ECONOMICS I RESEARCH Global economy s strong momentum intact despite elevated level of uncertainty Canada headed for another year of solid growth Dawn Desjardins (Deputy Chief Economist) (416) 974-6919 dawn.desjardins@rbc.com February 2018
Global economy stronger, broadly-based gains 6 World GDP growth % change 5 4 3.6 3.4 3.2 3.7 3.9 3.9 3 2 1-1 Forecast 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: International Monetary Fund, RBC Economics Research ECONOMICS I RESEARCH 2
Trade activity strengthened despite more protectionist talk Global Trade Volume % Change Year over Year, SA, 2010=100 2011 2012 2013 2014 2015 2016 2017 Source: Netherlands Bureau of Economic Policy Analysis, RBC Economics Research ECONOMICS I RESEARCH 3
Labour markets healthier, starting to see upward pressure on wages 14 12 10 Unemployment rate: International % U.S. United Kingdom Euro area Canada 8 6 4 2 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Bureau of Labor Statistics, Statistics Canada, Statistical Office of the European Communities, ECONOMICS I RESEARCH 4
Stronger growth means less stimulus warranted; end of era of easing 7 6 5 4 Central bank policy rates %, eop Canada U.S. UK Eurozone Forecast 3 2 1-1 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Bank of Canada, Federal Reserve Board, Bank of England, European Central Bank, RBC Economics Research ECONOMICS I RESEARCH 5
U.S. economy to get lift from tax changes; strong labour market 6 U.S. real GDP Quarter-over-quarter annualized % change 4 2 0-2 -4-6 Annual Growth Rates -8 Real GDP 2016 1.5 2017f 2.2 2018f 2.6 2019f 2.2-10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bureau of Economic Analysis, RBC Economics Research Forecast: ECONOMICS I RESEARCH 6
Canada s economy to grow at an above-potential rate again in 2018 8 Canada's real GDP Quarter-over-quarter % change, annualized rate Annual Growth Rates 6 Real GDP 2017f 2.9% 2018f 1.9% 2019f 1.6% 4 2 Canada's potential growth rate 0 Forecast: -2 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Statistics Canada, RBC Economics Research Forecasts ECONOMICS I RESEARCH 7
Consumption to moderate; gov t and business spending stronger Canadian real GDP growth composition forecast 2.5 Percentage points 2.0 2017f 2018f 1.5 1.0 0.5 0.0-0.5-1.0 Consumer spending Government spending Residential investment Non-res. investment Net trade Inventories Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 8
Regulatory changes weighed on home sales activity in 2017 600 Existing home sales in Canada Thousands, SAAR 550 500 450 400 350 300 250 200 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CREA, RBC Economics Research ECONOMICS I RESEARCH 9
and home sales will stay on slowing path in 2018 as rates rise 600 Home resales: Canada Thousands of units Forecast: 500 10-year average 478 504 536 516 500 491 400 300 200 100 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Canadian Real Estate Association, RBC Economics Research ECONOMICS I RESEARCH 10
Bank of Canada in no hurry; will gradually unwind stimulus 7 6 Interest rates: Canada % 10 Year bond yield BoC overnight rate 5 Forecast 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bank of Canada, RBC Economics Research ECONOMICS I RESEARCH 11
In part due to rise in household balance sheet sensitivity to rate hikes 5.0 Effect of a 1 ppt rate increase on mortgage payments Based on prevailing housing prices in Canada, expressed as a % of household income 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: CREA, RBC Economics Research ECONOMICS I RESEARCH 12
and because inflation has yet to move to the 2% target Canada: Headline inflation % change, year-over-year 3.5 3.0 2.5 BoC inflation target Forecast 2.0 1.5 1.0 0.5 0.0 2011 2012 2013 2014 2015 2016 2017 2018 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 13
and given the elevated state of policy uncertainty = NAFTA Canada: News-based Policy Uncertainty Index 300 12-month moving average, Mean=100 prior to 2011 250 200 150 100 50 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: PolicyUncertainty.com, RBC Economics Research ECONOMICS I RESEARCH 14
C$ rallied on strong data and rate hike; near term uncertainty to weigh 1.1 1.0 Canadian dollar forecast US$/C$ Parity Forecast 0.9 0.8 End of period 0.7 US$/C$ 2016 0.74 2017 0.80 2018f 0.81 2019f 0.79 0.6 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: Bank of Canada, RBC Economics Research Forecasts ECONOMICS I RESEARCH 15
Ontario s economy to remain near top of provincial leaderboard 8 Real GDP: Ontario and Canada Annual % change 6 Ontario Canada Forecast 4 2 2.6 2.9 2.1 1.8-2 -4 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 16
The job market has been on fire 11 Unemployment rate : Ontario % 10 9 Toronto Ontario 8 7 6 5 4 3 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 17
fueling spending by consumers 1000 900 800 700 600 500 400 300 200 100 New motor vehicle sales: Ontario Thousand units 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 16 17 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 18
Exporters are gaining ground 60 Ontario exports: All merchandise Billion $, quarterly 50 40 30 20 10 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 19
In April Ontario housing market lost its edge 300 250 Existing home sales Thousands, SAAR Ontario Toronto 200 150 100 50 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CREA, RBC Economics Research ECONOMICS I RESEARCH 20
although we think the market over-corrected 30 Resales per adult-age population - Toronto area SAAR home resales per 1000 population aged 15+ 25 20 Trend Average 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CREA, Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 21
The outlook is for a cooling in home resale activity, not a collapse Home resales: Ontario Thousands of units Forecast: 300 250 222 242 224 215 212 200 202 150 100 50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: CREA, RBC Economics Research ECONOMICS I RESEARCH 22
Overstretched affordability in key markets will weigh on demand 100 RBC Housing Affordability Measures - aggregate Ownership costs as % of household income 80 Vancouver 60 Toronto 40 Canada 20 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: RPS, Royal LePage, Statistics Canada, Bank of Canada, RBC Economics Research ECONOMICS I RESEARCH 23
ending the run of rapid price appreciation 20 18 16 Home prices: Ontario Annual % change Forecast: 18.5 14 13.1 12 10 8 7.2 6 4 2 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1.0 0.1 Source: RPS, Royal LePage, RBC Economics Research ECONOMICS I RESEARCH 24
Big ticket items like motor vehicle sales are also expected to gear down 2500 New motor vehicle sales: Canada Thousands of units Forecast: 2000 1500 1000 500 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 16 17 18 19 Sources: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 25
As higher rates bump up debt service costs 12 Debt service ratio - Canada Debt service payments on mortgage and non-mortgage debt as % of PDI, seasonally adjusted 10 8 6 4 2 Interest Principal 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 26
Fortunately, sustained job creation Labour market: Ontario 8 Year-over-year % change % 10 6 Unemployment rate (RHS) 9 8 4 6.5 6.0 5.7 5.8 7 6 2 1.1 1.8 1.4 0.8 5 4-2 -4 Employment growth 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 3 2 1 0 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 27
and a pick-up in wages will mitigate impact Ontario wage growth Year-over-year percent change 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2013 2014 2015 2016 2017 Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 28
Ontario still among the faster growing provincial economies in 2018 Provincial real GDP growth forecasts, 2018 annual % change SASK. 2.7% ALTA. B.C. ONT. N.& L. MAN. CANADA QUE. 2.3% 2.2% 2.1% 2.1% 2.0% 1.9% 1.8% P.E.I 1.5% N.B. N.S. 0.6% 0.7% -1% -1% 0% 1% 1% 2% 2% 3% 3% 4% 4% Source: Statistics Canada, RBC Economics Research ECONOMICS I RESEARCH 29
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