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June 2017 Highlights The observed uptick in global economic activity is consistent with our view that world GDP growth will pick up to 3.3% this year. Both advanced and emerging economies are seeing stronger growth, although that’s in part due to fiscal and monetary policy stimulus. With tighter policy in the cards for next year, it’s unclear if momentum can extend to 2018, more so considering risks such as trade protectionism, elevated debt levels and the impacts of Brexit. The U.S. economy is bouncing back nicely after a rough start to the year. Encouraged by solid employment and the apparent resurgence of industrial output and consumer spending, the Fed will likely raise interest rates again in June. That’s not to say all is rosy. We’re leaving unchanged our forecasts for U.S. growth for now, but acknowledge the possibility that a scandal-hit Trump administration may be unable to deliver the fiscal stimulus it promised. The better than expected handoff from last year (after upward revisions to Q4) and from Q1 (March’s unexpected output surge) prompted us to raise by two ticks our 2017 growth forecast for Canada to 2.4%. We have also raised our call for next year’s growth to 2%, expecting better business investment and government expenditures, the latter boosted by federal infrastructure money and fiscal stimulus from provincial governments ahead of elections in Quebec and Ontario. Krishen Rangasamy 514-879-3140 Change from Previous Forecast 2016 2017 2018 2017 2018 United States GDP 1.6% 2.2% 2.4% unch unch CPI inflation 1.3% 2.3% 2.2% unch unch Fed Fund Target Rate* 0.75% 1.50% 2.25% unch unch Ten-year bond yield* 2.45% 2.95% 3.30% unch unch GDP 1.5% 2.4% 2.0% +0.2 pp +0.3 pp CPI inflation 1.4% 1.8% 2.0% unch unch Overnight rate* 0.50% 0.50% 1.25% unch unch Ten-year bond yield* 1.72% 2.18% 2.68% unch unch Canada * end of period Monthly Economic Monitor World: Improving, but not out of the woods The observed uptick in global economic activity is consistent with our view that world GDP growth will pick up to 3.3% this year. Both advanced and emerging economies are seeing stronger growth, although that’s in part due to fiscal and monetary policy stimulus. With tighter policy in the cards for next year, it’s unclear if momentum can extend to 2018, more so considering risks such as trade protectionism, elevated debt levels and the impacts of Brexit. World: Improving trade volumes helped trim inventories Global trade volumes Ratio of world industrial production to global trade volumes (proxy for inventories) q/q % chg. saar % 18 16 14 Improving trade volumes … Momentum from the first quarter seems to have carried over to early Q2 according to Markit purchasing managers indices. A buoyant services sector was boosted in April by another increase in new orders in all of the economies covered by Markit’s survey, while the manufacturing sector also continued to expand in most emerging economies including Brazil, Russia, India, and China. China’s export sector and hence its factories now seem to be benefiting from a declining real effective exchange rate which is now the most competitive in three years. That explains perhaps the recent uptick in exports (up 8% yearon-year in April) and apparent stabilization in the People’s Bank of China’s foreign exchange reserves near US$3 trillion. The domestic economy also seems to be in decent shape thanks to support from consumers as evidenced by nominal retail spending which grew roughly 11% on a yearon-year basis in April. The apparent recovery in the real estate market may be helping. The number of cities seeing monthly declines in home prices have dwindled in recent months. So much so that the real estate climate index, after treading water for so long, has soared to its highest level in years. Credit growth also remains strong as evidenced by new bank loans which averaged a record 1.07 trillion yuan/month in the 12 months to April. All in all, China remains on track to grow 6.5% this year. But not all is rosy in the world’s second largest economy. A highly levered economy remains at risk of disorderly deleveraging, which explains Moody’s downgrade of China’s credit rating for the first time since 1989. 