European Union

Germany

France

Italy

Spain

Greece

Portugal

Source: Consensus Economics. 4

U.S. Outlook • Growth to rebound in 2014 following weather-induced decline in Q1; above 3 per cent in 2015 • Private sector recovery is building—jobs, housing, autos, investment • Fiscal agreement in Congress offers two years of stability • Fed continues activist monetary policy—short-term rates on hold until 2015-16, QE3 ramping down • U.S. energy self-reliance keeps growing

5

U.S. Existing Home Sales and Prices millions SAAR; $ 000s . 8.0 7.5

Sales

Average Price 280 270

7.0 6.5

260

6.0

250

5.5 5.0

240

4.5

230

4.0

220

3.5 3.0

2.5

210

200

Source: National Association of Realtors 6

U.S. Housing Starts. 000s 1,900 1,700 1,500 1,300 1,100 900 700 500 06

07

08

09

10

11

12

13

14f

15f

16f

Sources: Bureau of Economic Analysis; The Conference Board of Canada. 7

U.S. Vehicle Sales Back to Normal. millions, annualized. 17.0 16.0 15.0 14.0 13.0 12.0 11.0 10.0

9.0 8.0

Source: Moody’s Economy.com 8

U.S. Labour Market. change in U.S. employment, 000s. 500 400 300 200 100 0 -100 -200 -300 -400 -500 -600 -700 -800 -900

Source: Bureau of Economic Analysis. 9

U.S. Employment Growth. per cent change. 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0 -5.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014f 2015f Sources: BEA; The Conference Board of Canada. 10

US Oil Production millions of barrels per day

14.0

12.0

10.0

8.0

6.0

4.0 1980

1990

2000

2010

2012

2020f

Source: IEA. 11

US Oil Imports millions of barrels per day

14.0

12.0

10.0

8.0

6.0

4.0 1980

1990

2000

2010

2012

2020f

Source: IEA. 12

U.S. Federal Deficit NIPA basis, billions of current $ 400 200 0 -200 -400 -600 -800 -1,000 -1,200 -1,400

Sources: BEA; The Conference Board of Canada. 13

U.S. Net Debt as a share of GDP. per cent. 90.0 85.0 80.0 75.0 70.0 65.0 60.0 55.0 50.0 45.0 40.0 35.0 30.0

Source: IMF 14

Medium-term Fiscal Action Still Required • Congress has agreed to a two year budget plan, providing some fiscal peace • But unless steps are taken to address entitlements, the structural fiscal deficit will increase again after 2016 • A medium-term plan should include expenditure action, tax and entitlement reform and added revenues • A job for the next president!

15

U.S. Real GDP Growth per cent change 4.0

3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 03

04

05

06

07

08

09

10

11

12

13

14f

15f

Sources: Bureau of Economic Analysis The Conference Board of Canada. 16

Canadian Outlook • Canadian 2014 growth outlook is modest at just 2 per cent, picking up in 2015. • More positive external environment and continued low interest rates. • De-leveraging by governments is necessary, but a brake on growth.

• Investment intentions in the business sector are disappointing this year. • A weaker dollar coupled with stronger US demand will help exports. 17

Short-Term Interest Rates 90-Day Treasury Bill Rates 7 Canada

United States

6 5 4

3 2 1 0 99

00

01

02

03

04

05

06

07

08

09

10

11

12

13

14f 15f 16f 17f

Sources: Statistics Canada; U.S. Bureau of Economic Analysis; The Conference Board of Canada. 18

The Loonie and the Oil Price (WTI $US, $US/$C) Dollar (left)

Oil Price (right)

1.10

120

1.05

110

1.00

100

0.95

90

0.90

80

0.85

70

0.80

60

0.75

50

0.70

40

0.65

30

0.60

20

Sources: The Conference Board of Canada; U.S. EIA; Statistics Canada. 19

Canada’s Two-Gear Trade. Canadian bilateral trade, index 2001=100. U.S.

Non-U.S.

200 180

160 140 120 100 80

Sources: Industry Canada; Statistics Canada; The Conference Board of Canada. 20

Export Volumes per cent change 6.0 4.0 2.0 0.0 -2.0 -4.0

-6.0 -8.0 -10.0 -12.0 -14.0 03

04

05

06

07

08

09

10

11

12

13

14f

15f

Sources: Statistics Canada; The Conference Board of Canada. 21

Canada, Housing Starts vs. Demographic Requirements. (000s).

