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ECONOMIC STUDIES | DECEMBER 16, 2016 ECONOMIC & FINANCIAL OUTLOOK 2017: A turning point? HIGHLIGHTS ff Major uncertainties persisted throughout 2016 and numerous disruptive events occurred this year, such as the Brexit victory in the United Kingdom, and Donald Trump’s election as U.S. president. This year should therefore wind up with fairly subdued economic growth in most parts of the world. ff The coming year will also have its share of uncertainty, from elections in several European countries, the process for the U.K.’s withdrawal from the European Union, and the implementation of Donald Trump’s election platform. However, economic conditions should improve over the course of the year, particularly in the United States and Canada, and in most of the provinces. ff In the United States, Donald Trump’s win does not seem to have hampered the upswing in U.S. confidence. The policies the new administration will apparently implement should trigger faster economic growth in 2017, although the increase in interest rates and the greenback’s appreciation should limit the rebound. After that, the introduction of policies that are not as good for the economy, such as stronger protectionism, could curb real GDP growth in 2018. ff In Canada, the energy sector’s stabilization and benefits of the federal government’s stimulus program should pave the way for slightly stronger economic growth in 2017 and 2018. A number of headwinds will continue to hamper Canada’s economy, such as the housing market slowdown expected in several regions, and uncertainties over NAFTA’s future. CONTENTS Highlights........................................................... 1 Risks inherent in our scenarios............................ 2 Financial forecasts.............................................. 3 ff In Quebec, economic conditions have improved recently, with more positive results, particularly for the labour market. We have therefore increased our projection for 2016 from 1.3% to 1.5%. Caution is in order, however, and Quebec’s economy still faces a number of obstacles, such as lacklustre growth in business investment. Growth is thus not expected to beat 2016’s by very much in the next few years. ff In the other provinces, the regional disparities seen in recent years could wane in 2017 and 2018. For one thing, Alberta, Saskatchewan and Newfoundland and Labrador will benefit from the energy sector’s stabilization. For another, the growth champions of recent years, Ontario and British Columbia, could be especially hard hit by the housing market’s forecast slowdown. ff The Federal Reserve (Fed) should keep bringing its key interest rates up slowly in the quarters to come, which will open the door for an ongoing bond yield uptrend. In contrast, the other central banks will want to maintain highly accommodative monetary policies. The loonie has been particularly robust since the U.S. election. It has gotten a hand from the rise in oil prices, but also from the fact that investors seem to be starting to think that the Bank of Canada could follow the Fed by raising its key rates next year. In our opinion, such expectations are premature and we continue to look for a Canadian key rate status quo until the fall of 2018, with the Canadian dollar trending down. Economic forecasts Overseas................ 4 United States.............. 6 Canada.................. 8Quebec.....................10 Ontario and other provinces............................12 Medium-term issues and forecasts..................15 François Dupuis, Vice-President and Chief Economist • Hélène Bégin, Senior Economist • Mathieu D’Anjou, Senior Economist Benoit P. Durocher, Senior Economist • Francis Généreux, Senior Economist • Jimmy Jean, Senior Economist • Hendrix Vachon, Senior Economist Desjardins, Economic Studies: 514‑281‑2336 or 1 866‑866‑7000, ext. 5552336 • [email protected] • desjardins.com/economics NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively. IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2016, Desjardins Group. All rights reserved. ECONOMIC STUDIES RISKS INHERENT IN OUR SCENARIOS The weakness of emerging economies, especially China’s, is still a source of concern. A pullback in Europe’s economy, difficult negotiations in the United Kingdom in the wake of the Brexit referendum and persistent geopolitical risks could also disrupt the global economy, as could potential trade wars. In the United States, the uncertainty about the policies to be put forth by Donald Trump’s new administration is a major source of risk. The forecasts could be greatly affected by how households, businesses, the financial markets and foreign governments respond to elements such as the president-elect’s protectionism, the explosion of the federal government debt in the United States and immigration reform. In Canada, the risks remain tilted downward and concerns have edged up a notch due to the resurgence of U.S. protectionism. Furthermore, the future of NAFTA is uncertain. The situation in the real estate market and the high level of household debt are also worrisome, especially with the new federal rules on residential credit and the increase in certain mortgage rates. Bond yields have adjusted upwards following the U.S. presidential election, but they remain weak and our scenarios only call for interest rates to rise gradually in the next few quarters. Surfacing concerns about a real surge in inflation, or a loss of confidence in the solvency of the U.S. government could push bond yields much higher and potentially destabilize the financial markets. The recent wave of optimism on the markets could also continue, driving up stock markets, interest rates and commodity prices faster than anticipated. This would also be good for the Canadian dollar. TABLE 1 World GDP growth (adjusted for PPP) and inflation rate WEIGHT* 2016f 2017f 2018f 2016f 2017f 2018f 39.3 15.8 1.4 1.6 1.6 1.4 1.8 2.5 1.9 1.7 2.1 2.0 0.8 1.3 1.5 1.6 2.1 1.9 1.9 2.4 2.0 0.3 0.5 1.5 2.7 1.6 2.3 1.5 2.2 0.8 1.8 1.6 2.1 1.9 2.2 4.2 2.4 11.9 0.8 2.0 1.6 0.7 1.1 1.3 0.7 1.3 1.3 -0.2 0.7 0.2 0.4 2.0 1.3 0.9 2.3 1.5 3.4 2.3 1.9 1.7 1.2 0.9 1.2 1.1 0.8 1.4 1.3 1.0 0.4 0.2 -0.1 1.5 1.2 0.8 1.7 1.4 1.2 4.0 1.0 1.5 3.1 1.4 3.0 1.4 2.7 0.6 1.2 1.0 2.1 1.1 2.4 60.7 25.4 3.9 6.7 4.3 6.4 4.6 6.3 4.8 2.8 4.7 2.9 4.1 3.1 17.2 7.0 6.6 7.6 6.2 7.5 5.9 7.5 