Centre de référence en agriculture et agroalimentaire du Québec April 21, 2015 2015 2016 economic and financial outlook François Dupuis Vice-President and Chief Economist Desjardins Group Cooperating in building the future Outline The global economy and oil The North American economy Interest rates and the Canadian dollar The Quebec economy Main risks to monitor and summary 2 1 Les Perspectives 2015
The Global Economy and Oil 3 The global economy Better economic growth in the Euro zone and in Japan at the end of 2014 In % 3 Real GDP growth 2 1 0-1 -2-3 U.K. France Euro zone Germany Italy Japan 3rd quarter 2014 4th quarter 2014 Sources: Office for National Statistics, Bureau of Economic Analysis, Eurostat, Cabinet Office and Desjardins, Economic Studies 4 2 Les Perspectives 2015
Euro zone An upturn in bank credit is seen generally throughout the zone % annual change 25 20 15 10 5 Outstanding credit in the private sector Euro zone France Germany Netherlands Italy Spain Greece 0-5 -10 2002 2004 2006 2008 2010 2012 2014 Sources: European Central Bank and Desjardins, Economic Studies 5 Emerging countries Many concerns, but no disaster % annual change 13 China s real GDP An arduous economic shift in China 12 11 Difficulties in Brazil Hope in India 10 9 8 7 Towards 6.5%? A tense situation in Eastern 6 Europe (Russia-Ukraine) 5 2010 2011 2012 2013 2014 2015 Sources: Organization for Economic Cooperation and Development and Desjardins, Economic Studies 6 3 Les Perspectives 2015
140 120 100 80 60 40 20 0-20 -40-60 -80 Oil The spectacular dive in oil prices drags down inflation growth % annual change % annual change Inflation G20 Price of oil 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 7 6 5 4 3 2 1 0 Price of WTI* oil (left) Inflation - G20 countries (right) * West Texas Intermediate Sources: Datastream, Organization for Economic Cooperation and Development and Desjardins, Economic Studies 7 Oil Prices have fallen far enough to curb investment 45 Sources: Bank of Canada and Energy Aspects 8 4 Les Perspectives 2015
Oil The industry is starting to slow down its activities Number 1 800 Drills in use by the oil industry in the United States 1 600 1 400 1 200 1 000-54% 800 600 400 200 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: Baker Hugues and Desjardins, Economic Studies 9 Oil U.S. oil inventories are exploding In millions of barrels 500 Commercial inventories of crude in the United States 450 400 350 300 250 1983 1987 1991 1995 1999 2003 2007 2011 2015 Sources: Energy Information Administration and Desjardins, Economic Studies 10 5 Les Perspectives 2015
Oil Non-economic factors Change of attitude on the part of Saudi Arabia; Final negotiations on Iran s nuclear program; Chaos in Libya and in Yemen; Conflict in Iraq; Tensions between Russia and the West. 11 Oil Two scenarios considered US$/barrel 120 Price of WTI* oil 110 100 90 $90 80 70 $60 $75 60 50 40 30 $45 20 2012 2013 2014 2015 2016 2017 Base scenario Scenario of prolonged low prices * West Texas Intermediate. Sources: Datastream and Desjardins, Economic Studies 12 6 Les Perspectives 2015
The global economy Economic growth by region Canada 2.5%, 1.9% and 2.1% Quebec 1.3%, 1.7% and 1.5% United States 2.4%, 3.0% and 3.0% Latin America 1.1%, 1.0% and 2.4% World: 3.4%, 3.5% and 3.9% (5.5% in 2007) Real GDP in 2014, 2015 and 2016 United Kingdom 2.8%, 2.6% and 2.5% Industrialized economies: 1.7%, 2.2% and 2.4% (2.5% in 2007) Euro Zone 0.9%, 1.4% and 1.6% Eastern Europe 1.6%, -0.6% and 1.7% India 7.2%, 7.5% and 7.5% Japan -0.1%, 0.9% and 1.3% China 7.4%, 7.0% and 6.9% Southern Asia 4.3%, 4.9% and 5.1% Emerging economies: 4.5%, 4.3% and 4.9% (8.2% in 2007) Sources: Consensus Forecasts and Desjardins, Economic Studies 13 U.S. Economy 14 7 Les Perspectives 2015
United States Reasons for optimism Painful, but effective consolidation; A return to faster growth; Finally, real improvement in the job market; The oil price slump: additional support; Entrepreneurs have also regained confidence: the return of the "animal spirit"?; The Fed s key interest rate hikes will not start until the end of the year. 15 United States Consumer confidence is greatly improving Index 110 100 University of Michigan Confidence Index Capture of Saddam Hussein Highest level since January 2004 90 80 70 Weather Effects 60 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: University of Michigan and Desjardins, Economic Studies 16 8 Les Perspectives 2015