1.024 1.020 1.016 12 10 16 3-quarter change (R) 14 12 8 1.012 1.008 6 4 10 2 8 Latest CPB data provided more evidence about a strengthening global economy. World trade volumes grew again in the first quarter of the year, pushing up the average for the period 2016Q3-2017Q1 to more than 5% annualized, the biggest 3-quarter increase since 2011. And with trade growing faster than industrial output for a third consecutive quarter, the ratio of industrial production to trade volumes (a proxy of inventories) fell to the lowest in four years. That’s good news for production going forward, assuming of course trade volumes can maintain the pace. 20 1.004 1.000 0 6 0.996 … helped trim some inventories in Q1 4 0.992 2 0 -2 0.988 Quarterly annualized change (L) -4 2010 2011 2012 2013 0.984 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 Q1 2017 Q1 NBF Economics and Strategy (data via CPB) China: Real effective yuan most competitive in three years Real effective yuan versus FX reserves 4.1 134 US$ trillion 4.0 132 FX reserves (L) 3.9 130 3.8 128 3.7 126 Real effective yuan (R) 3.6 124 3.5 122 3.4 120 3.3 118 3.2 116 3.1 114 3.0 112 2.9 110 2014 2015 2016 2017 NBF Economics and Strategy (data via Bloomberg, Bank of International Settlements) China: Credit growth still strong New loans, 12-month average 1,100 Billion yuan 1,000 900 800 700 600 500 400 300 200 100 Apr. 2017 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 NBF Economics and Strategy (data via Bloomberg) 2 Monthly Economic Monitor Japan: Fastest growth in a year Contributions to real GDP growth World Economic Outlook Domestic demand 6 Trade Inventories/other Real GDP % 5 Forecast 4 3 2016 1.7 1.6 1.7 1.0 1.8 1.5 2.5 4.0 1.9 2.8 1.4 2.0 2017 1.9 2.2 1.7 1.3 1.7 2.4 2.6 2.9 2.1 2.5 2.0 2.2 2018 1.9 2.4 1.5 1.0 1.3 2.0 2.8 2.9 2.1 2.5 2.0 2.2 Emerging Asia China India Indonesia Malaysia Philippines Thailand 6.3 6.7 6.8 5.0 4.2 6.8 3.2 6.2 6.5 7.3 5.2 4.4 6.4 3.3 6.0 6.2 7.6 5.4 4.4 6.3 3.3 Latin America Mexico Brazil Argentina Venezuela Colombia -1.0 2.3 -3.6 -2.3 -18.0 2.0 1.2 1.5 0.6 2.8 -4.1 1.7 2.0 2.1 2.5 3.0 -0.3 2.8 Eastern Europe and CIS Russia Czech Rep. Poland Turk ey 1.6 -0.2 2.4 2.8 2.9 2.0 1.2 2.5 3.3 2.8 2.0 1.7 2.6 3.2 3.1 Advanced countries United States Euroland Japan UK Canada Australia New Zealand Hong Kong Korea Taiwan Singapore 2 1 0 -1 -2 -3 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 NBF Economics and Strategy (data via Datastream) Among developed economies, Japan was an unexpected outperformer in the first quarter, managing to grow 2.2% annualized, i.e. above potential for an economy which continues to be restrained by a declining workforce. Domestic demand grew at the fastest pace in a year, and trade also contributed to growth. That was the fifth consecutive quarter of positive growth for Japan, the longest such streak since 2006. And based on Markit purchasing managers indices, growth seems to have continued in Q2, albeit at a more moderate pace. Part of this Japanese resurgence is due to the depreciation of the yen in real effective terms which has allowed trade and hence the current account to improve markedly after hitting an all-time low in 2014. The current account surplus is now roughly 4% of GDP, the highest since 2010. This improvement is partly due to the Bank of Japan’s monetary policy stimulus which has weighed on the currency. Recall that the BoJ’s balance sheet is set to swell to over US$4.5 trillion (more than 100% of GDP), or about four times the size of the Fed’s balance sheet as a share of the economy. However, the BoJ’s