1.9 5.1 1.9 5.1 2.0 5.1 5.3 6.8 4.5 -0.9 4.4 1.6 4.6 1.9 2.1 5.3 3.1 4.3 3.4 4.0 1.9 2.8 2.1 -3.2 2.2 1.2 1.0 2.1 3.3 7.1 3.5 5.2 3.4 4.8 IN % Advanced economies United States Canada Quebec Ontario Japan United Kingdom Euro zone Germany France Italy Other countries Australia Emerging and developing economies North Asia China India South Asia Latin America Mexico Brazil Eastern Europe Russia INFLATION RATE1 REAL GDP GROWTH 7.3 1.3 2.2 2.5 5.5 5.0 4.9 3.1 -0.6 1.2 1.4 6.3 5.3 5.1 Other countries 15.9 2.3 2.6 3.9 10.6 10.8 8.3 South Africa 0.6 0.5 1.3 2.4 6.4 5.9 5.1 100.0 3.0 3.3 3.5 2.8 3.2 3.1 World f: forecasts; PPP : Purchasing Power Parities, exchange rate that equates the costs of a broad basket of goods and services across countries; * 2015; 1 The inflation forecasts were revised to no longer account for Venezuela. Major international organizations are now doing the same. Sources: World Bank, Consensus Forecasts and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 2 ECONOMIC STUDIES FINANCIAL FORECASTS The favourable reception investors gave the Donald Trump win has turned into a real wave of optimism in the last few weeks. Encouraging economic numbers have also supported the stock market and bond yield uptrend. The commitment from the Organization of Petroleum Exporting Countries (OPEC) to substantially cut the global oil supply as of January 2017 suggests that oil prices will stay above US$50 a barrel for good. On December 14, the Federal Reserve (Fed) surprised no one when it announced a second 0.25% key rate increase. U.S. monetary policy should continue to firm slowly in the coming quarters, which suggests that bond yields could keep trending up, but more slowly. The other central banks will want to maintain highly accommodative policies; the European Central Bank recently announced that its large-scale asset purchases would continue until the end of 2017 at least. The U.S. dollar should therefore remain strong. To date, the Canadian dollar has been particularly robust since the U.S. election. It has gotten a hand from the rise in oil prices, but also from the fact that investors seem to be starting to think that the Bank of Canada could follow the Fed by raising its key rates next year. In our opinion, there is no basis for such expectations and we continue to look for a Canadian key rate status quo until late 2018, with the Canadian dollar trending down. TABLE 2 Summary of the financial forecasts 2016 END OF PERIOD IN % (EXCEPT IF INDICATED) Key interest rate United States Canada Euro zone United Kingdom Federal bonds United States 2-year 5-year 10-year 30-year Canada 2-year 5-year 10-year 30-year Currency market Canadian dollar (USD/CAD) Canadian dollar (CAD/USD) Euro (EUR/USD) British pound (GBP/USD) Yen (USD/JPY) Stock markets1 (level and growth) United States – S&P 500 Canada – S&P/TSX Commodities (annual average) WTI oil (US$/barrel) Gold (US$/ounce) 2017 2018 Q3 Q4f Q1f Q2f Q3f Q4f Q1f Q2f Q3f Q4f 0.50 0.50 0.00 0.25 0.75 0.50 0.00 0.25 0.75 0.50 0.00 0.25 1.00 0.50 0.00 0.25 1.00 0.50 0.00 0.25 1.25 0.50 0.00 0.25 1.25 0.50 0.00 0.25 1.50 0.50 0.00 0.25 1.75 0.50 0.00 0.25 2.00 0.75 0.05 0.25 0.76 1.15 1.61 2.33 1.25 2.05 2.55 3.15 1.20 1.95 2.50 3.10 1.40 2.05 2.55 3.20 1.45 2.15 2.65 3.25 1.60 2.30 2.80 3.35 1.60 2.30 2.75 3.30 1.90 2.55 2.95 3.40 2.15 2.85 3.25 3.55 2.30 2.90 3.25 3.55 0.52 0.62 1.00 1.66 0.80 1.20 1.80 2.40 0.70 1.10 1.70 2.35 0.75 1.20 1.75 2.40 0.80 1.30 1.85 2.45 0.85 1.40 1.95 2.55 0.85 1.40 1.90 2.50 1.10 1.65 2.10 2.55 1.25 1.90 2.35 2.65 1.40 2.00 2.40 2.70 1.31 0.76 1.12 1.30 101 1.33 0.75 1.05 1.25 118 1.35 0.74 1.05 1.21 118 1.39 0.72 1.04 1.17 120 1.39 0.72 1.03 1.15 120 1.41 0.71 1.02 1.13 122 1.41 0.71 1.01 1.12 122 1.43 0.70 1.01 1.11 123 1.41 0.71 1.00 1.10 124 1.39 0.72 1.01 1.10 125 2,250 15,200 Target: 2,400 (+6.7%) Target: 16,100 (+5.9%) Target: 2,450 (+2.1%) Target: 16,750 (+4.0%) 43 (52*) 1,250 (1,160*) 55 (58*) 1,150 (1,100*) 57 (60*) 1,050 (1,000*) f: forecasts; WTI: West Texas Intermediate; 1 End of year. Sources: Datastream and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 3 ECONOMIC STUDIES Overseas Europe: Political pitfalls on the horizon FORECASTS Since Donald Trump was elected, the focus has mainly been on the United States. However, political events in Europe could also have a big impact on the scenarios in 2017. For now, growth remains relatively stable in the euro zone; real GDP should rise 1.3% in 2017 and 2018, after a 2016 gain of 1.6%. So far, the eventual Brexit has not had much impact on Britain’s economy, but real GDP growth should still slacken next year. China’s economy seems to have stopped slowing and growth should stay around 6%. The global economy should expand 3.3% in 2017 and 3.5% in 2018, following slower growth of 3.0% in 2016. EURO ZONE Euroland’s real GDP growth was relatively stable in the third quarter, advancing 1.4% after a 1.2% gain last spring. These two increases are nonetheless weaker than the average of 2.0% seen in the two previous quarters. It was not the zone’s major economies that did well in the summer of 2016, but rather Portugal, Greece, the Netherlands and Spain, which all posted annualized growth of around 3%. In contrast, Italy (1.0%), France (1.0%) and Germany (0.8%) posted more disappointing results (graph 1). What can we expect for the end of 2016 and 2017? For now, there is no sign of strong acceleration. At best, some of the consumer confidence indexes have improved, but the gains are too slight to suggest much stronger growth by consumer spending (graph 2). The same applies for business. Some PMI indexes have improved, but are not yet high enough to really change the situation. What’s more, Europe’s economy will have to deal with some political obstacles. It could already be affected by a decline in British demand as a result of the adjustments associated with Brexit. Added to that are the uncertainties that could fuel the Italian political difficulties subsequent to the recent loss in the constitutional referendum, the Dutch election in March, the elections for the French President (April–May) and legislature (June), and the general election in Germany (September or October). What remains to be seen is whether the surge in populism that led to the outcome of the referendum in the United Kingdom and Donald Trump’s win will persist in 2017 in these countries. If