Global economy maintaining solid growth momentum Canada leading the pack Dawn Desjardins (Deputy Chief Economist) (416) 974-6919 dawn.desjardins@rbc.com September 2017
Brighter global outlook gains traction World GDP growth % change 6 5 Forecast 4 3 3.5 3.4 3.1 3.5 3.6 2 1-1 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: International Monetary Fund, RBC Economics Research 2
An impressive recovery in trade despite policy uncertainty Global Trade Volume % Change Year over Year, SA, 2010=100 12 10 8 6 4 2-2 2011 2012 2013 2014 2015 2016 2017 Source: Netherlands Bureau of Economic Policy Analysis, RBC Economics Research 3
Unemployment rates signal full employment is close Unemployment rate: % 14 12 10 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, RBC Economics Research 4
Inflation trending lower, UK outlier Headline Inflation: International % change, year-over-year 5.0 Forecast 4.0 3.0 2.0 1.0 0.0-1.0 UK Euro Zone Canada US 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Statistics Canada, Bureau of Labor Statistics, RBC Economics Research 5
Canada and the US: more rate hikes coming % 7 6 ECB Deposit rate Forecast % 7 6 U.K. policy rate Forecast 5 5 4 4 3 3 2 2 1 1 0-1 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: ECB, RBC Economics Research 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bank of England, RBC Economics Research % 7 6 Canadian overnight rate Forecast % 7 6 U.S. target rate Forecast 5 5 4 4 3 3 2 2 1 1 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bank of Canada, Federal Reserve Board, RBC Economics Research 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bank of Canada, Federal Reserve Board, RBC Economics Research 6
Financial conditions continue to support economies Global Financial Conditions financial conditions index (normalized) 2.0 easier 1.0 0.0-1.0-2.0-3.0-4.0 tighter Canada* Emerging Markets** US Eurozone -5.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: RBC Economics, Bank of Canada, Bloomberg, J.P. Morgan, FRB St. Louis, RBC Capital Markets *BoC FCI discontinued as of 4 Dec 2015; subsequent estimates are RBC Economics' approximation 7
U.S. economy: solid performance despite policy uncertainty U.S. real GDP growth Quarter-over-quarter annualized % change 6 5 4 Annual Growth Rates 2015 2.9 2016 1.5 2017f 2.1 2018f 2.3 3 2 1-1 -2 Forecast: 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bureau of Economic Analysis, RBC Economics Research 8
US business investment to ramp up; solid consumer spending U.S. real GDP growth composition Percentage points 3.0 Consumer spending Government spending Residential investment Non-res. investment Net trade Inventories 2.0 1.0 0.0-1.0 2016 2017f 2018f Source: Bureau of Economics Analysis, RBC Economics Research 9
Fed has achieved full employment goal; price stability on horizon U.S. Inflation and consumption deflator % change, year-over-year 4.0 3.5 3.0 Headline CPI US PCE Deflator Forecast Unemployment rate: U.S. % 11 10 9 Forecast 2.5 8 2.0 7 1.5 6 1.0 5 0.5 4 0.0 3-0.5 2011 2012 2013 2014 2015 2016 2017 2018 2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Bureau of Labor Statistics, Bureau of Economic Analysis, RBC Economics Research Source: Bureau of Labor Statistics, RBC Economics Research 10
supporting case for reducing policy stimulus Interest rates: U.S. % 7 6 10 Year bond yield Fed Funds 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 Source: Federal Reserve, RBC Economics Research 11
Canada set to be growth leader in 2017 3.5 Real GDP growth 2017 forecast % change 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Canada U.S. U.K. Euro area Japan Source: IMF, Statistics Canada, RBC Economics Research 12
Economy is running well above its potential growth rate Canada's real GDP Quarter-over-quarter % change, annualized rate Forecast 8 6 Real GDP 2016 1.5% 2017f 2.9% 2018f 2.0% 4 2 0-2 2011 2012 2013 2014 2015 2016 2017 2018 Source: Statistics Canada, RBC Economics Research Forecasts 13
Consumers, government spend and drag from investment disappearing Canada real GDP growth composition Percentage points 4.0 Consumer spending Government spending Residential investment Non-res. investment Net trade Inventories 3.0 2.0 1.0 0.0-1.0-2.0 2016 2017f 2018f Source: Statistics Canada, RBC Economics Research 14
Government spending ramping up Canada Federal fiscal support Percentage point support to annual GDP growth 0.5 0.4 Federal Fall 2016 Budget Update Infrastructure Announcement Federal Budget 2016 Impact (infrastructure + tax changes) 0.3 0.2 0.1 0.0 2016 2017 Source: Statistics Canada, RBC Economics Research 15
Growing number of businesses intend to invest Bank's Business Outlook Survey: M&E Investment 40 30 20 10 % 0-10 -20-30 -40 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Statistics Canada, RBC Economics Research 16
