Canadian Teleconference: Can the Canadian Economy Survive the Turmoil in the United States? Nigel Gault Chief U.S. Economist Dale Orr Canadian Macroeconomic Services Copyright 2008 Global Insight, Inc.
The U.S. Economic Outlook Copyright 2008 Global Insight, Inc.
The Double-Shock Economy Shock One: Housing and the Credit Crunch Shock Two: Oil at US$100/barrel The combination is dragging the United States economy into recession can Washington policy-makers ride to the rescue? Copyright 2008 Global Insight, Inc. 02/2008 3
Employment Growth Has Turned Negative (Establishment employment, thousands of jobs) 500 400 300 200 100 0-100 -200-300 -400 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Copyright 2008 Global Insight, Inc. 02/2008 4
Recession Ahead Dampened by Foreign Trade (Annualized rate of growth) 6 5 4 3 2 1 0-1 -2 2007 2008 2009 Real GDP Domestic Demand Copyright 2008 Global Insight, Inc. 02/2008 5
Residential Construction: A Slump of Historic Proportions 6.5 (Residential structures investment, percent of GDP) 6.0 5.5 5.0 4.5 4.0 3.5 3.0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Copyright 2008 Global Insight, Inc. 02/2008 6
Foreclosure Rate Has Hit New Highs (Percent of all home mortgage loans entering foreclosure) 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 Source: Mortgage Bankers Association Copyright 2008 Global Insight, Inc. 02/2008 7
Widespread Home Price Declines OFHEO Purchase Only Index, Metro 2007Q4 Y/Y Percent Change Computed by Global Insight -23.4 to -15.4-15.3 to 0.0 0.0 to 2.2 2.2 to 6.1 6.1 to 17.2 Copyright 2008 Global Insight, Inc. 02/2008 8
Bloated Supplies of Homes for Sale (Months supply at current selling rate, single-family homes) 11 10 9 8 7 6 5 4 3 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Existing Homes New Homes Copyright 2008 Global Insight, Inc. 02/2008 9
Housing Starts Dip Further, Prices to Fall 2.25 (Million units) (Year/year percent change) 15 2.00 10 1.75 5 1.50 0 1.25-5 1.00-10 0.75 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-15 Housing Starts (Left scale) OFHEO House Price Index (Right scale) Copyright 2008 Global Insight, Inc. 02/2008 10
Consumer Sentiment Has Slipped into the Recession Zone 120 (Reuter/Univ. of Michigan Sentiment Index) 110 100 90 80 70 60 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Copyright 2008 Global Insight, Inc. 02/2008 11
Housing Wealth Has Supported Consumer Spending, But Is Now Turning Down 250 (Percent of household disposable income) 200 150 100 50 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 Housing Wealth Housing Equity Mortgage Debt Copyright 2008 Global Insight, Inc. 02/2008 12
Consumer Loan Standards Tightening (Net percent tightening standards) 50 40 30 20 10 0-10 -20-30 1996 1998 2000 2002 2004 2006 2008 Credit Cards Other Consumer Loans Source: Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices Copyright 2008 Global Insight, Inc. 02/2008 13
Surging Energy Prices Are Wiping Out Real Wage Gains Once Again 3 (Percent change from a year earlier) 2 1 0-1 -2 2000 2001 2002 2003 2004 2005 2006 2007 2008 Real Average Hourly Earnings Growth (CPI-deflated) Copyright 2008 Global Insight, Inc. 02/2008 14
Consumption Growth Will Fall Short of Income Growth in 2008 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 (Percent growth, real) 2005 2006 2007 2008 2009 Real Consumption Real Disposable Income Copyright 2008 Global Insight, Inc. 02/2008 15
Emergency Stimulus from Washington US$107 billion in personal tax rebates (FY08) US$44 billion in extra depreciation (FY08) How big is the personal tax rebate? Consumers spend about US$2.5 trillion per quarter (not annualized) So a US$107 billion rebate is about 4.3% of quarterly spending Copyright 2008 Global Insight, Inc. 02/2008 16
Household Tax Rebates Assumptions Rebates paid beginning in Q2 and Q3 Assuming that the government gets checks out in May or June there will be some help to Q2, but the big boost would be to Q3 Spending assumptions About 20% spent within three months About 40% spent within six months About 50% spent after one year Copyright 2008 Global Insight, Inc. 02/2008 17
Fiscal Stimulus Pulls Growth into 2008: GDP (Real GDP, annualized rate of growth) 6 5 4 3 2 1 0-1 -2 2007 2008 2009 2010 Baseline Excl. Fiscal Stimulus Copyright 2008 Global Insight, Inc. 02/2008 18
Fiscal Stimulus Pulls Growth into 2008: Consumer Spending (Real consumption, annualized rate of growth) 6 5 4 3 2 1 0-1 -2 2007 2008 2009 2010 Baseline Excl. Fiscal Stimulus Copyright 2008 Global Insight, Inc. 02/2008 19
Impacts of Fiscal Stimulus (Percent change) 2008 2009 2010 Real GDP Baseline 1.2 2.0 3.2 Without fiscal stimulus 0.8 2.2 3.4 Real consumption Baseline 1.4 1.7 2.7 Without fiscal stimulus 0.8 1.9 3.1 Real equipment spending Baseline 1.6 3.0 5.9 Without fiscal stimulus 0.4 3.9 6.7 Copyright 2008 Global Insight, Inc. 02/2008 20