so, it could heavily undermine the European Union. Although Euroland’s jobless rate has finally dropped below 10%, it remains high in some of these countries, which could fuel political shifts (graph 3 on page 5). The situation in Germany seems less worrisome, however. In the meantime, we are expecting the euro zone’s real GDP growth to be 1.6% in 2016, followed by gains of just 1.3% in 2017 and 2018. UNITED KINGDOM Brexit developments are coming at a snail’s pace and the goals of Theresa May’s government are still far from clear. This situation is providing further uncertainty in the United Kingdom. What’s more, recent comments by various British and European politicians suggest very tough negotiations, which could result in a “hard Brexit” that would substantially curb the movement of people, goods and services. Formal negotiations are expected to begin before the end of March. GRAPH 1 GRAPH 2 The major euro zone nations posted soft real GDP growth in Q3 Euroland household confidence is up, but not yet enough to suggest consumption will accelerate Real GDP Index Quarterly annualized variation in % 3 3 -5 2 -10 2 1 -15 0 -20 1 -1 -25 -2 Sources: Eurostat and Desjardins, Economic Studies Portugal Greece Netherlands Spain Austria Finland Euro zone Italy France Germany -30 Belgium 0 Annual variation in % 0 -35 2010 2011 2012 2013 Confidence (left) 2014 2015 2016 -3 Real consumption (right) Sources: Eurostat, European Commission and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 4 ECONOMIC STUDIES GRAPH 3 GRAPH 4 The euro zone’s jobless rate has finally dropped below 10% In the United Kingdom, growth weakened slightly in Q3 Jobless rate Real GDP In % In % 14 5 12 4 10 3 8 2 6 1 4 0 2 0 2008 2009 2010 Euro zone 2011 France 2012 2013 Germany 2014 Italy 2015 2016 -1 2010 2011 Netherlands Sources: Eurostat and Desjardins, Economic Studies So far, these risks are not having too much direct impact on the strength of the U.K.’s economy. Real GDP grew 2.0% there in the third quarter. This is lower than the 2.7% gain recorded last spring, but does not represent a trend change (graph 4). Net exports, stimulated by the pound’s slide, were the main contributor to growth in the third quarter. The British currency’s depreciation is, however, starting to be a drag on the economy through a substantial increase in import prices and livelier rise in producer and consumer prices (graph 5). Britain’s economy is also expected to slow in 2017; real GDP should rise 1.1% after gaining 2.0% in 2016. 2012 2013 China’s economy has stabilized in the last few quarters; annual real GDP growth was 6.7% for the first three quarters of 2016 (graph 6). Also note that quarterly real GDP change was stronger last spring and summer. This reflects the fact that investment stopped slowing after bottoming out early in the year. China’s real GDP should rise 6.6% in 2016. However, many risks persist in this economy, starting with debt-laden public enterprises. This situation could bring on another slowdown; economic growth should drop to 6.2% in 2017. The wave of protectionism that is hitting the global economy could take growth slightly below 6.0% as of 2018. 2015 2016 Annual change Sources: Office for National Statistics and Desjardins, Economic Studies GRAPH 5 Prices seem to be accelerating in the United Kingdom Price indexes Annual variation in % Annual variation in % 2 1 0 -1 -2 JAN. 2015 APR. JUL. OCT. Consumer (left) CHINA 2014 Quarterly annualized change JAN. APR. JUL. OCT. 2016 Producer (left) Import (right) 10 8 6 4 2 0 -2 -4 -6 -8 Sources: Office for National Statistics and Desjardins, Economic Studies GRAPH 6 Growth is stable in China Real GDP In % 11 10 9 8 7 6 5 4 2011 2012 2013 2014 Quarterly annualized change 2015 2016 Annual change Sources: National Bureau of Statistics of China and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 5 ECONOMIC STUDIES United States The U.S. economy in the Donald Trump era FORECASTS Positive signs were already multiplying before the November 8 election. Donald Trump’s victory does not seem to have marred this trend, on the contrary. As such, real GDP growth will remain strong in the fourth quarter of 2016. The scenarios will then be subject to the facts and actions of the new administration. Our assumptions anticipate short-term positive impacts, primarily due to tax cuts for households and businesses. Rising interest rates and a strong dollar will however limit the rebound. Real GDP growth of 2.5% is expected in 2017. New policies implemented thereafter that are less conducive to the economy could rein in real GDP growth, which should slow to 2.1% in 2018. Real GDP in the United States grew by 3.2% in the third quarter, according to the preliminary estimate of the national accounts— the fastest advance since summer 2014. We can also expect the economy to keep humming along through the last quarter of the year. The improvement in household confidence is also worth noting (graph 7). There was a risk that the surprising result of the November 8 election would fuel uncertainty and undermine household confidence. The opposite seems to have occurred instead. Both of the main confidence indexes were up in November and the gains appear to be extending into December, based on the University of Michigan index. The context is ripe for real consumption to accelerate. Businesses are not sitting on the sidelines. The ISM indexes may have dipped by the end of summer, but they are rising now (graph 8), which is a good sign for business investment. For its part, drilling is also climbing in the United States, suggesting that oil investment is starting to recover after seven consecutive quarters of significant declines. Donald Trump’s election clearly has sizable repercussions on our economic scenarios. Since he only takes office on January 20, 2017, the president-elect is busy building his cabinet. For the moment, we have to look to his electoral program to assess the implications of his election for the U.S. economy. However, of all the measures proposed, we still do not know exactly which ones will be implemented, and more importantly, when and how. We therefore have to make assumptions, and we will have to adjust our assumptions once Donald Trump and Congress clarify their intentions. Among the assumptions retained, we expect tax cuts of about US$830 on average per household as of spring 