expansionary policies continue to be offset by Tokyo’s fiscal tightening as evidenced by a narrowing structural budget deficit. Japan: Healthy current account surplus Current account balance 5 % of GDP TOTAL 4 Middle East and N. Africa Sub-Saharan Africa 3.8 1.5 2.3 2.7 3.2 3.5 3 Investment income/other 2 Goods 1 0 Advanced economies Emerging economies World So urce: NB F Eco no mics and Strategy 1.7 4.1 3.1 1.9 4.3 3.3 1.9 4.5 3.4 Services -1 -2 -3 2017 Q1 -4 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 NBF Economics and Strategy (data via Datastream) 3 Monthly Economic Monitor World: Another healthy quarter in the eurozone Eurozone real GDP 3.5 110 q/q % chg. saar Index=100 in 2008Q1 Germany 3.0 108 … thanks to continued expansion in Germany 2.5 106 2.0 104 1.5 1.0 102 0.5 100 0.0 Eurozone 98 -0.5 ex-Germany Another quarter of healthy growth in the Eurozone … -1.0 96 In the Eurozone, real GDP rose 2.0% annualized in the first quarter, faster than the pace seen in the U.S. Of the fourteen countries that reported quarterly growth rates (out of 19 eurozone members), thirteen showed increases in output, including powerhouses Germany (+2.4%) and France (+1.0%). So much so that the zone’s overall output is now 3% above 2008 levels. And based on flash manufacturing PMIs for May (which was at its highest in 73 months) it seems momentum extended to Q2. The European Commission’s Economic sentiment index is the highest in a decade reflecting increased confidence among both businesses and consumers in Europe. 94 -1.5 Q1 -2.0 2012 2013 2014 2015 2016 Q1 92 2008 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017 NBF Economics and Strategy (data via Eurostat) Does that mean the European Central Bank will be withdrawing stimulus? That’s unlikely to happen soon considering ECB President Draghi continues to see risks “tilted to the downside” and remains concerned about below-target inflation which “has yet to show a convincing upward trend”. Moreover, the ECB knows the Eurozone still has a ways to go to catch up to its peers ─ while the zone’s real GDP is now 3% above pre-recession levels, output in the U.S. and Canada are respectively 13% and 15% above levels of 2008Q1. Also, the European Central Bank will not be entirely satisfied with credit access. At first glance, the ECB’s policies seem to working well with higher credit growth translating into improving Eurozone economic data. Loan growth to non-financial corporations has indeed improved since Targeted Longer-Term Refinancing Operations (TLTROs) were first implemented in June 2014 ─ the ECB designed the TLTROs to reduce funding costs for banks and give them incentives to lend. The TLTROs have had mixed results, boosting loans in healthy Eurozone economies but failing to replicate the feat in the most vulnerable ones. Italy: Banking sector saddled with bad debt Non-performing loans as a share of total loans 13 % 12 11 10 9 8 7 6 5 4 3 2017 Q1 2 1998 2000 2002 2004 NBF Economics and Strategy (data via Datastream) 2006 2008 2010 2012 2014 2016 The failure of TLTROs in the latter case is likely due to lingering weakness of bank balance sheets. In Italy for example, the share of non-performing loans in total loans is at an all-time high. That explains in part why member countries such as Greece (which saw a decline in output in Q1 on top of a massive slump the prior quarter), Italy, Spain, Portugal, Cyprus, and Slovenia all remain in recovery mode as opposed to being in expansion, with their respective GDP still below pre-recession levels. There are also risks sovereign spreads may widen again, e.g. if Greece and its creditors are unable to agree on another bailout before July or Italy’s 2018 elections hand over power to anti-EU politicians. And of course, the negative impacts of Brexit on the Eurozone should not be underestimated. All told, the ECB’s work is hardly complete. In other words, Euro bulls and others counting on a quick end to the ECB’s stimulative monetary policies may end up being disappointed. 