Investment turnaround started in early 2017 Real business fixed investment Q4/Q4 % change 25 20 Forecast 15 10 5-5 -10-15 -20 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Statistics Canada, RBC Economics Research 17
Trade activity heating up Real merchandise trade: Canada Billion constant 2007 $ 124 120 Exports Imports 116 112 108 104 100 2011 2012 2013 2014 2015 2016 2017 Source: Statistics Canada, RBC Economics Research 18
Correction in Ontario contributed to national sales decline Existing home sales Thousands, SAAR 600 500 Canada 400 300 Ontario 200 100-100 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Source: CREA, RBC Economics Research 19
Policies effective in slowing price gains MLS Home Price Index Year-over-year % change 40 30 20 Vancouver Toronto July 25, 2016: BC government announces 15% foreign buyer tax in Metro Vancouver, effective Aug. 2, 2016. 10 0-10 April 20, 2017: Ontario government announces housing action plan that includes a non-resident buyer tax of 15% effective immediately. -20 2013 2014 2015 2016 2017 Source: CREA, RBC Economics Research 20
Home sales activity on slower trajectory Home resales: Canada Thousands of units Forecast: 600 500 10-year average 477 503 535 516 488 400 300 200 100 0 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Source: Canadian Real Estate Association, RBC Economics Research 21
Period of rapid price appreciation coming to an end Home prices in Canada Annual % change, composite Forecast: 12 10 9.6 8 7.8 6 5.1 4 2 1.2 0-2 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Brookfield RPS, Royal LePage, CREA, RBC Economics Research 22
Cooling in housing market will have some knock-on effects Economic activity exposed to a housing market % of GDP, four quarters ending Q1 2017 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 New construction Renovations Ownership transfer costs Transportation Financial Services Household-related G&S Food & Beverage Recreation and Culture Source: Statistics Canada, RBC Economics Research 23
A slowing in consumer spending likely ahead Consumer expenditures in Canada Quarter-over-quarter % change, annualized 10 8 Forecast 6 4 2-2 -4-6 GDP (YoY) Consumer Spending Annual Growth Rates 2015 2016 2017f 1.9 2.4 3.1 2018f 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1.8 Source: Statistics Canada, RBC Economics Research 24
Credit balances trended higher in 2017 Canada : Total household credit % Change, Year-over-year 14 12 10 8 6 4 2 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Bank of Canada, RBC Economics Research 25
Rate increases will boost debt service burdens modestly Debt service ratio - Canada Debt service payments on mortgage and non-mortgage debt as % of PDI, seasonally adjusted 12 Forecast 10 8 6 4 2 Interest Principal 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Source: Statistics Canada, RBC Economics Research 26
Not all households have debt; one-third have $50K or more Debt Free 13% <$5k 4% 6% 7% 4% 8% 13% 12% 33% $5k-<$25k $25k-<$50k $50k-<$75k $75k-<$100k $100k-<$150k $150k-<$200k $200k+ 27
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Strong job gains underpin household spending Canada :Employment 12-month change SA Thousands 500 400 300 200 100 0-100 -200-300 -400-500 Source: Statistics Canada, RBC Economics Research 28
Signs that wages are picking up pace Canadian wage growth Year-over-year percent change 4.0 3.5 3.0 SEPH fixed-weight average hourly earnings (3mth moving average) Average hourly compensation (quarterly data) 2.5 2.0 1.5 1.0 0.5 0.0 2013 2014 2015 2016 2017 Source: Statistics Canada, RBC Economics Research 29
Oil prices range-bound around $50.00 West Texas Intermediate (WTI) $US/bbl 140 120 Forecast 100 80 60 40 Annual Levels 20 WTI 2015 $49 2016 $43 2017f $48 2018f $50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Energy Information Administration/Wall Street Journal, RBC Economics Research 30
C$ rallied as BOC switched gears Canadian dollar forecast US$/C$ 1.1 Forecast 1.0 Parity 0.9 0.8 0.7 US$/C$ End of period 2015 0.72 2016 0.74 2017f 0.78 2018f 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 Source: Bank of Canada, RBC Economics Research Forecasts 31
% points Change in Bank of Canada s policy stance saw spreads collapse Canada and U.S. 2-year bond yield spread 1.2 1.0 0.8 0.6 0.4 0.2 0.0-0.2-0.4-0.6-0.8 2011 2012 2013 2014 2015 2016 2017 Source: Bank of Canada, Federal Reserve Board, RBC Economics Research 32
Bank of Canada: output gap closure in sight Interest rates: Canada % 7 10 Year bond yield BoC overnight rate 6 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 Source: Bank of Canada, RBC Economics Research 33
BC and Ontario lead; Alberta playing catch-up after recession Canada Provincial Real GDP Forecast Annual percent change 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0 2016 estimate 2017 forecast 2018 forecast B.C. ONT. N.B. MAN. P.E.I. QUE. N.S. SASK. N.& L. ALTA. Source: Statistics Canada, RBC Economics Research 34
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