2017. At the same time, businesses should also be eligible for more accommodating tax and regulatory policies on investments. Government spending should rise in 2017, primarily for defence. Infrastructure investments, based on a fairly complicated public-private financing arrangement, should ramp up at a later date. These measures should stimulate U.S. real GDP growth temporarily through the new year, and we have adjusted our scenario accordingly. However, some factors will limit the gains from Donald Trump’s policies (graph 9 on page 7). First, the interest rate increases we can already count on will negatively impact growth, especially in the housing market. Second, the greenback’s appreciation will stifle net exports. Third, the jump in disposable income due to tax cuts should bump up the savings rate sharply. GRAPH 7 GRAPH 8 Household sentiment is improving The ISM indexes are improving Consumer confidence indexes ISM indexes Index Index 140 110 120 100 100 90 80 80 52 60 70 50 40 60 48 20 2000 50 46 2013 2002 2004 2006 Conference Board (left) 2008 2010 2012 2014 University of Michigan (right) Sources: Conference Board, University of Michigan and Desjardins, Economic Studies 2016 Index 60 58 56 54 2014 2015 Manufacturing 2016 Non-manufacturing Sources: Institute for Supply Management and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 6 ECONOMIC STUDIES GRAPH 9 GRAPH 10 Two factors could hurt U.S. growth: The dollar’s rise and higher interest rates The expected growth in U.S. real GDP has been revised upwards in the short term, but downward in the longer term Index In % Annual variation in % 130 4.25 3.0 Real GDP 128 4.00 126 124 3.75 122 3.50 120 118 JAN. 2016 2.5 2.0 1.5 1.0 0.5 APR. JUL. Effective U.S. dollar* (left) 3.25 OCT. 0.0 2016 2017 30-year mortgage rate (right) 2018 Previous forecasts * Federal Reserve’s broad index. Sources: Federal Reserve Board, Datastream and Desjardins, Economic Studies 2019 2020 New forecasts Sources: Bureau of Economic Analysis and Desjardins, Economic Studies Lastly, some of the measures put forth by Donald Trump are clearly less favourable to the U.S. economy starting with the protectionist measures. Our assumptions consider that some targeted tariffs will start rising as of 2018, and this will have a negative impact on investment and drive up inflation. In such circumstances, real GDP growth could be weaker in 2018 (2.1%) than in 2017 (2.5%), and could shift to an even slower pace in the medium term (graph 10). TABLE 3 United States: Major economic indicators QUARTERLY ANNUALIZED VARIATION IN % (EXCEPT IF INDICATED) Real GDP (2009 US$) Personal consumption expenditures Residential construction Business fixed investment Inventory change (US$B) Public expenditures Exports Imports Final domestic demand Other indicators Nominal GDP Real disposable personal income Employment according to establishments Unemployment rate (%) Housing starts1 (thousands of units) Corporate profits*2 Personal saving rate (%) Total inflation rate* Core inflation rate*3 Current account balance (US$B) 2016 2017 ANNUAL AVERAGE Q3 Q4f Q1f Q2f Q3f Q4f 2015 2016f 2017f 2018f 3.2 2.8 -4.4 0.1 7.6 0.2 10.1 2.1 1.7 2.2 1.9 10.3 3.4 20.0 1.3 -0.5 2.5 2.3 1.5 1.7 5.6 2.4 25.0 0.7 1.0 4.0 1.8 3.3 3.6 2.2 8.4 20.0 1.8 1.5 4.0 3.8 3.6 4.1 2.9 7.1 20.0 1.1 1.5 4.0 3.9 2.6 3.2 2.8 2.0 50.0 1.3 1.5 7.5 2.7 2.6 3.2 11.7 2.1 84.0 1.8 0.1 4.6 3.1 1.6 2.6 4.9 -0.5 14.7 0.8 0.6 0.8 2.0 2.5 2.8 3.1 3.9 28.8 0.9 2.0 3.5 2.6 2.1 2.5 2.3 3.0 -6.3 1.5 0.2 -0.4 2.4 4.6 2.7 1.8 4.9 1,145 4.7 1.5 1.4 4.7 1,257 3.3 2.5 1.4 4.7 1,185 5.1 11.1 1.4 4.6 1,217 4.8 2.5 1.5 4.5 1,232 4.8 1.5 1.5 4.4 1,232 3.7 3.5 2.1 5.3 1,108 2.9 2.7 1.7 4.9 1,178 4.4 3.9 1.5 4.6 1,216 4.2 3.0 1.2 4.4 1,249 2.8 5.9 1.1 2.2 -452 11.0 5.9 1.8 2.1 -465 7.5 6.1 2.3 1.9 -479 9.0 7.8 2.0 1.7 -492 4.0 7.5 2.0 1.7 -506 4.0 7.1 2.0 1.7 -536 -3.0 5.8 0.1 1.8 -463 0.5 6.0 1.3 2.2 -479 6.1 7.1 2.1 1.8 -503 4.4 7.7 2.4 2.5 -516 f: forecasts; * Annual change; 1 Annualized basis; 2 Before taxes; 3 Excluding food and energy. Sources: Datastream and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 7 ECONOMIC STUDIES Canada Conditions are improving but major concerns remain FORECASTS The third quarter of 2016 ended on a positive note with a 0.3% expansion in real GDP by industry in September. The carryover for Q4 is therefore fairly high, meaning that real GDP advances will be upgraded for the quarter and for 2016 overall—real GDP growth in 2016 could come in at 1.4%, up from the initial forecast of 1.2%. Projections for next year are still calling for 1.9% growth, with several uncertainties that are clouding the outlooks. A 2.0% gain is also expected in 2018. As expected, Canada’s economy rebounded in the third quarter with a 3.5% gain (quarterly annualized), after a 1.3% contraction last spring. Furthermore, the trade balance improved significantly due to advances in exports that outpaced imports (graph 11). Household consumption also made strong contributions to real GDP growth, as did changes in inventory. That said, three elements continue to cloud the horizon, a reflection of the fairly high level of uncertainty hanging over Canada. negative impacts of falling oil prices on investments in the energy sector are gradually dissipating, and the higher level of oil prices noted since the start of 2016 is clearly tied to this result. Activity in the oil and gas extraction industry has been rising for a few months now. Not only has the ground lost during the forest fires in Alberta been recouped, the volume of production in this sector reached a new historic peak in September (graph 13 on page 9). First of all, government spending was down 0.6% in the third quarter, while the slight increase in investments by public administrations was offset by a decline in government consumption spending. The benefits of the federal government’s stimulus plan are visibly not being felt. However, our scenario includes some of the more significant impacts that are set to occur in the coming quarters. Third, there are signs that residential investment is running out of steam after several quarters of sharp growth. This fall the federal government introduced a new series of measures to curtail insured mortgage credit and last summer the government of British Columbia instituted measures to further control property purchases by foreign buyers in the Vancouver