4 Monthly Economic Monitor U.S.: Accelerating growth The U.S. economy is bouncing back nicely after a rough start to the year. Encouraged by solid employment and the apparent resurgence of industrial output and consumer spending, the Fed will likely raise interest rates again in June. That’s not to say all is rosy. We’re leaving unchanged our forecasts for U.S. growth for now, but acknowledge the possibility that a scandal-hit Trump administration may be unable to deliver the fiscal stimulus it promised. U.S.: Job openings now falling on a year on year basis Non-farm payrolls and Job openings 2.5 y/y % chg. y/y % chg. Non-farm payrolls (L) 2.0 30 20 1.5 1.0 10 0.5 0.0 0 Job openings (R) -0.5 -10 -1.0 -1.5 -20 -2.0 Latest data from the Job Openings and Labor Turnover Survey shows something we haven’t seen since the Great Recession; job openings fell on a year-on-year basis during the first quarter of 2017. Is this a sign of bad things to come for the U.S. labour market as was the case in late 2007, or is this akin to 2012Q3 when a sharp decline in the growth rate of job openings proved to be temporary and did not materially hurt employment creation? As one may recall, the difference between those two cases is how GDP growth responded. In the first case, GDP growth collapsed bringing down job openings and employment. But in the second case, economic growth bounced back after grinding to a halt in the second half of 2012. We expect a similar outcome this time as GDP growth and job openings pick up after a disappointing first quarter. -2.5 -30 -3.0 -40 -3.5 -4.0 -50 -4.5 -5.0 -60 2002 2004 2006 2008 2010 2012 2014 2016 NBF Economics and Strategy (data via Datastream) 2017 Q1 U.S.: Sharp rebound in output in the second quarter Industrial production 7 q/q % chg. saar 6 5 4 3 Why such optimism? April data were more than encouraging. Industrial production jumped during the month with broad-based gains, i.e. in manufacturing, mining and utilities. Auto output, which was soft in the first quarter, is coming back strongly boosting manufacturing as a result. Even assuming no change in May and June, industrial output is on track to grow in Q2 at the fastest pace since 2014. Retail sales were also strong during April. Discretionary spending, i.e. retail sales excluding gasoline, groceries, health/personal care, rose at the fastest pace in three months. Even assuming no change in May and June ─ a very conservative assumption given the solid state of the labour market ─, real consumption spending growth is on track to top the prior quarter’s performance. All in all, U.S. GDP growth is set to be north of 3% annualized in the second quarter, i.e. a sharp rebound after a soft Q1 which was in part affected by residual seasonality. The Fed knows this and hence will feel comfortable in raising interest rates again at its June meeting. True, inflation remained weak in April, with the core PCE deflator now running at a meagre 0.8% annualized on a three-month annualized basis, the lowest in over two years. But most FOMC members will understand this is just a giveback after outsized price increases over the December-January period. 2 1 0 -1 -2 -3 -4 Q2 est.* -5 2014 2015 2016 2017 * Assuming no change in May and June and no revisions to prior months NBF Economics and Strategy (data via Datastream) U.S.: Inflation soft, but economy is revving up PCE deflator excluding food and energy, 3-month annualized 2.8 % Real personal consumption expenditures 4.8 Fed likely to shrug off weak core inflation and say it still expects inflation to eventually move towards target … 2.6 2.4 4.0 2.2 3.6 2.0 3.2 1.8 2.8 1.6 2.4 1.4 2.0 1.2 1.6 1.0 1.2 0.8 0.8 Apr. 0.6 2010 2011 2012 2013 2014 2015 2016 q/q % chg. saar 4.4 2017 … in light of improving demand Q2 est.