Montreal Real Estate Forum March 31, 2015 Economic Outlooks for 2015 François Dupuis Vice-President and Chief Economist Desjardins Group Cooperating in building the future
Outline The global economy and oil The North American economy Interest rates and the Canadian dollar The Quebec economy Appendix : Risks to watch out for 2
The Global Economy and Oil 3
The global economy Better economic growth in the Euro zone and in Japan at the end of 2014 In % Real GDP growth 3 2 1 0-1 -2-3 U.K. France Euro zone Germany Italy Japan 3rd quarter 2014 4th quarter 2014 Sources: Office for National Statistics, Bureau of Economic Analysis, Eurostat, Cabinet Office and Desjardins, Economic Studies 4
Euro zone An upturn in bank credit is seen generally throughout the zone % annual change 25 20 15 10 5 Outstanding credit in the private sector Euro zone France Germany Netherlands Italy Spain Greece 0-5 -10 2002 2004 2006 2008 2010 2012 2014 Sources: European Central Bank and Desjardins, Economic Studies 5
Emerging countries Many concerns, but no disaster % annual change 13 China s real GDP An arduous economic shift in China Difficulties in Brazil Hope in India A tense situation in Eastern Europe (Russia-Ukraine) 12 11 10 9 8 7 6 Towards 6.5%? 5 2010 2011 2012 2013 2014 Sources: Organization for Economic Cooperation and Development and Desjardins, Economic Studies 6
Oil The spectacular plunge in oil prices amplifies disinflation % annual change % annual change 140 120 100 80 60 40 20 0-20 -40-60 -80 Inflation G20 Price of oil 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 7 6 5 4 3 2 1 0 Price of WTI* oil (left) * West Texas Intermediate Sources: Datastream, Organization for Economic Cooperation and Development and Desjardins, Economic Studies Inflation - G20 countries (right) 7
Oil Prices have fallen far enough to curb investment 45 Sources: Bank of Canada and Energy Aspects 8
Oil The industry is starting to slow down its activities Number 1 800 Drills in use by the oil industry in the United States 1 600 1 400 1 200-49% 1 000 800 600 400 200 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: Baker Hugues and Desjardins, Economic Studies 9
Oil U.S. oil inventories are exploding In millions of barrels 500 Commercial inventories of crude in the United States 450 400 350 300 250 1983 1987 1991 1995 1999 2003 2007 2011 2015 Sources: Energy Information Administration and Desjardins, Economic Studies 10
Oil Non-economic factors Change of attitude on the part of Saudi Arabia Negotiations on Iran s nuclear program Chaos in Libya and in Yemen Conflict in Iraq Tensions between Russia and the West 11
Oil Two scenarios considered US$/barrel Price of WTI* oil 120 110 $100 100 90 80 70 $78 $68 60 50 40 $45 30 20 2012 2013 2014 2015 2016 2017 Base scenario Scenario of prolonged low prices * West Texas Intermediate. Sources: Datastream and Desjardins, Economic Studies 12
The global economy Economic growth by region Real GDP in 2014, 2015 and 2016 Canada 2.5%, 2.0% and 2.2% Quebec 1.4%, 1.7% and 1.5% United Kingdom 2.6%, 2.6% and 2.5% Eastern Europe 1.6%, -0.6% and 1.7% United States 2.4%, 3.1% and 3.0% Euro Zone 0.9%, 1.3% and 1.6% China 7.4%, 7.0% and 6.9% Japan -0.1%, 0.9% and 1.3% Latin America 1.1%, 1.6% and 2.6% India 7.2%, 7.4% and 7.0% Southern Asia 4.3%, 4.9% and 5.1% World: 3.4%, 3.5% and 3.7% (5.5% in 2007) Industrialized economies: 1.7%, 2.2% and 2.3% (2.5% in 2007) Emerging economies: 4.6%, 4.3% and 4.6% (8.2% in 2007) Sources: Consensus Forecasts and Desjardins, Economic Studies 13
U.S. Economy 14
United States Reasons for optimism Painful, but effective consolidation A return to faster growth Finally, real improvement in the job market The oil price slump: additional support Entrepreneurs have also regained confidence: the return of the "animal spirit"? The Fed s key interest rate hikes will not start until the end of the year. 15
United States Consumer confidence is greatly improving Index 110 University of Michigan Confidence Index Capture of Saddam Hussein 100 Highest level since January 2004 90 80 70 Weather Effects 60 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: University of Michigan and Desjardins, Economic Studies 16
United States Still a few clouds in the sky Appreciation of the U.S. dollar Weak growth in wages and job quality Expected decline in oil investments A few disappointing data in businesses and housing A federal government paralyzed by partisan politics 17