area. If we also take the slowly climbing mortgage rates into account, our scenario for the next few quarters calls for residential construction to decline and less favourable conditions for the resale market. Second, non-residential investment is still struggling. The third quarter may have ended with a 3.5% increase—the first since the summer of 2014—but the bulk of this advance stems from the purchase of a module for the Hebron project in Newfoundland and Labrador. Without this one-time purchase, non-residential investment would have dipped again for the quarter (graph 12). The scope of the declines recorded since the spring is not nearly as high as in previous quarters. The very In closing, Canada will inevitably be impacted by Donald Trump’s victory in the U.S. presidential election. The positive effects should however be evened out by some negative effects, meaning that the overall impact could very well be negligible. On one hand, stronger U.S. demand due to tax relief and a weaker GRAPH 11 GRAPH 12 Canadian exports should continue to benefit from the uptrend in foreign demand The retreat by business investment is dwindling in Canada Index Index Quarterly annualized variation in % 148 130 125 120 115 110 105 100 95 90 85 Real non-residential investment 138 128 118 108 98 88 2000 Desjardins forecasts 2002 2004 2006 2008 2010 Foreign demand (left) Sources: Statistics Canada and Desjardins, Economic Studies 2012 2014 Exports (right) 2016 2018 10 5 0 -5 -10 -15 -20 -25 -30 Q1 2014 Q2 Q3 Q4 Q1 2015 With the Hebron module Q2 Q3 Q4 Q1 2016 Q2 Q3 Estimate excluding the Hebron module Sources: Statistics Canada and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 8 ECONOMIC STUDIES loonie bodes well for Canadian exports. The Keystone XL pipeline could be back in the news, which would support Canada’s energy sector. On the other, uncertainties about the free trade agreement between Canada, the United States and Mexico are another thing for businesses to worry about. This should limit non-residential investment in the coming quarters. However, the current assumption is that the changes that will eventually be made to NAFTA will have very little effect on Canada. GRAPH 13 Canada’s energy sector strengthens Oil and gas extraction In 2007 $B 110 105 100 95 90 85 2014 2015 2016 Sources: Statistics Canada and Desjardins, Economic Studies TABLE 4 Canada: Major economic indicators 2016 2017 ANNUAL AVERAGE QUARTERLY ANNUALIZED VARIATION IN % (EXCEPT IF INDICATED) Q3 Q4f Q1f Q2f Q3f Q4f 2015 2016f 2017f 2018f Real GDP (2007 $) Final consumption expenditure [of which:] 3.5 1.6 2.7 2.1 1.3 2.4 2.2 2.5 1.7 2.5 1.8 2.6 0.9 1.8 1.4 2.1 1.9 2.3 2.0 2.4 Household consumption expenditure Governments consumption expenditure 2.6 -1.2 1.7 3.0 1.7 4.0 1.9 4.0 2.1 3.5 2.4 3.0 1.9 1.5 2.2 2.1 2.0 3.1 2.2 2.8 Gross fixed capital formation [of which:] Residential structures Non-residential structures Machinery and equipment Intellectual property products Governments gross fixed capital formation Investment in inventories (2007 $B) Exports Imports Final domestic demand Other indicators Nominal GDP Real disposable personal income Employment Unemployment rate (%) Housing starts1 (thousands of units) Corporate profits*2 Personal saving rate (%) Total inflation rate* Core inflation rate*3 Current account balance ($B) -1.3 -1.5 0.9 1.2 0.8 0.6 -4.6 -2.7 0.1 0.5 -5.5 15.7 -12.2 -17.0 2.6 -0.8 -12.5 5.0 -2.0 10.0 -1.9 -1.5 -2.0 -1.0 15.0 -2.2 -1.0 -1.0 -0.5 15.0 -2.1 -0.5 -0.5 1.5 10.0 -2.1 -0.5 0.0 2.0 8.0 3.8 -16.0 -3.3 -9.0 4.5 2.5 -9.5 -3.5 -5.8 1.1 -2.1 -1.6 -1.2 -2.7 10.4 -1.4 -0.2 0.0 0.9 5.6 4.6 8.9 3.3 0.9 2.0 4.3 -2.4 1.2 1.0 1.0 2.5 2.1 0.5 4.0 3.5 2.3 -1.0 3.5 3.5 2.1 -2.3 3.0 3.0 2.2 3.9 3.4 0.3 0.3 -0.2 1.1 -0.7 1.0 -0.4 2.5 1.9 1.8 0.3 2.7 2.8 2.0 6.1 7.4 0.3 7.0 200 4.7 0.5 2.4 6.9 189 2.5 2.0 0.6 6.8 182 4.0 2.0 0.8 6.8 177 3.2 2.0 1.1 6.8 173 3.8 2.5 1.1 6.7 171 0.2 3.3 0.8 6.9 196 2.0 2.8 0.7 7.0 196 3.6 2.5 1.0 6.8 176 3.8 2.5 1.0 6.6 172 -1.5 5.8 1.2 2.0 -18 -1.0 5.5 1.6 2.0 -17 4.0 5.5 2.0 1.8 -16 12.0 5.5 1.8 1.5 -15 3.0 5.5 2.1 1.6 -15 15.0 5.5 1.8 1.8 -14 -19.5 5.0 1.1 1.8 -68 -7.1 5.1 1.5 2.0 -71 8.3 5.5 1.9 1.7 -60 9.0 5.8 2.0 1.7 -50 f: forecasts; * Annual change; 1 Annualized basis; 2 Before taxes; 3 Excluding food and energy. Sources: Datastream and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 9 ECONOMIC STUDIES Quebec More positive signs on the horizon FORECASTS Barring a few exceptions, as we saw in August when the real GDP by industry fell 0.5%, economic growth in Quebec has been fairly solid since the start of the year. After eight months, the carryover for Quebec’s economy reached 1.5% for 2016, above our previous projection of 1.3%. The economic conditions are clearly much rosier than we initially believed. That said, caution is in order as some difficulties could resurface in the next few months, especially in the housing market. In these conditions, we are increasing our forecast for 2016 to 1.5%, while we still expect a 1.6% gain in 2017. The tides in Quebec’s economy seem to have turned, with more positive results rolling in for some time now. After a disappointing start to the year, very robust job creation in recent months has boosted the labour market (graph 14). Since July, Quebec has gained 71,900 new jobs—a 1.8% increase. In contrast, job growth in the other provinces was only 0.5% for the period. The jobs in Quebec are also of better quality, with full-time jobs accounting for almost 60% of all new jobs created since the start of 2016. Elsewhere in Canada, 60,200 full-time jobs have been lost since the start of the year, while more than 150,000 part-time jobs have ben created. As such, Quebec’s unemployment rate has fallen from 7.9% at the end of 2015 to 6.2% in November 2016—a historic low not seen since 1976 when Statistics Canada began releasing this data. Even if the decline in the unemployment rate was supported by a drop in the participation rate largely due to the aging of the population, the employment rate (the number of jobs vs. the total population) has also increased significantly in the last few months, which points to a relatively healthy labour market (graph 15). This upswing in the labour market is reflected in the household confidence index, which shifted back above its historical average last spring. That household consumer spending is also higher is