* 0.4 2014 2015 2016 2017 * Assuming no change in May and June and no revisions to prior months NBF Economics and Strategy (data via Datastream) 5 Monthly Economic Monitor U.S.: Job creation largely tilted towards sectors with low wage inflation Private sector non-farm payrolls and Hourly earnings, April 2017 4.8 Information Leisure/hospitality 4.4 SER01 y/y % chg. Hourly earnings, 4.0 3.6 3.2 Professional services 2.8 Utilities 2.4 Manufacturing 2.0 GOODS Wholesale Transport/ warehousing SERVICES TOTAL Financial activities Construction Education/ Health 1.6 Mining/ logging Retail 1.2 0.8 -1.8 -1.4 -1.0 -0.6 -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 Non-farm payrolls, y/y % chg. SER02 NBF Economics and Strategy (data via U.S. Bureau of Labor Statistics) U.S.: Commercial and industrial loan growth remains weak Loans and leases 16 q/q % chg. saar 14 12 10 8 The Fed will also take comfort from the U.S. labour market which bounced back spectacularly (after March’s blip) as non-farm payrolls grew a consensus-topping 211,000 in April. The breadth of the increase in the goods sector, continued strength in services sector employment and record full-time employment were all signals consistent with a healthy economy. The jobless rate, which fell to a decade low of just 4.4% (ditto for the wide measure which is at just 8.6%), will also support the Fed’s call for tighter policy. That’s not to say the Fed will abandon its gradualist approach. The persistence of low wage inflation is what is preventing an even more aggressive stance from the Fed ─ hourly earnings were growing at an annual pace of just 2.5% in April. The softness in wage growth in part reflects the stabilization of the participation rate after several years of decline, with new entrants into the labour force keeping wages under wraps. Moreover, job creation has been largely titled towards sectors with low wage inflation. Over the past year, sectors that experienced solid employment growth over the past year, including mining/logging and education/health, also had some of the smallest wage gains. Another reason why the FOMC will want to move slowly on rates is the apparent stagnation in commercial and industrial loans since it resumed its tightening cycle in December last year. 6 Loans and leases 4 2 0 Commercial and industrial loans -2 2012 2013 2014 2015 2016 2017 Q2 est.* * Based on data up to mid-May NBF Economics and Strategy (data via Federal Reserve) U.S.: Record household debt Total household debt 13.0 Percent of balance 90+ days delinquent 14 US$ trillion % 13 12.5 12 12.0 Student 11 11.5 10 11.0 9 10.5 Household debt hit new record in 2017Q1 … Credit card 8 10.0 7 9.5 6 Other 5 9.0 8.5 8.0 4 Auto 3 TOTAL 1 7.0 Mortgage 0 2004 2006 2008 2010 2012 2014 NBF Economics and Strategy (data via New York Fed) 2016 2017 Q1 2004 2006 2008 2010 2012 Does such debt accumulation threaten U.S. financial stability? Not at this point. Total delinquencies remain relatively low, with less than 4% of total loans being 90+ days delinquent. True, delinquencies have risen for student and auto loans. But student loans are guaranteed by the federal government and hence represent minimal direct risks to banks. Rising delinquencies on auto loans should not be surprising in light of sub-prime lending which now accounts for roughly a quarter of the $1.2 trillion in auto loans outstanding. But note that only a quarter of those sub-prime auto loans, or roughly $75 billion, were originated by banks. That’s insignificant when compared to the sub-prime mortgage situation which brought the U.S. economy to its knees a decade ago. Heloc … but overall delinquency rate remains relatively low 2 7.5 Thankfully, overall loans and leases continue to grow courtesy of consumer loans. Last quarter, household debt soared to $12.7 trillion, the highest ever recorded. Since hitting a cycle trough mid-2013, household debt has risen a massive $1.6 trillion thanks to strong growth for auto and student loans. 