Vermont Economic Conference: Mapping Our Economic Future Michael Dolega Director & Senior Economist TD Economics January 5 2018
Summary Global economy gathering speed, leading to another upgrade in outlook. Robust growth has diminished slack across many AEs Inflation still low but monetary policy is forward-looking Central banks take more steps towards the unwind of emergency policy Rising rates have led to curve flattening across many AEs Term premiastill low but may rebalance as QE goes into reverse Risks returning into balance: Above-trend growth is reducing downside risks in advanced economies Protectionism and geopolitical tensions remain on the table Elevated asset prices (equities, housing, CRE, bitcoin, etc) are an increasing concern 2
Recovery has been disappointing and fraught with forecast downgrades until recently 4.5 4 3.5 3 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Now 2.5 2 2016 2017 2018 2019 3
outlook has been upgraded for the second consecutive quarter the first time during this recovery 3.5 3.0 2.5 2.0 1.5 1.0 0.5 AverageAnnual Growth %, 16Q3-17Q3 Average growth Range for trend growth 0.0 Canada U.S. Eurozone Italy Japan Source: National Statistical Agencies, TD Economics 4
Faster economic growth came hand-in in-hand with a surge in trade which followed years of underwhelming performance 10 8 6 Trade volume; y/y % chng. World Advanced Economies (AE) Emerging Economies (EE) 4 2 0-2 2011 2012 2013 2014 2015 2016 2017 Source: TD Economics 5
Why does it matter for Vermont? Other Asia, 3.71 Exports (% of total) Oceania, 0.5 Africa, 0.39 S/C America, 1.16 Asia Pacific, 35.4 Canada, 40.5 Eurozone, 9.11 Other Europe, 1.25 UK, 2.38 Mexico, 5.6 6
Eurozone sovereign debt crisis is now in the rear view but many underlying issues remain 35 30 25 20 15 10 5 10-year gov't bond yield, spread to German bunds; pp Greece Ireland Portugal Spain 0 2010 2011 2012 2013 2014 2015 2016 2017 Source: TD Economics 7
Canada escaped recession in good shape before growth stalled on commodity price collapse 6 4 2 0-2 -4 Real GDP; y/y % chng. -6 Canada Nfld. & Lab. -8 Sask. Alberta -10 2008 2010 2012 2014 2016 2018 Source: StatCan, TD Economics (Forecast as of Dec-2017). 8
China and India to power ahead as Brazil and Russia dig themselves out of moderate recessions 12 10 8 6 4 2 0 Real GDP; y/y % chng. -2 Brazil Russia -4 India China -6 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: TD Economics 9
Rising U.S. oil production has altered the way the economy is affected by oil prices and the dynamics of the trade deficit MMB per Day; 12-Week Moving Average 11 Crude Oil Imports 10 Crude Oil Production 9 8 7 6 5 4 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Source: Energy Information Administration, Department of Energy, TD Economics 10
Robust growth eliminating economic slack 4 2 0-2 Output gap; % -4 EU UK -6 Japan Australia -8 2005 2007 2009 2011 2013 2015 2017 2019 2021 Source: TD Economics 11
Diminishing slack should help boost inflation CPI; y/y % chng. 4 3.5 3 2.5 2 U.S. Eurozone Japan U.K. Canada 1.5 1 0.5 0-0.5-1 2014 2015 2016 2017 Source: TD Economics 12
Central banks start to step back from emergency levels 100 75 50 25 Change in policy rate per year; basis points Federal Reserve Bank of Canada Bank of England European Central Bank Forecast 0 Source: TD Economics. 2016 2017 2018 2019 13
Flattening yield curve is characteristic of maturing cycles, but does not suggest a recession is imminent 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0-0.5 Yield Curve Slope, % 10y-2y 10y-2y Excluding-QE -1.0 1983 1987 1991 1995 1999 2003 2007 2011 2015 Source: Bloomberg, Federal Reserve Board, TD Economics Notes: Grey shaded areas represent NBER defined recessions. 14
Term premia should rebalance as QE diminishes 5 4 3 2 1 0 Term premium, 10-year; % ACM KW -1 1962 1967 1972 1977 1982 1987 Source: FRB, TD Economics 1992 1997 2002 2007 2012 2017 15
Dollar strength to continue diminishing as other central banks follow in Fed's footsteps 1.6 1.4 1.2 FCU per $1 USD; GBPUSD CADUSD EURUSD 1 0.8 0.6 0.4 1990 1994 1998 2002 2006 2010 2014 2018 2022 Source: FRB, TD Economics 16
When it comes to the U.S. trade deficit NAFTA is not the culprit but China's entry to WTO has been a catalyst 0.1 0 Trade Balance, % of US GDP China Canada Mexico China -0.1-0.2-0.3-0.4-0.5-0.6 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: Bureau of the Census, TD Economics. 17
Importance of manufacturing has been on a relative decline well before NAFTA or China's WTO entery 40 35 30 25 Manufacturing employment, share; % US Canada EU Japan UK 20 15 10 5 1939 1944 1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 Source: TD Economics 18
Global growth to accelerate before slowing in-line with potential 4 3.5 3 2.5 2 1.5 Real GDP; y/y % chng. 1 World Canada 0.5 EA UK 0 Austalia Japan 2015 2016 2017 2018 2019 2020 Source: TD Economics 19
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