not surprising. After only nine months, the carryover for retail sales in 2016 reached 4.0% (graph 16 on page 11)—retail sales in Quebec have not increased at this pace since 2010. Quebec’s public finances also reflect these more favourable conditions. According to the preliminary results, the first six months of fiscal 2016–2017 saw the Quebec government’s own-source revenues climb by 2.1%, while the update last fall expected a scant 1.4% gain. If we also take the slower than expected growth in budget spending into account, fiscal 2016–2017 is on track to end with another surplus. Note that a balanced budget had been tabled in the fall update (graph 17 on page 11). That said, not everything is rosy and certain difficulties could emerge in the months ahead. The labour market could underperform in the next few months, given the volatility of job data. In addition, the introduction of new federal measures to restrict residential credit combined with the uptick in mortgage rates should put the brakes on the resale and residential construction markets. Lastly, business investment should remain anemic, especially now that worries about the uncertain future of NAFTA have edged up a notch. GRAPH 14 GRAPH 15 Quebec’s labour market has improved in the last few months Quebec’s unemployment rate is at a historic low and the employment rate is fairly high Number of jobs In thousands In thousands 50 40 30 20 10 0 -10 -20 -30 -40 In % In % 4,200 17 62 4,175 15 60 13 58 11 56 9 54 4,050 7 52 4,025 5 1976 4,150 4,125 4,100 4,075 2014 2015 Monthly change (left) Sources: Statistics Canada and Desjardins, Economic Studies 2016 Level (right) 1981 1986 1991 1996 Unemployment rate (left) 2001 2006 2011 2016 50 Employment rate (right) Sources: Statistics Canada and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 10 ECONOMIC STUDIES GRAPH 16 GRAPH 17 Quebec consumer consumption is picking up Quebec's budget situation is benefiting from the better economic conditions Value of retail sales Budget balance for fiscal 2016–2017 Annual variation in % 7 In $B 3 6.2 6 Carryover after nine months 5 3.0 3 2 0 2011 2012 2013 0.0 0 -3 2014 2015 2016 Sources: Statistics Canada and Desjardins, Economic Studies 0.0 -0.2 -1.0 -2 1.7 0.5 2010 1.7 -1 2.5 1.2 1 2.7 1 4.0 4 2.1 2 -2.0 Operating balance Contingency fund According to the October 2016 update Payments to the Generations Fund Total – Balance in terms of the Act Interim data for April to September Sources: Ministère des Finances du Québec and Desjardins, Economic Studies TABLE 5 Quebec: Major economic indicators ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) 2014 2015 2016f 2017f 2018f Real GDP (2007 $) Final consumption expenditure [of which:] 1.3 1.3 1.2 0.4 1.5 1.7 1.6 1.4 1.5 1.4 Household consumption expenditure Governments consumption expenditure 1.6 1.1 1.1 -1.4 1.9 1.1 1.8 0.5 1.5 1.0 Gross fixed capital formation [of which:] Residential structures Non-residential structures Machinery and equipment Intellectual property products Governments gross fixed capital formation Investment in inventories (2007 $B) Exports Imports Final domestic demand Other indicators Nominal GDP Real disposable personal income Weekly earnings Employment Unemployment rate (%) Personal saving rate (%) Retail sales Housing starts1 (thousands of units) Total inflation rate -8.1 -1.7 -1.1 0.5 1.3 -0.8 -10.7 -17.0 -4.6 -11.2 0.3 -7.9 -3.5 -3.8 3.7 1.6 -2.4 -3.3 -0.4 -3.0 -4.0 -0.5 -0.7 0.0 10.0 0.0 0.5 0.5 1.0 5.0 2,370 3.6 -1.8 -0.6 2,365 3.8 0.9 0.0 2,400 -0.3 -1.5 0.9 2,750 3.5 2.2 0.9 2,500 3.2 2.0 1.0 1.9 1.1 2.1 0.0 7.7 4.0 1.7 38.8 1.4 2.6 2.4 2.1 0.9 7.6 5.4 0.5 37.9 1.1 2.5 3.0 1.4 0.8 7.1 4.8 4.0 37.7 0.8 3.2 2.7 2.1 1.0 6.9 4.2 2.8 34.0 1.6 3.4 2.0 2.2 0.5 6.8 4.5 2.7 32.0 1.9 f: forecasts; 1 Annualized basis. Sources: Statistics Canada, Institut de la statistique du Québec, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 11 ECONOMIC STUDIES Ontario and other provinces Regional disparities could gradually fade away FORECASTS Canada’s economic growth saw strong regional disparities in 2015 and 2016. These disparities could wane in 2017 and 2018, when Alberta, Saskatchewan and Newfoundland and Labrador start to benefit from the energy sector’s stabilization. In contrast, the growth champions of recent years, Ontario and British Columbia, could be especially hard hit by the housing market’s forecast slowdown. Each province’s real GDP growth is expected to close in on the national average in 2017 and 2018, at around 2.0%. ONTARIO The province continues to benefit from better economic conditions than most of Canada’s other regions, in particular due to the positive impacts of stronger U.S. demand and a relatively weak loonie. For example, employment has expanded 1.0% since the start of 2016, with 71,000 jobs added since August. The unemployment rate fell to 6.3% in November, its lowest point since the spring of 2008. The carryover for Ontario manufacturers’ sales is also at 3.8% for 2016, while it is down 2.6% in the other provinces (graph 18). The housing market is also still ascending. However, it is expected to start to slow in the coming months, as the impacts of the new federal restrictions and rise in mortgage rates start to be felt. Ontario’s real GDP should rise 2.7% in 2016 and 2.3% in 2017. A gain of 2.2% is expected for 2018. WESTERN PROVINCES Given the slight increase in oil prices, the problems in the energy sector should fade in Alberta and Saskatchewan. According to the Canadian numbers, energy sector output started to increase substantially last summer. The rebuilding effort in the Fort McMurray area after the forest fires should also stimulate Alberta’s economic growth. Following another tough year in 2016, the two provinces’ economic growth could close in on the national average in 2017 and 2018. British Columbia’s economic growth continues to stand out. As in 2015, the province’s real GDP could post the fastest provincial growth in 2016. However, British Columbia’s output could slow somewhat in 2017 and 2018. Among other things, the housing sector has been at the heart of the province’s economic growth in recent years (graph 19), and this major contribution should dwindle in the coming months. Because the imbalances seem bigger in the Vancouver area’s housing market, British Columbia could be especially hard hit by the federal government’s new restrictive