2014 2016 2017 Q1 All told, the U.S. economy remains on a solid footing and is unlikely to be destabilized by an over-aggressive Fed. That’s not to say all is rosy. We’re leaving unchanged our forecasts for U.S. growth for now, but acknowledge the possibility that a scandal-hit Trump administration may be unable to deliver the fiscal stimulus it promised. 6 Monthly Economic Monitor Canada: First quarter surge The better than expected handoff from last year (after upward revisions to Q4) and from Q1 (March’s unexpected output surge) prompted us to raise by two ticks our 2017 growth forecast for Canada to 2.4%. We have also raised our call for next year’s growth to 2%, expecting better business investment and government expenditures, the latter boosted by federal infrastructure money and fiscal stimulus from provincial governments ahead of elections in Quebec and Ontario. Canada: Economic growth surged in first quarter Real and Nominal GDP 9 The buoyant economy explains why employment has been so strong. In the 12-months to April, the labour market has created over 275,000 jobs, more than two-thirds of which were full-time positions. And roughly 55% of the jobs created were in the private sector. Quebec, Ontario and British Columbia accounted for the large majority of the job gains over that period, but there were also encouraging increases in Alberta, suggesting the latter province is bouncing back nicely after the oil shock. But don’t expect another spectacular quarterly GDP growth print in Q2. The accumulation of inventories could lead to a ramp down in production. Also, consumption strength seen last quarter is unlikely to be repeated in Q2 after the savings rate fell to a two-year low of just 4.3%. Moreover, a moderation in growth is in the cards for the energy sector and housing market. Recall that oil production is being curtailed at Syncrude in the current quarter, while residential construction is not being helped by measures implemented by Ontario’s government, including the 15% tax on non-resident buyers. So, we’re expecting GDP growth to soften to roughly 1% annualized in the second quarter. 2017Q1 3.7% q/q % chg. saar 8 GDP Nominal GDP 2016Q4 2.7% 7 6 5 4 3 2 1 0 Canada’s real GDP grew 3.7% annualized in the first quarter of 2017. While trade was a drag on the economy courtesy of rising imports, that was more than offset by sharp gains for domestic demand. There were indeed healthy gains for consumption spending, residential investment, government expenditures and even business investment. Inventories also contributed to growth after the prior quarter’s destocking. Nominal GDP grew a massive 8.3% annualized, a positive for public finances. The better than expected handoff from last year (after upward revisions to Q4) and from Q1 (March’s solid growth of 0.5% unannualized) prompted us to raise by two ticks our 2017 growth forecast to 2.4%. Contributions to real GDP Real GDP -1 -2 -3 -4 Q1 -5 2013 2014 2015 2016 2017 Consumption Business investm. Nonprofit sector Residential investm. Government Domestic Demand 2.4% 1.0% 0.0% 1.1% 0.1% 4.7% Exports Imports Trade -0.1% -4.2% -4.3% 0.3% Inventories Stat.discrepancy 3.6% -0.2% -1.8% 1.7% -2.5% 0.0% 0.5% 0.5% 0.1% 4.1% 4.3% 0.1% NBF Economics and Strategy (data via Statistics Canada) Canada: Resilient labour market Employment creation according to Labour Force Survey, 12-month average to April 2017 25 Thousand jobs/month 20 15 10 5 0 NBF Economics and Strategy (data via Statistics Canada) Canada: Core inflation is low according to Statistics Canada … Core CPI measures 3.0 y/y % chg. 2.8 2.6 2.4 Median 2.2 2.0 1.8 1.6 While the Q2 moderation and lack of price pressures ─ the annual core inflation rate was just 1.3% in April ─ should keep the Bank of Canada on the sidelines for another few months, a more hawkish tone is likely later this year. At its meeting in May the central bank unexpectedly ditched its dovish language and signalled to markets an upcoming change in monetary policy stance. 