United States Still a few clouds in the sky Appreciation of the U.S. dollar; Weak growth in wages and job quality; Expected decline in oil investments; A few disappointing data in businesses and housing; A federal government paralyzed by partisan politics. 17 United States The weather was colder than normal in the East and the Midwest in February Temperature deviations in February 2015 compared with the average of 1895-2015 Record cold Far below average Below average Near average Above average Far above average Record heat Source: National Oceanic and Atmospheric Administration 18 9 Les Perspectives 2015
The Canadian Economy 19 Canada Main issues "The oil price slump will have negative repercussions on Canadian economic growth and on business investment, especially in the first half of 2015." The possibility of recession is quite high in Alberta, Saskatchewan and Newfoundland and Labrador; Non-energy exports will benefit from the depreciation of the Canadian dollar and from the higher U.S. demand; Consumption and non-commodity business investment will contribute to growth; Household debt remains high. The housing market should slow in 2015, particularly in Alberta. 20 10 Les Perspectives 2015
Canada Investment outlooks have deteriorated especially in the energy sector In % 40 35 30 Balance of opinions Investments in machinery and equipment in the next 12 months The oil and gas sector, which represents nearly 6% of GDP, accounts for around 30% of total business investment. 25 20 15 10 5 0 2010 2011 2012 2013 2014 2015 Source: Bank of Canada 21 In $M 38 000 36 000 Canada International trade has seen great improvement since the beginning of 2014 Merchandise exports In $M 13 000 12 000 34 000 Non-energy (left) 11 000 32 000 10 000 30 000 9 000 28 000 26 000 Energy (right) 8 000 7 000 24 000 2010 2011 2012 2013 2014 2015 6 000 Sources: Statistics Canada and Desjardins, Economic Studies 22 11 Les Perspectives 2015
Canada Home sales slow in Alberta In units 10 000 9 000 8 000 7 000 6 000 5 000 4 000 3 000 2 000 1 000 0 Sales of existing properties 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Vancouver Calgary Toronto Montreal Sources: Canadian Real Estate Association and Desjardins, Economic Studies 23 5,5 5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 Canada The effects of the oil price slump will be uneven from one province to another % annual change 2,0 2,5 2,1 1,9 1,9 2,7 2,5 2,4 4,0 3,8 0,0 2 Real GDP growth 5,0 1,5 0,5 1,7 2,6 2,3 2,3 2,2 2,2 1,3 2,7 2,4 1,0 1,7 1,5 1,3 2013 2014 2015 2016 2,2 1,6 1,6 1,4 Canada B.C. Alb. Sask. Man. Ont. Qc Atlantic Sources: Statistics Canada and Desjardins, Economic Studies 24 12 Les Perspectives 2015
Agri-food sector: Many parameters to watch 25 Agri-food sector First look Certain economic factors may have an impact on the bio-food sector: Energy prices (addressed previously); Interest rates; Value of the Canadian dollar compared with the U.S. dollar; Other issues. 26 13 Les Perspectives 2015
Agri-food sector Toward a growing divergence in monetary policies In % 6 5 Main key interest rates of the central banks Desjardins forecasts 4 3 2 1 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 United States Canada Euro zone Japan Sources: Datastream and Desjardins, Economic Studies 27 Agri-food sector Five factors that could convince the Bank of Canada to lower its rates 1) An additional drop in oil prices; 2) A sharper-than-expected income shock; 3) A widespread real estate market correction; 4) Sources of growth rebalancing too slowly; 5) Significant slowdown by the U.S. economy. Source : Desjardins, Études économiques 28 14 Les Perspectives 2015
1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Agri-food sector Gas prices will again impact total inflation in Canada in the coming months % annual change 3,0 2,5 CPIX Desjardins forecasts 2,0 1,5 1,0 0,5 Total CPI 0,0 2012 2013 2014 2015 2016 Sources: Statistics Canada and Desjardins, Economic Studies 29 Agri-food sector Bond yields will remain at historic lows In % 18 16 14 12 10 8 6 4 2 0 Interest rate trends over a span of 115 years U.S. 10-year yield Average U.S. 10-year yield CAN 10-year yield Average CAN 10-year yield Desjardins forecasts Sources: Datastream and Desjardins, Economic Studies 30 15 Les Perspectives 2015
Agri-food sector The majority of currencies will remain weak against the U.S. dollar In US$ In US$ 1.10 1.05 Canadian $ Desjardins forecasts 1.60 1.50 1.00 0.95 0.90 0.85 Euro 1.40 1.30 1.20 0.80 1.10 0.75 2010 2011 2012 2013 2014 2015 2016 1.00 Canadian dollar (left) Euro (right) Sources: Datastream and Desjardins, Economic Studies 31 Québec Évolution des indicateurs depuis septembre: Agri-food sector Contrasting outlooks for 2015 Lower oil prices; Economic growth in Canada and Quebec (even though modest); Growing U.S. demand; Weaker Canadian dollar (for exporters); Weak interest rates. Positive factors Negative factors Indebted consumers; High tax burden; Weaker dollar (for importers: e.g. machinery); Beginning of the demographic shock. 32 16 Les Perspectives 2015