measures. The measures that the British Columbia government announced last summer to limit foreign investors’ contribution in the Vancouver area should also curb growth by the province’s housing market. Manitoba’s economic growth should beat the national average in 2016 for a second straight year. Among other things, the manufacturing sector is benefiting from the lower loonie and agriculture is doing relatively well. For example, deliveries of the major grains are up 1.3% over the first ten months of 2016 from the same period last year (graph 20). Under these conditions, Manitoba should be able to keep annual growth at around 2% until 2018. GRAPH 18 GRAPH 19 Ontario’s manufacturing sector stands out British Columbia has benefited heavily from the lively housing market Carryover for manufacturer sales for 2016 Contribution of residential investment to British Columbia’s real GDP In % In % 10 5 0.9 5.9 3.8 3.8 0.8 3.5 0.7 0.8 0 0.6 -0.2 0.5 -1.8 -5 -4.1 -10 0.4 0.3 -9.7 0.2 -15 -20 0.1 B.C. Alta. Sask. Man. Ont. Que. Sources: Statistics Canada and Desjardins, Economic Studies N.B. N.S. P.E.I. -18.2 N.L. 0.0 2011 2012 2013 2014 2015 Sources: Statistics Canada and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 12 ECONOMIC STUDIES ATLANTIC PROVINCES GRAPH 20 Grain deliveries are still fairly high in Manitoba In general, production by the Atlantic provinces should keep growing more slowly than the national average in the coming years. Note that the region’s growth potential is lower. However, economic conditions should slowly improve in Newfoundland and Labrador, as the energy sector stabilizes. Also, the commissioning of the new Hebron facilities should boost energy production in the next few years. Manitoba – Total grain deliveries for the first ten months of the year In millions of tonnes 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2010 2011 2012 2013 2014 2015 2016 Sources: Statistics Canada and Desjardins, Economic Studies TABLE 6 Ontario: Major economic indicators ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) 2014 2015 2016f 2017f 2018f Real GDP (2007 $) Final consumption expenditure [of which:] 2.7 2.4 2.5 2.6 2.7 2.6 2.3 2.1 2.2 1.9 Household consumption expenditure Governments consumption expenditure 2.8 1.2 2.7 2.2 2.9 1.8 2.1 1.9 1.7 2.5 Gross fixed capital formation [of which:] Residential structures Non-residential structures Machinery and equipment Intellectual property products Governments gross fixed capital formation Investment in inventories (2007 $B) Exports Imports Final domestic demand Other indicators Nominal GDP Real disposable personal income Weekly earnings Employment Unemployment rate (%) Personal saving rate (%) Retail sales Housing starts1 (thousands of units) Total inflation rate* 1.5 5.3 1.5 3.1 0.8 0.7 7.7 4.3 -5.4 -0.1 7.2 9.7 6.8 -2.7 0.6 6.3 -0.9 -3.0 -2.7 0.0 -3.0 -0.5 -0.5 0.0 22.6 -1.9 0.5 0.8 1.5 6.0 4,061 4.4 4.0 2.2 3,457 2.8 3.7 3.1 500 3.4 2.0 2.4 -1,000 3.0 2.5 2.3 -500 2.8 2.1 1.7 4.7 0.6 2.0 0.8 7.3 2,2 5.0 59.1 2.4 4.9 3.5 2.6 0.7 6.8 3.0 4.2 70.2 1.2 4.1 4.0 1.0 1.1 6.6 2.4 4.2 73.9 1.8 4.4 3.0 2.0 1.2 6.4 2.4 3.5 64.1 2.1 4.4 2.0 2.3 1.3 6.2 2.6 3.2 61.9 2.2 f: forecasts; * Annual change; 1 Annualized basis. Sources: Statistics Canada, Ontario's Ministry of Finance, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 13 ECONOMIC STUDIES TABLE 7 Canada: Major economic indicators by provinces ANNUAL AVERAGE IN % (EXCEPT IF INDICATED) 2014 2015 2016f 2017f 2018f Real GDP growth – Canada Atlantic Quebec Ontario Manitoba Saskatchewan Alberta British Columbia 2.6 0.1 1.3 2.7 1.5 2.4 5.0 3.3 0.9 0.5 1.2 2.5 2.2 -1.3 -3.6 3.3 1.4 0.5 1.5 2.7 1.9 0.0 -2.5 3.0 1.9 0.7 1.6 2.3 2.0 1.7 1.9 2.0 2.0 1.3 1.5 2.2 2.0 2.0 2.5 2.5 Total inflation rate – Canada Atlantic Quebec Ontario Manitoba Saskatchewan Alberta British Columbia 2.0 1.7 1.4 2.4 1.9 2.4 2.6 1.0 1.1 0.4 1.1 1.2 1.2 1.6 1.1 1.1 1.5 1.9 0.8 1.8 1.4 1.1 1.0 1.8 1.9 1.9 1.6 2.1 1.8 1.7 1.9 2.1 2.0 1.9 1.9 2.2 1.8 1.7 2.0 2.2 Employment growth – Canada Atlantic Quebec Ontario Manitoba Saskatchewan Alberta British Columbia 0.6 -0.9 0.0 0.8 0.1 1.0 2.2 0.6 0.8 -0.4 0.9 0.7 1.5 0.5 1.2 1.2 0.7 -0.7 0.8 1.1 -0.5 -0.9 -1.6 3.0 1.0 0.6 1.0 1.2 0.7 0.5 0.3 1.5 1.0 0.7 0.5 1.3 0.8 0.7 1.0 1.3 Unemployment rate – Canada Atlantic Quebec Ontario Manitoba Saskatchewan Alberta British Columbia 6.9 10.0 7.7 7.3 5.4 3.8 4.7 6.1 6.9 10.0 7.6 6.8 5.6 5.0 6.0 6.2 7.0 10.0 7.1 6.6 6.1 6.3 8.1 6.1 6.8 9.9 6.9 6.4 6.0 6.1 7.8 6.0 6.6 9.6 6.8 6.2 5.8 5.8 7.4 6.0 Retail sales growth – Canada Atlantic Quebec Ontario Manitoba Saskatchewan Alberta British Columbia 4.6 3.1 1.7 5.0 4.3 4.6 7.5 5.6 1.7 0.7 0.5 4.2 1.5 -3.5 -4.6 6.0 3.3 3.0 4.0 4.2 4.4 0.5 -2.1 6.2 3.2 2.5 2.8 3.5 3.8 1.7 1.2 5.2 3.0 2.6 2.7 3.2 3.4 2.2 2.5 4.0 189.3 8.0 38.8 59.1 6.2 8.3 40.6 28.4 195.5 8.1 37.9 70.2 5.5 5.1 37.3 31.4 196.3 7.9 37.7 73.9 5.4 4.8 24.6 42.0 175.6 7.5 34.0 64.1 5.0 5.0 26.0 34.0 171.9 7.4 32.0 61.9 4.8 6.0 27.8 32.0 Housing starts – Canada (thousands of units) Atlantic Quebec Ontario Manitoba Saskatchewan Alberta British Columbia f: forecasts Sources: Statistics Canada, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 14 ECONOMIC STUDIES Medium-term issues and forecasts Several elements could hurt the global economy over the medium range Our medium-term scenario includes an economic slowdown that will materialize around 2019 or 2020. Donald Trump’s win triggered a relatively positive reaction from the markets, anticipating that some of the policies proposed would stimulate economic growth in the near term. However, a pullback could follow this slightly livelier period. There is also reason for concern about the impacts of a potentially rapid increase in public debt in the United States, in addition to the higher interest rates and demographic changes occurring in many countries. A surge in U.S. protectionism could add to the difficulties. A great deal of uncertainty nonetheless surrounds the medium-term scenario, which will have to be adjusted in keeping with the actual directions the Trump administration takes. A pullback in sight The U.S.’s economic growth cycle is starting to age, which already argued for an eventual slowdown over the medium term. Donald Trump’s win increased the probability of such a slowdown around 2019 or 2020. In the near term, some of his proposed policies, such as tax cuts, could