1.4 Trim 1.2 Common component 1.0 0.8 Apr. 2017 0.6 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 NBF Economics and Strategy (data via Statistics Canada) 7 Monthly Economic Monitor Gone was the reference to “material” excess capacity; the central bank instead referred to “ongoing excess capacity”. The latter explains the central bank’s decision to stand pat on rates for now, but the changing language sets the stage for a move from a neutral stance to a tightening bias before year end. The central bank also unexpectedly downplayed the low core inflation rate saying it’s partly due to temporary factors related to retail competition. However, what the central bank did not mention (and probably should have) is the possibility that the CPI is not adequately capturing price pressures. … but it’s unclear how reliable the core CPI data actually is Teranet-National Bank Composite House Price Index versus Homeowners’ replacement cost CPI 16 Difference between annual inflation rates of resale homes and replacement cost 10 y/y % chg. 14 Resale home price 9 % … is now the largest on records 8 12 7 10 6 8 5 6 4 4 3 2 2 Replacement cost 0 -2 Divergence between inflation of resale homes and replacement cost CPI … -4 -6 1 0 -1 -2 -3 -8 -4 2000 2002 2004 2006 2008 2010 2012 2014 2016 2000 2002 2004 2006 2008 2010 2012 2014 2016 NBF Economics and Strategy (data via Statistics Canada, Teranet-National Bank) Canada : Housing affordability in the four largest markets MPPI - Monthly mortgage payment on median home price (25 year amortization, 5-year term) 100 % of median income 90 80 Vancouver 70 60 Toronto 50 40 Montreal 30 Calgary 20 1985 1990 1995 2000 2005 2010 2015 NBF Economics and Strategy (data via Statistics Canada, Teranet-National Bank, CREA) Canada: Non-energy exports remain weak Real U.S. imports of goods versus Real Canadian merchandise exports 120 Real U.S. imports of petroleum versus Real Canadian energy exports 150 Index=100 in Feb.2008 Index=100 in Feb.2008 Canadian exports 140 116 U.S. imports 130 120 Canadian overall real exports have tracked U.S. real imports … 112 108 … but that’s only because of energy exports … 110 100 90 104 Canadian exports 100 U.S. imports 80 70 60 2008 96 2009 2010 2011 2012 2013 2014 2015 2016 2017 Real U.S. imports of non-petroleum goods versus Real Canadian non-energy exports 92 128 124 120 88 116 112 84 108 Index=100 in Feb.2008 … which have offset underperforming non-energy exports U.S. imports 104 100 80 Canadian exports 96 92 88 76 84 80 76 72 72 2008 2009 2010 2011 2012 2013 2014 2015 NBF Economics and Strategy (data via Datastream) 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Take housing for example. The CPI’s homeowners replacement cost has risen at a much slower pace than resale home prices over the last several years. So much so that the difference between year-on-year changes of resale homes and replacement cost CPI was a stunning 9.5% in April, the highest ever recorded. Part of this gap is due to Vancouver. While that city’s Teranet-National Bank house price index has gone up almost 70% since 2008, its new home price index (which is used in the CPI calculation) is little changed over the last nine years. In other words, the true core inflation rate is likely higher than what Statistics Canada is reporting. We welcome the Bank of Canada’s decision to ditch the dovish rhetoric and signal the possibility of tighter monetary policy soon. Record low interest rates have pumped up an already stretched real estate market, thereby increasing risks to financial stability. Surging home prices have caused home affordability to deteriorate sharply in cities such as Vancouver and Toronto, both at their worst since the early 1990’s. They have also forced home buyers to take on bigger mortgages than they would have otherwise. The