United States The weather was colder than normal in the East and the Midwest in February Temperature deviations in February 2015 compared with the average of 1895-2015 Record cold Far below average Below average Near average Above average Far above average Record heat Source: National Oceanic and Atmospheric Administration 18
The Canadian Economy 19
Canada Main issues "The oil price slump will have negative repercussions on Canadian economic growth and on business investment, especially in the first half of 2015." The possibility of recession is quite high in Alberta, Saskatchewan and Newfoundland and Labrador. Non-energy exports will benefit from the depreciation of the Canadian dollar and from the higher U.S. demand. Consumption and non-commodity business investment will contribute to growth. 20
Canada Investment outlooks have deteriorated especially in the energy sector In % 40 35 30 Balance of opinions Investments in machinery and equipment in the next 12 months The oil and gas sector, which represents nearly 6% of GDP, accounts for around 30% of total business investment. 25 20 15 10 5 0 2010 2011 2012 2013 2014 Source: Bank of Canada 21
Canada International trade has seen great improvement since the beginning of 2014 In $M 38,000 Merchandise exports In $M 13,000 36,000 34,000 Non-energy (left) 12,000 11,000 32,000 10,000 30,000 9,000 28,000 26,000 Energy (right) 8,000 7,000 24,000 2010 2011 2012 2013 2014 2015 6,000 Sources: Statistics Canada and Desjardins, Economic Studies 22
Canada Home sales slow in Alberta In units Sales of existing properties 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Vancouver Calgary Toronto Montreal Sources: Canadian Real Estate Association and Desjardins, Economic Studies 23
Canada The effects of the oil price slump will be uneven from one province to another % annual change 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Real GDP growth 5.0 2013 2014 4.0 3.8 2015 2.7 2.8 2.9 2.7 2.5 2.3 2.3 2.2 2.2 2.0 2.0 1.9 1.7 1.7 1.5 1.3 1.4 1.4 1.0 1.0 0.0 Canada B.C. Alb. Sask. Man. Ont. Qc Atlantic Sources: Statistics Canada and Desjardins, Economic Studies 24
Financial Markets 25
Financials Heading for growing divergence in monetary policies In % 6 5 Main key interest rates of the central banks Desjardins forecasts 4 3 2 1 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 United States Canada Euro zone Japan Sources: Datastream and Desjardins, Economic Studies 26
Financials Economic growth is no longer reflected in bond yield trends % annual change United States In % 7 8 Desjardins forecasts 6 6 5 4 4 2 3 0 2-2 Nominal GDP Bond yields 1-4 2000 2002 2004 2006 2008 2010 2012 2014 2016 0 American nominal GDP (left) Federal ten-year bonds (right) Sources: Bureau of Economic Analysis, Datastream and Desjardins, Economic Studies 27
Financials The global savings rate is high and could keep climbing, especially in emerging countries As % of global GDP 27 Global savings rate 26 25 24 IMF* forecasts 23 22 21 1980 1985 1990 1995 2000 2005 2010 2015 * International Monetary Fund, World Economic Outlook Reports, October 2014 Sources: International Monetary Fund and Desjardins, Economic Studies 28
1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Financials Global interest rates are at historic lows, few impacts are expected on mortgage rates In % 18 16 14 12 10 8 6 4 2 0 Interest rate trends over a span of 115 years U.S. 10-year yield Average U.S. 10-year yield CAN 10-year yield Average CAN 10-year yield Desjardins forecasts Sources: Datastream and Desjardins, Economic Studies 29
Financials The majority of currencies will remain weak against the U.S. dollar In US$ In US$ 1.10 1.05 Canadian $ Desjardins forecasts 1.60 1.50 1.00 1.40 0.95 0.90 1.30 0.85 Euro 1.20 0.80 1.10 0.75 2010 2011 2012 2013 2014 2015 2016 1.00 Canadian dollar (left) Euro (right) Sources: Datastream and Desjardins, Economic Studies 30
The Quebec Economy 31
Quebec The greatest increase in international exports since the end of the 1990s % annual change 15 International exports in real terms 10 5 0-5 -10-15 1982 1986 1990 1994 1998 2002 2006 2010 2014 Sources: Institut de la statistique du Québec and Desjardins, Economic Studies 32
