Economic & Financial Market Outlook BC Pension Forum March 1, 2013 Chris Lawless, Chief Economist
Overview Global forces Recent economic performance ~ US, Europe, Japan, China ~ Other emerging markets ~ Canada & BC Financial markets Outlook Risks 2
De-leveraging 140% U.S. household debt as a percent of after-tax income 130% 120% 110% 100% 90% 2000 2002 2004 2006 2008 2010 2012 Source: Federal Reserve 3
40% of the world way below potential 4 GDP: percent above/below potential 2 Outlook > 0-2 -4-6 US Eurozone Japan -8 Source: Oxford Economics 4
Europe - unemployment rates 30 25 20 Annual averages, percent Spain Outlook > 15 10 5 0 Eurozone Germany Source: Oxford Economics 5
Inflation 35 % change in consumer prices 30 25 20 15 10 5 0 World Advanced Emerging Outlook > Source: International Monetary Fund 6
Eurozone labour cost adjustments 140 130 Unit labour costs* (Index 2000 Q1 = 100; seas. adj.) Spain Italy 120 110 100 France Portugal Germany 90 Data through 2012Q3 2000 2002 2004 2006 2008 2010 2012 Source: Eurostat * Labour costs per unit of real economic output
U.S. job market improving 65 60 Quits and layoffs as % of total separations (s.a.) Quits 55 Jan01 Dec07 avg. 50 45 40 35 Layoffs Jan01 Dec07 avg. 30 2001 2003 2005 2007 2009 2011 Source: Bureau of Labor Statistics
U.S. housing Housing market index (seasonally adjusted) 100 Building permits (000s; SAAR) 2,600 75 1,950 50 1,300 25 650 0 0 2005 2006 2007 2008 2009 2010 2011 2012 Jan-13 Monthly data to Feb 2013 Source: Federal Reserve Bank of St. Louis; National Association of Home Builders 9
U.S. household net worth recovers $70,000 $US Billions $65,000 $60,000 $55,000 $50,000 $45,000 $40,000 2000 2002 2004 2006 2008 2010 2012 Source: Federal Reserve 10
U.S. energy independence? Oil Natural gas Source: U.S. Department of Energy 11
U.S. manufacturing renaissance? Average annual % change 2000-2011 Pharmaceuticals Chemical Aerospace Autos & trucks Heavy machinery All industries Employment Shipments -6-4 -2 0 2 4 6 Source: Empirical Research Partners 12
Japanese Yen 74 Yen per U.S. dollar, daily (inverted) 79 84 89 94 99 Source: Federal Reserve 13
China economic activity PMI level (50 = balanced) 58 Sales (year/year % change) 18 54 Purchasing managers index (left) 15 50 12 46 Real retail sales (right) 2010 2011 2012 2013 9 Source: Bloomberg; bcimc estimates 14
2012 emerging market surprises 3 % difference between January 2012 real GDP growth forecasts and current estimates 2 1 0-1 -2-3 Source: Consensus Economics, Oxford Economics 15
Canada s external balance 6% Current account balance as a % of GDP 4% 2% 0% -2% -4% -6% Source: Statistics Canada 16
Canada s merchandise exports 130 Real merchandise exports (Index Jan 2005 = 100; 3mma seas. adj.) 115 100 85 70 Metals and minerals Energy Other Autos and parts Forestry 55 40 2005 2006 2007 2008 2009 2010 2011 2012 Source: Statistics Canada Monthly data to Dec 2012 17
Commodity prices 1,000 Bank of Canada commodity price index, weekly, in US$ (Jan 1972 = 100) 900 800 700 600 500 400 300 200 100 2003 2005 2007 2009 2011 2013 18
Oil sands price disadvantage $140 Western Canada Select (heavy oil) vs. global light crude benchmarks, $US/barrel $120 $100 $80 $60 $40 $20 Western Cda Select WTI Brent $0 Source: Bloomberg 19
Canadian dollar $1.04 C$ per U.S. $, daily $1.02 $1.00 $0.98 $0.96 $0.94 $0.92 Source: Federal Reserve 20