Agri-food sector Sector growth is still not in line with Quebec GDP 2013 2012 2011 Total Quebec economy Food manufacturing Crop and animal production 2010 2009 2008 (4) (2) 0 2 4 6 8 % annual change Sources: Institut de la statistique du Québec and Desjardins, Economic Studies 33 Agri-food sector At first glance, there is more positive than negative in Quebec However, factors other than economic may have just as much influence: Trade negotiations: (with Europe, at the WTO, Trans-Pacific Partnership); Trade policies of our trade partners, the U.S., Europe; Animal disease; Grain prices; The whims of Mother Nature 34 17 Les Perspectives 2015
The Quebec Economy 35 Quebec The economy is facing several headwinds Low oil prices and a weak Canadian dollar along with improvements in the U.S. and Ontario economies will stimulate growth; Consumer confidence is low, job creation was lacking in 2014 and retail sales in real terms were underwhelming; Even though exports are accelerating, business investment is slow to recover; The Quebec residential real estate market is stabilizing, and the soft landing seems to be successful; Cleaning up Quebec s public finances will allow a return to a balanced budget by 2015 2016, but the province s contribution to the economy will be reduced on several fronts. Source: Desjardins, Economic Studies 36 18 Les Perspectives 2015
15 Quebec The greatest increase in international exports since the end of the 1990s % annual change International exports in real terms 10 5 0-5 -10-15 1982 1986 1990 1994 1998 2002 2006 2010 2014 Sources: Institut de la statistique du Québec and Desjardins, Economic Studies 37 Quebec Business investment continues to falter In 2007 $M In 2007 $M 2,000 Non-residential buildings 360 Construction strike 340 1,800 320 1,600 300 Industrial 280 1,400 260 240 1,200 220 1,000 200 Commercial 180 800 160 2007 2008 2009 2010 2011 2012 2013 2014 2015 Commercial (left) Industrial (right) Sources: Statistics Canada and Desjardins, Economic Studies 38 19 Les Perspectives 2015
Index 160 Quebec Consumer confidence is heading back up but is still below the historical average 140 120 100 80 Historical average 60 40 Effect of lower gasoline prices 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: Conference Board of Canada and Desjardins, Economic Studies 39 Quebec Job creation is finally accelerating! Dec. 2013 = 100 104 103 Canada Ontario British Columbia Quebec Alberta 102 101 100 99 Dec. Jan. Feb. Mar. April May June July Aug.Sept. Oct. Nov. Dec. Jan. Feb. Mar. 2013 2014 2015 Sources: Statistics Canada and Desjardins, Economic Studies 40 20 Les Perspectives 2015
8 7 6 5 4 3 2 1 0-1 -2-3 Quebec Retail sales have been disappointing in the past few years % annual change Retail sales in real terms Average 1994-2014: 2.5% Recession 1% QST hike in 2011 and 2012 Forecasts for 2015 and 2016 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Sources: Statistics Canada and Desjardins, Economic Studies 41 Main risks to monitor and summary 42 21 Les Perspectives 2015
Risk factors to watch out for Consequences of the major transfer of wealth stemming from the collapse of oil prices: Increase in geopolitical tensions in the Middle East and Eastern Europe Decline in savings in the emerging countries Rebalancing of the Canadian economy New economic disappointments in the Euro zone and in Japan More difficult negotiations with Greece from now to mid-2015 European banking sector Consequences of the start of monetary tightening in the United States: Additional risk for emerging countries (spring 2013) Faster-than-expected hikes in interest rates could be detrimental to the stock markets The consolidation of public finances in Quebec will put a drain on the economy and could affect the morale of households and businesses. 43 If we had to summarize, what would be the highlights? Overall, 2015 and 2016 should be somewhat better than 2014. U.S. economy: will grow even faster and have a positive impact on exports; Canadian economy: will grow moderately; Quebec economy: will benefit slightly from this momentum; Canadian dollar: will hold below parity; Interest rates: will continue to be low; Agri-food sector: more positive than negative economic parameters. 44 22 Les Perspectives 2015
Thank you very much! Our web site: www.desjardins.com/economics Our email: desjardins.economics@desjardins.com 45 23 Les Perspectives 2015