Quebec Business investment continues to falter In 2007 $M 2,000 1,800 1,600 1,400 1,200 1,000 800 Non-residential buildings Construction strike Industrial Commercial In 2007 $M 360 340 320 300 280 260 240 220 200 180 160 2007 2008 2009 2010 2011 2012 2013 2014 2015 Commercial (left) Industrial (right) Sources: Statistics Canada and Desjardins, Economic Studies 33
Index 160 Quebec Consumer confidence is heading back up but is still below the historical average 140 120 100 80 Historical average 60 40 Effect of lower gasoline prices 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Sources: Conference Board of Canada and Desjardins, Economic Studies 34
Quebec Job creation is finally accelerating! Dec. 2013 = 100 104 103 Canada Ontario British Columbia Quebec Alberta 102 101 100 99 Dec. Jan. Feb. Mar. April May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. 2013 2014 2015 Sources: Statistics Canada and Desjardins, Economic Studies 35
Quebec Retail sales have been disappointing in the past few years % annual change 8 Retail sales in real terms 7 6 5 4 3 2 1 0 Average 1994-2014: 2.5% Forecasts for 2015 and 2016-1 -2-3 Recession 1% QST hike in 2011 and 2012 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Sources: Statistics Canada and Desjardins, Economic Studies 36
Quebec The household debt rate reaches a peak In % 180 Credit* in relation to personal disposable income 170 160 Ontario 150 Canada 140 130 Quebec 120 110 100 90 80 70 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 * Total outstanding consumer credit and residential mortgage credit Sources: Statistics Canada, Canada Mortgage and Housing Corporation, Bank of Canada, Institut de la statistique du Québec and Desjardins, Economic Studies 37
Quebec The burden of principal and interest payments has not increased for households In % 24 Monthly payments in relation to gross income* 22 20 18 16 Average from 2004 to 2014: 16.0% 14 12 10 8 6 4 2 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 * Corresponds to the debt service ratio (average DSR) Sources: Ipsos Reid and Desjardins, Economic Studies 38
Quebec Home resale prices have stabilized in the past two years In thousands of $ Prices of properties % annual change 280 20 275 270 Level 265 15 260 255 250 10 245 Change 240 235 5 230 225 0 220 215 210-5 2008 2009 2010 2011 2012 2013 2014 2015 Change (right) Level (left) Sources: Canadian Real Estate Association and Desjardins, Economic Studies 39
Québec Le marché des copropriétés existantes est nettement excédentaire Quebec The condo resale market is in a surplus position everywhere Number 20 18 16 14 Ratio of sellers to buyers Quebec City CMA Montreal CMA Gatineau CMA 12 10 8 6 Surplus Balance Shortage 4 2 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Sources: Fédération des chambres immobilières du Québec through the Centris system and Desjardins, Economic Studies 40
Quebec Many headwinds are buffeting the economy Lower oil prices, a low Canadian dollar and improvement in the U.S. and Ontario economies will stimulate growth. Consumer confidence is low, job creation has been disappointing in 2014 and retail sales in real terms are limp. Even though exports are accelerating, business investment is taking time to pick up steam. The residential real estate market is stabilizing in Quebec and the soft landing appears to have been achieved. The consolidation of Quebec s public finances will make it possible to balance the budget in 2015-2016, but the government s contribution to the economy will be reduced in many respects. Source: Desjardins, Economic Studies 41
Appendix : Risks 42
Risk factors to watch out for Consequences of the major transfer of wealth stemming from the collapse of oil prices: Increase in geopolitical tensions in the Middle East and Eastern Europe Decline in savings in the emerging countries Rebalancing of the Canadian economy, impact on the financial system New economic disappointments in the Euro zone and in Japan More difficult negotiations with Greece from now to mid-2015 European banking sector Consequences of the start of monetary tightening in the United States: Additional risk for emerging countries (spring 2013) Faster-than-expected hikes in interest rates could be detrimental to the stock markets The consolidation of public finances in Quebec will put a drain on the economy and could affect the morale of households and businesses. 43
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