be good for economic growth, but the benefit would not last. Bigger increases in bond yields have been seen since the U.S. presidential election. If they persist in the years to come, these increases could hurt the economy. The impacts would not solely be focused in the United States, given the correlation between the various global bond yields, particularly in the longer maturities. Households around the world could also have to cope with higher oil prices and potentially slower growth by different asset classes. Debt could be a problem A lot of uncertainty persists about how Donald Trump plans to finance his tax cuts and increase some public expenditures. It seems most likely that U.S. public debt will shoot up in the next few years (graph 21). The addition of government bonds to the market will drain more savings, which could result in a slower pace for investment and consumption. In economics, this phenomenon is called a crowding-out effect. U.S. bonds could find foreign takers, but this would mean a worsening of the U.S. trade deficit. This scenario seems less likely assuming a surge in U.S. protectionism. That being said, the U.S. dollar’s rise against most currencies will make it difficult to lower or even stabilize the U.S. trade deficit. GRAPH 21 Donald Trump's proposals could substantially increase public debt Publicly held U.S. federal government debt In % of GDP 110 Scenario with the Donald Trump measures 100 90 80 70 60 2010 2012 2014 2016 2018 2020 2022 2024 2026 Congressional Budget Office's core scenario Committee for a Responsible Federal Budget's scenario Sources: Committee for a Responsible Federal Budget, Congressional Budget Office and Desjardins, Economic Studies another crisis, but it certainly makes the economy more sensitive to adverse shocks. Difficult to accelerate economic growth potential Demographic change will remain a major issue in the coming years. Population ageing will increase the pressure on public finances, while the scarcity of labour will reduce economic growth potential. More rigid immigration policy could exacerbate the phenomenon in the United States. In this context, we cannot really expect growth rates to return to the averages seen in previous decades. Times when U.S. growth beats 3.0% will be much scarcer. Canada will rarely get above 2.5%, with the average running between 1.5% and 2.0%. Quebec will be especially affected by demographic change. Annual real GDP growth should converge on 1.0% to 1.5% and job creation will be subdued. The pressure to increase investment and raise productivity will be heavy. Ontario will do better demographically and the province should post growth a little above the Canadian average. Debt could also give other countries a headache. At about 250% of GDP, global debt (private and public sector) is now higher than it was during the last financial crisis. It should be noted that high global debt does not, on its own, guarantee that we will see DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 15 ECONOMIC STUDIES TABLE 8 Medium-term major economic and financial indicators ANNUAL AVERAGE AVERAGES 2015 2016f 2017f 2018f 2019f 2020f 2021f 2009–2015 2016–2021f 2.6 0.1 5.3 -0.7 0.26 3.26 0.05 2.13 2.84 49 1,160 1.6 1.3 4.9 10.1 0.50 3.50 0.30 1.85 2.60 43 1,250 2.5 2.1 4.6 6.7 1.00 4.00 0.85 2.65 3.25 55 1,150 2.1 2.4 4.4 2.1 1.65 4.65 1.50 3.05 3.45 57 1,050 1.8 2.5 4.6 0.0 1.80 4.80 1.60 2.80 3.10 52 1,150 1.3 1.8 5.2 4.0 1.50 4.50 1.30 2.45 2.75 52 1,200 1.9 1.5 5.8 8.0 1.55 4.55 1.40 2.80 3.05 58 1,150 1.5 1.4 7.8 12.8 0.25 3.25 0.08 2.57 3.54 81 1,325 1.9 1.9 4.9 5.1 1.33 4.33 1.16 2.60 3.03 53 1,158 0.9 1.1 0.8 144 6.9 196 -11.1 0.78 0.65 2.79 2.97 4.67 0.53 0.55 0.86 1.53 2.20 1.4 1.5 0.7 129 7.0 196 16.8 0.76 0.50 2.70 3.15 4.65 0.50 0.55 0.70 1.25 1.90 1.9 1.9 1.0 186 6.8 176 5.9 0.72 0.50 2.70 3.15 4.75 0.55 0.80 1.25 1.80 2.45 2.0 2.0 1.0 191 6.6 172 4.0 0.71 0.55 2.75 3.20 4.95 0.65 1.15 1.75 2.20 2.60 1.2 1.6 0.6 113 6.6 175 0.0 0.73 0.80 3.00 3.20 4.95 0.75 1.05 1.55 2.00 2.35 1.0 1.1 0.3 56 6.8 170 5.0 0.72 0.50 2.70 3.00 4.85 0.50 0.70 1.15 1.70 2.00 1.7 1.5 0.5 91 6.6 180 10.0 0.77 0.55 2.75 3.20 5.05 0.60 1.00 1.55 2.05 2.30 1.6 1.5 0.8 134 7.4 189 6.3 0.93 0.81 2.83 3.36 5.25 0.74 1.14 1.75 2.45 3.03 1.5 1.6 0.7 128 6.7 178 7.0 0.73 0.57 2.77 3.15 4.87 0.59 0.88 1.33 1.83 2.27 0.23 -0.32 -0.40 -0.35 -1.40 -1.35 -0.95 -1.25 -1.00 -0.95 -0.60 -0.50 -0.55 -0.45 -0.40 -0.90 -1.10 -1.05 0.52 -0.52 -1.24 0.52 -0.52 -1.24 -0.57 -0.77 -0.77 Quebec Real GDP (var. in %) Total inflation rate (var. in %) Employment (var. in %) Employment (thousands) Unemployment rate Retail sales (var. in %) Housing starts (thousands of units) 1.2 1.1 0.9 37 7.6 0.5 38 1.5 0.8 0.8 33 7.1 4.0 38 1.6 1.6 1.0 41 6.9 2.8 34 1.5 1.9 0.5 21 6.8 2.7 32 1.0 1.5 0.2 8 6.6 2.3 32 0.8 1.0 0.1 4 6.7 2.0 30 1.2 1.5 0.4 17 6.6 2.5 33 1.2 1.5 0.8 31 7.9 2.0 44 1.3 1.4 0.5 21 6.8 2.7 33 Ontario Real GDP (var. in %) Total inflation rate (var. in %) Employment (var. in %) Employment (thousands) Unemployment rate Retail sales (var. in %) Housing starts (thousands of units) 2.5 1.2 0.7 45 6.8 4.2 70 2.7 1.8 1.1 75 6.6 4.2 74 2.3 2.1 1.2 81 6.4 3.5 64 2.2 2.2 1.3 90 6.2 3.2 62 1.3 1.7 0.7 50 6.1 3.0 62 1.1 1.2 0.4 29 6.3 2.5 60 1.7 1.6 0.6 43 6.1 3.2 65 1.5 1.7 0.7 45 7.9 2.8 64 1.9 1.8 0.9 61 6.3 3.3 64 IN % (EXCEPT IF INDICATED) United States Real GDP (var. in %) Total inflation rate (var. in %) Unemployment rate S&P 500 index (var. in %)1 Federal funds rate Prime rate Treasury bills – 3-month Federal bonds – 10-year Federal bonds – 30-year WTI oil (US$/barrel) Gold (US$/ounce) Canada Real GDP (var. in %) Total inflation rate (var. in %) Employment (var. in %) Employment (thousands) Unemployment rate Housing starts (thousands of units) S&P/TSX index (var. in %)1 Exchange rate (US$/C$) Overnight funds Prime rate Mortgage rate – 1-year Mortgage rate – 5-year Treasury bills – 3-month Federal bonds – 2-year Federal bonds – 5-year Federal bonds – 10-year Federal bonds – 30-year Yield spreads (Canada—United States) Treasury bills – 3-month Federal bonds – 10-year Federal bonds – 30-year f: forecasts; WTI : West Texas Intermediate; 1 Variations are based on observation of the end of period. Sources: Datastream, Statistics Canada, Canada Mortgage and Housing Corporation and Desjardins, Economic Studies DECEMBER 2016 | ECONOMIC & FINANCIAL OUTLOOK 16