Housing Starts

Household Formation

240 220 200 180 160 140 120

Sources: Canada Mortgage and Housing Corporation; The Conference Board of Canada. 22

Unemployment Rate vs. Natural Rate per cent Unemployment Rate

Natural Rate

13.0 12.0 11.0 10.0 9.0 8.0 7.0 6.0 5.0

Sources: Statistics Canada.; The Conference Board of Canada. 23

Growth in Industrial Composite Average Weekly Wage versus CPI per cent change Average Weekly Wages

CPI

5.0

5.0

4.5

4.5

4.0

4.0

3.5

3.5

3.0

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0 03

04

05

06

07

08

09

10

11

12

13

14f

15f

Sources: Statistics Canada; The Conference Board of Canada. 24

Real Wage Gains by Province. per cent change over the period 40

2002-12 35 30 25 20 15 10 5 0 NL

PEI

NS

NB

Que

Ont

Man

Sask

Alta

BC

Sources: Statistics Canada; The Conference Board of Canada. 25

Employment Growth per cent change 2.5 2.0 1.5 1.0 0.5 0.0 -0.5

266,000 jobs lost

-1.0 -1.5 -2.0 03

04

05

06

07

08

09

10

11

12

13

14f

15f

Sources: Statistics Canada; The Conference Board of Canada. 26

Total Consumer & Mortgage Debt as Per Cent of Disposable Income. quarterly, 1990Q1 2013Q4. 150 140 130 120 110 100 90 80 70

Source: Statistics Canada. 27

Mortgage and Consumer Debt Service. share of disposable income 1990Q1 to 2013Q4.

10.5 10.0 9.5

Recession 08:4–09:2

9.0 8.5 8.0 7.5 7.0

Recession 90:2–91:1

6.5

Source: Statistics Canada. 28

Real Consumer Spending. per cent change. 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 03

04

05

06

07

08

09

10

11

12

13

14f

15f

Sources: Statistics Canada; The Conference Board of Canada. 29

Pre–Tax Net operating surplus: corporations per cent share of GDP 18.0 17.0 16.0

15.0 14.0 13.0 12.0 11.0 10.0

Historical peak of 17.3 per cent in 2008Q3

9.0 8.0

Sources: Statistics Canada; The Conference Board of Canada. 30

Real Business Investment non-residential structures and machinery, per cent change 12.0 8.0 4.0 0.0 -4.0 -8.0 -12.0

-16.0 -20.0 03

04

05

06

07

08

09

10

11

12

13

14f

15f

Sources: Statistics Canada; The Conference Board of Canada. 31

Real Government Spending on Goods, Services and Capital, Canada per cent change 5.0 4.0 3.0 2.0 1.0 0.0

-1.0 03

04

05

06

07

08

09

10

11

12

13

14f

15f

16f

17f

Sources: The Conference Board of Canada; Statistics Canada; various government budgets. 32

Federal and Provincial Gov’t Balances. as a share of GDP, 2013-14.

0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 -1.6

-1.8 N.L.

P.E.I.

N.S.

N.B.

Que.

Ont.

Man.

Sask.

Alta.

B.C.

Federal

Sources: The Conference Board of Canada; Statistics Canada; various government budgets. 33

Federal and Provincial Gov’t Net Debt. as a share of GDP, 2013-14. 60% 50% 40% 30% 20% 10% 0%

-10% N.L.

P.E.I.

N.S.

N.B.

Que.

Ont.

Man.

Sask.

Alta.

B.C.

Federal

Sources: The Conference Board of Canada; Statistics Canada; various government budgets. 34

Canada’s Real GDP Growth per cent change 4.0

3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 03

04

05

06

07

08

09

10

11

12

13

14f

15f

Sources: Statistics Canada; The Conference Board of Canada. 35

2014 Real GDP by Province. per cent change, basic prices, $2007. 0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

AB BC NS MB

ONT Qc PEI

Canada :2.1%

NL NB SASK

Sources: The Conference Board of Canada; Statistics Canada 36

2015 Real GDP by Province. per cent change, basic prices, $2007. 0.0

0.5

1.0

AB BC MAN ONT NS PEI Qc SASK NB NL

1.5

2.0

2.5

3.0

3.5

Canada:2.6%

Sources: The Conference Board of Canada; Statistics Canada 37

38

Implications • Global risks down but still elevated • Weaning ourselves from cheap money • U.S. private sector recovery is real • Canadian growth moderate • Governments de-leveraging, very modest private investment • Growth prospects uneven across the country

39

conferenceboard.ca