Canada s economy on track for a solid 2018 although policy uncertainty lingers Dawn Desjardins (Deputy Chief Economist) (416) 974-6919 dawn.desjardins@rbc.com March 2018
Canada is facing a challenging environment 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 2018 Source: PolicyUncertainty.com, RBC Economics Research 2
But economy is healthy and solid growth is expected this year 8 6 Canada's real GDP Quarter-over-quarter % change, annualized rate Real GDP Annual Growth Rates 2017 3.0% 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 Economic Research Forecasts 3
As consumers step back, government and investment to ramp up 2.5 Contributions to Canadian GDP growth percentage point contribution 2.0 2017 2018f 1.5 1.0 0.5 0.0-0.5-1.0-1.5 Consumer spending Government spending Residential investment Nonresidential investment Net trade Inventories Source: Statistics Canada, RBC Economic Research 4
Government committed to stimulus, not worried about deficits Federal government budget balance 20 10 0-10 billions of C$ 9.6-5.8-5.2 1.9-1.0 projection -20-18.9-17.8-19.4-18.1-17.5-16.9-13.8-12.3-30 -26.2-40 -33.4 Series2-50 -60-55.6 07/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 22/23 Source: Department of Finance, RBC Economics Research 5
A larger bump in spending on tap for this year 14000 Canada Federal Infrastructure Spending $ millions 12000 10000 8000 6000 4000 2000 2016 2017 2018 2019 2020 2021 Federal infrastructure plans by project start date Source: Infrastructure Canada, RBC Economics Research 6
Businesses remained focused on strong demand; not trade threats 40% Business investment spending and intentions year-over-year % change in investment, balance of opinion on investment 30% 20% 10% 0% -10% -20% -30% Investment intentions M&E investment -40% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bank of Canada, Statistics Canada, RBC Economic Research 7
so Canadian companies are upbeat Business confidence indicators 70 business barometer >50=stronger next year, BOS indicator index level BOS indicator index level 6 65 5 4 60 3 55 2 1 50 0 45 CFIB Business Barometer (LHS) BoC Business Outlook Survey Indicator (RHS) -1-2 40 2010 2011 2012 2013 2014 2015 2016 2017-3 Source: Bank of Canada, Canadian Federation of Independent Businesses, RBC Economics Research 8
Oil prices: WCS lags WTI uptick leaving producers with smaller margins 140 120 Oil prices: WTI and WCS $US/bbl Western Canadian Select (WCS) West Texas Intermediate (WTI) Forecast 100 80 60 40 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Bloomberg, Wall Street Journal, RBC Economics Research 9
Oil prices to trade between $50 and $60 in 2018 140 120 West Texas Intermediate (WTI) $US/bbl Forecast 100 80 60 40 Annual Levels 20 WTI 2015 $49 2016 $43 2017 $51 2018f $54 2019f $56 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Energy Information Administration/Wall Street Journal, RBC Economics Research 10
Business investing to boost capacity 20 Real business fixed investment Year-over-year % change 15 Forecast 10 5-5 -10-15 -20-25 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Statistics Canada, RBC Economic Research 11
Export gain led by energy; non-energy performance disappointing Canadian exports by sector 160 150 140 130 120 Index: 2007 Q2 = 100 Non-energy commodities (29% of total exports) Non-commodities (50% of total exports) Energy commodities (21% of total exports) Foreign activity measure 110 100 90 80 70 60 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Statistics Canada, Bank of Canada, RBC Economics Research 12
Home sales activity on slower trajectory 600 Home resales: Canada Thousands of units 500 10-year average 485 511 541 516 497 491 400 300 200 100 0 00 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 Forecast: 13
Period of rapid price appreciation coming to an end Home prices in Canada 12 Annual % change, composite 10.9 Forecast: 10 9.7 8 6 5.1 4 2 2.0 0 0.3-2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: RPS, Royal LePage, CREA, RBC Economics Research 14
Canadian consumption to moderate, not stop 10 Consumer expenditures in Canada Quarter-over-quarter % change, annualized 8 6 Forecast 4 2-2 -4-6 GDP(YoY) Consumer Spending Annual Growth Rates 2016 2017 2018f 2019f 2.4 3.5 2.1 1.4 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Statistics Canada, RBC Economic Research 15
Volatility aside, the labour market is healthy 9.0% 8.5% 8.0% 7.5% 7.0% Unemployment rate and wage growth unemployment rate Unemployment rate (left axis) Wage growth (right axis) wage growth 6.0% 5.0% 4.0% 3.0% 6.5% 6.0% 5.5% 2.0% 1.0% 5.0% 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Statistics Canada, RBC Economic Research 16
Underlying inflation pressures are increasing. 3.5 3.0 2.5 Core measures of inflation: Canada % change, year-over-year BoC target CPI-Trim CPI-Median 2.0 1.5 1.0 0.5 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Statistics Canada, RBC Economics Research 17
teeing up for headline rate to hit BOC s 2% target 3.5 3.0 2.5 Canada: Headline inflation % change, year-over-year BoC inflation target Forecast 2.0 1.5 1.0 0.5 0.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: Statistics Canada, RBC Economics Research 18
Bank of Canada to gradually hike policy rate 7 6 Interest rates: Canada % 10 Year bond yield BoC overnight rate Forecast 5 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 19
Debt service costs will rise in 2018 20% Canada debt service ratio debt service payments as a % of disposable income 18% 16% 14% Interest Principal 12% 10% 8% 6% 4% 2% 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 Source: Statistics Canada, RBC Economics Research 20
C$ to take direction from relative interest rate policy and oil prices 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 0.82 2019f 0.78 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 Economic Research 21
All provinces, outside Newfoundland, to grow in 2018 Provincial real GDP growth in 2018 Annual % change SASK. 2.9 ALTA. B.C. ONT. 2.0 2.2 2.3 N.& L. -2.0 MAN. CANADA QUE. 2.0 1.9 1.9 P.E.I 1.5 N.B. N.S. 0.7 0.8-3 -2-1 0 1 2 3 4 Sources: Statistics Canada, RBC Economics Research 22
Disclaimer The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authorization of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities. Registered trademark of Royal Bank of Canada. Royal Bank of Canada. 23