Commercial Real Estate Loan Standards Tightening 100 (Net percent tightening standards for commercial real estate loans) 80 60 40 20 0-20 -40 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices Copyright 2008 Global Insight, Inc. 02/2008 21
The Business Capital Spending Cycle: Construction Is Peaking 20 15 10 5 0-5 -10-15 -20-25 (Percent change from a year earlier, real spending) 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Software & Equipment Buildings Copyright 2008 Global Insight, Inc. 02/2008 22
Export-Led Growth 20 (Percent change from a year earlier, volumes) 15 10 5 0-5 -10-15 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Real U.S. Exports Real U.S. Imports Copyright 2008 Global Insight, Inc. 02/2008 23
The U.S. Dollar Hits New Lows 1.3 (2000=1.0, inflation-adjusted) 1.2 1.1 1.0 0.9 0.8 0.7 0.6 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Major Currency Index Other Important Trading Partners Index Copyright 2008 Global Insight, Inc. 02/2008 24
Headline Inflation Is Spiking Higher as Energy and Food Prices Surge 5 (Percent change from a year earlier) 4 3 2 1 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 All-Urban CPI Copyright 2008 Global Insight, Inc. 02/2008 25
Core Consumer Inflation Not Yet Comfortable 3.0 (Ex-food and energy, percent change from a year earlier) 2.5 2.0 1.5 1.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Core Consumption (PCE) Price Index Copyright 2008 Global Insight, Inc. 02/2008 26
But We Expect the Fed to Keep Cutting Interest Rates 7 (Percent) 6 5 4 3 2 1 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Federal Funds 10-Year Treasury Yield Copyright 2008 Global Insight, Inc. 02/2008 27
Bottom Line Economy slipping into recession Tax rebates, monetary stimulus should bring back growth in the second half of the year Fed has more work to do despite inflation risks Downside risk: double-dip recession economy contracts again in early 2009 Copyright 2008 Global Insight, Inc. 02/2008 28
U.S. Economic Growth by Sector (Percent change unless otherwise noted) 2007 2008 2009 Real GDP 2.2 1.2 2.0 Consumption 2.9 1.4 1.7 Light vehicle sales (millions) 16.11 15.04 15.56 Residential investment -17.0-24.0 1.9 Housing starts (millions) 1.34 0.88 1.15 Business fixed investment 4.8 1.7-0.9 Government 2.0 1.7 0.3 Exports 8.0 8.2 8.4 Imports 1.9-0.1 3.4 Copyright 2008 Global Insight, Inc. 02/2008 29
Other Key Indicators (Percent unless otherwise noted) 2007 2008 2009 Employment (percent growth) 1.1 0.3 0.6 Unemployment rate 4.6 5.4 5.8 CPI inflation 2.9 3.3 1.4 Oil prices (WTI, US$/bbl) 72.18 91.36 76.75 Core PCE price inflation 2.1 2.4 2.1 Federal funds rate 5.02 2.39 2.72 10-year government bond yield 4.63 3.40 3.94 Dollar (major currencies, 2000=1) 0.77 0.70 0.71 Copyright 2008 Global Insight, Inc. 02/2008 30
The Canadian Economic Outlook Copyright 2008 Global Insight, Inc.
We Have Become More Pessimistic on 2008 Successive Forecasts of 2008 GDP (Percent) 2.5 2.3 2.1 1.9 1.7 1.5 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Copyright 2008 Global Insight, Inc. 02/2008 32
No Recession in Canada (Real GDP, percent change annualized) 6 4 2 0-2 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 Canada U.S. Copyright 2008 Global Insight, Inc. 02/2008 33
Canada s s Growth is Uneven (2008 Real GDP, percent change) 4 3 2 1 0 BC AL ON QU CA Copyright 2008 Global Insight, Inc. 02/2008 34
Ontario Is Hurting the Most (Real GDP, percent change) 6.5 5.5 4.5 3.5 2.5 1.5 0.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Canada Ontario Copyright 2008 Global Insight, Inc. 02/2008 35
Canada s s Unemployment Rate at Record Low (Percent) 8.5 7.5 6.5 5.5 4.5 3.5 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Canada US Copyright 2008 Global Insight, Inc. 02/2008 36
Canada s s Housing Holding Up (Indexed, 2006Q1 = 100) 110 100 90 80 70 60 50 40 30 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 Canada U.S. Copyright 2008 Global Insight, Inc. 02/2008 37
The Interest Rate Gap Reverses (Three-month T-bills, yields) 6 5 4 3 2 1 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 Canada U.S. Copyright 2008 Global Insight, Inc. 02/2008 38
Canadian Dollar Crests (U.S. cents) 105 100 95 90 85 80 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 Copyright 2008 Global Insight, Inc. 02/2008 39
Current Account Crumbles (Billions of dollars) 40 20 0-20 -40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Copyright 2008 Global Insight, Inc. 02/2008 40
Trade Balance Tumbles (Billions of dollars) 80 60 40 20 0-20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Copyright 2008 Global Insight, Inc. 02/2008 41
Question and Answer During this time, you may ask a question over the phone by dialing *1. Copyright 2008 Global Insight, Inc. 02/2008 42
Thank You Visit our Web site at www.globalinsight.com Copyright 2008 Global Insight, Inc. 02/2008 43