Canada fiscal tightening 10 Year/year % change in nominal government spending + investment 8 6 4 2 0 2005 2006 2007 2008 2009 2010 2011 2012 Source: Statistics Canada 21
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Canada housing activity 70 65 60 55 50 45 40 35 Sales to new listings of all homes (%; 3- month moving average, seas. adj.) >60 = seller s market <40 = buyer s market Greater Vancouver Calgary Toronto Victoria 30 2010 2011 2012 2013 Data to January 2013 Source: Canadian Real Estate Association 23
Canada house prices 135 130 125 120 115 110 105 100 95 90 85 Average home price* (Index Jan 2010 = 100) Greater Vancouver *Includes condos and townhomes Victoria Calgary Toronto 80 2010 2011 2012 2013 Data to January 2013 Source: Canadian Real Estate Association 24
B.C. employment 5% Year/year percentage change; 3-month moving avg, 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% 2000 2002 2004 2006 2008 2010 2012 Source: Statistics Canada 25
B.C. manufacturing & exports 40% 30% Year/year percentage change in $ value (3mon avg) Goods exports Mfg. sales 20% 10% 0% -10% -20% -30% -40% 2000 2002 2004 2006 2008 2010 2012 Source: Statistics Canada 26
B.C. capital expenditures $50 $45 $40 Private & public capital expenditures, billions +10% +9.1% +2.4% -16.9% +6.8% +0.9% $35 $30 $25 $20 2008 2009 2010 2011 2012 2013 Intentions Source: Statistics Canada 27
Canadian interest rates 4.0 Yields on Government of Canada securities (%; weekly) 3.5 3.0 2.5 10-year 2.0 1.5 1.0 3-month 0.5 0.0 Jan Apr Jul Oct Jan Apr Jul Oct Jan 2011 2012 2013 Source: Bloomberg 28
Eurozone will Italy cause more trouble? 16 What governments pay to borrow - 10-year bond yield (%) 14 12 10 8 6 4 2 Portugal Italy Spain France 0 2008 2009 2010 2011 2012 2013 Source: Bloomberg Data to Feb 22, 2013 29
Economic outlook 10 8 Real GDP growth (annual % chg) 2012 2013 2014 6 4 2 0-2 2.3 2.5 2.0 2.0 2.0 1.6 1.7 1.3 0.3 0.5-0.2-0.5 Canada U.S. Japan Eurozone Source: bcimc 30
Economic outlook 10 8 6 4 2 0 Real GDP growth (annual % chg) 2012 2013 2014 7.1 6.5 6.0 5.6 5.6 5.3 5.4 4.9 4.3 4.5 3.9 3.8 3.3 2.6 0.9 8.2 7.8 9.0-2 Mexico Turkey India Brazil India China Source: Oxford Economics (March 2013) 31
Stock markets 130 125 Major market total return indexes (Dec 31, 2011 = 100; $C) Europe 120 115 110 105 Emerging Markets U.S. S&P 500 100 95 Canada/TSX 2012 2013 Source: FactSet, MSCI Data to Feb 26, 2013 32
Canadian stock vs. bond yields 20 % 18 16 14 12 Government of Canada bond yield, 10yr+ 10 8 6 4 2 TSX dividend yield 0 1956 1964 1972 1980 1988 1996 2004 2012 Source: FactSet; Statistics Canada; TD Securities Data to Jan 2013 3.02 2.47 33
Lower expectations Return 16% 14% 12% 10% 8% Mortgages Bonds Short-Term Capital Markets - Long Term Expectations 1990 and 2012 Real Estate Real Estate 1990 2012 Global Equities Global Equities Private Placements Private Placements Emerging Markets Equity Emerging Markets Equity 6% Mortgages Actuarial discount rate: 6.5% 1990 & 2012 4% 2% Short-Term Bonds 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 34 Risk (Standard Deviation of 2-Year Return)
Risks 2013: ~ Eurozone financial crisis resumes ~ U.S. fiscal showdown ~ Middle East/Africa conflicts ~ Canada: housing & consumer sector, business/energy investment, First Nations ~ Wild cards weather, etc. Longer-term: ~ Market-driven fiscal crisis in U.S. and Japan ~ Climate change ~ Are productivity & innovation in decline? 35
Questions, comments? Chris.Lawless@bcimc.com 36