heavy debt burden coupled with Bank of Canada rate hikes ─ we still expect Governor Poloz to deliver his first ever interest rate hike in 2018Q1 ─ should restrain consumption growth next year. Residential investment is also likely to soften as home price inflation falls back to more sustainable levels. As for business investment, it’s unclear if the recent uptick can be sustained in light of enhanced uncertainties. But government spending should accelerate as federal infrastructure money is finally spent and provincial governments deploy fiscal stimulus ahead of elections in Quebec and Ontario. That’s the main reason we raised our 2018 growth forecast for Canada by three ticks to 2.0%. And assuming trade flows are not materially impacted after the renegotiation of the North American Free Trade Agreement, export growth should also accelerate next year thanks to strengthening U.S. demand and the lagged impacts of a cheaper Canadian dollar. There is indeed plenty of room for under-performing nonenergy exporters to bounce back. 8 Monthly Economic Monitor United States Economic Forecast 2016 Q4/Q4 2017 2018 2.4 2.6 1.7 2.0 2.2 (0.3) 1.5 1.6 2.4 2.0 3.1 1.1 (0.1) 0.2 1.5 2.6 49.6 2.1 2.2 2.2 6.3 4.8 1.1 1.2 2.4 2.8 2.5 2.5 2.7 1.2 2.1 2.0 0.2 1.0 0.8 2.4 1.7 1.3 4.4 2.2 5.6 (620.0) (502.0) 1.9 1.6 4.7 1.8 9.3 ... ... 1.7 1.4 4.5 2.2 3.9 ... ... 1.7 1.3 4.4 2.2 4.5 ... ... (Annual % change)* 2014 2015 2016 2017 2018 Gross domestic product (2009 $) Consumption Residential construction Business investment Government expenditures Exports Imports Change in inventories (bil. $) Domestic demand 2.4 2.9 3.5 6.0 (0.9) 4.3 4.4 57.7 2.6 2.6 3.2 11.7 2.1 1.8 0.1 4.6 84.0 3.1 1.6 2.7 4.9 (0.5) 0.8 0.4 1.1 22.0 2.1 2.2 2.6 5.9 4.4 0.2 1.9 3.5 3.6 2.5 3.5 1.6 6.2 1.6 5.9 (483.3) (392.1) 3.5 1.7 5.3 0.1 (3.0) (439.0) (463.0) 2.6 1.7 4.9 1.3 (0.1) (588.0) (481.2) 1.6 1.3 4.5 2.3 4.3 (594.0) (462.0) Real disposable income Household employment Unemployment rate Inflation Before-tax profits Federal balance (unified budget, bil. $) Current account (bil. $) 2006 -304 * or as noted Financial Forecast** Current 5-30-17 Fed Fund Target Rate 3 month Treasury bills Treasury yield curve 2-Year 5-Year 10-Year 30-Year Exchange rates U.S.$/Euro YEN/U.S.$ Q4 2016 Q4 2017 Q4 2018 2016 2017 2018 Q2 2017 Q3 2017 Q4 2017 Q1 2018 1.00 0.92 1.25 1.08 1.50 1.30 1.50 1.33 1.75 1.55 0.75 0.50 1.50 1.33 2.25 2.08 1.28 1.76 2.21 2.88 1.35 1.84 2.32 2.97 1.70 2.24 2.80 3.41 1.85 2.43 2.95 3.53 2.10 2.65 3.09 3.65 1.20 1.93 2.45 3.06 1.85 2.43 2.95 3.53 2.60 2.96 3.30 3.76 1.12 111 1.11 113 1.10 112 1.12 114 1.14 115 1.05 117 1.12 114 1.11 112 ** end of period Quarterly pattern Q3 2016 Real GDP growth (q/q % chg. saar) CPI (y/y % chg.) Core CPI (y/y % chg.) Unemployment rate (%) Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 actual actual actual forecast forecast forecast forecast forecast 3.5 1.1 2.2 4.9 2.1 1.8 2.2 4.7 1.2 2.6 2.2 4.7 3.4 2.2 1.9 4.4 2.1 2.4 2.0 4.5 2.0 2.2 2.1 4.5 1.5 2.0 2.0 4.4 3.3 2.3 2.3 4.4 National Bank Financial 9 Monthly Economic Monitor Canada Economic Forecast (Annual % change)* 2014 2015 2016 2017 2018 2016 Q4/Q4 2017 2018 Gross domestic product (2007 $) Consumption Residential construction Business investment Government expenditures Exports Imports Change in inventories (millions $) Domestic demand 2.6 2.8 2.7 3.2 0.0 5.8 2.2 9,392 1.9 0.9 1.9 3.8 (11.5) 1.9 3.4 0.3 3,861 0.3 1.5 2.4 3.0 (8.6) 1.8 1.0 (0.9) -415 1.0 2.4 2.8 3.5 (1.0) 0.9 1.7 2.3 10,436 1.9 2.0 1.4 (2.9) 3.7 2.4 3.8 1.9 4,298 1.5 2.0 2.7 2.9 (7.5) 2.2 0.8 (0.8) -2,522 1.3 2.2 2.3 2.0 3.5 0.9 2.9 4.8 8,659 2.0 2.1 1.3 (3.5) 4.4 2.5 3.7 1.7 2,736 1.5 Real disposable income Employment Unemployment rate Inflation Before-tax profits Current account (bil. $) 1.3 0.6 6.9 1.9 8.2 (48.2) 3.3 0.9 6.9 1.1 (19.5) (67.6) 2.7 0.7 7.0 1.4 (4.5) (67.0) 2.1 1.4 6.6 1.8 27.8 (52.0) 1.7 0.7 6.4 2.0 6.4 (40.8) 2.6 1.1 6.9 1.4 14.6 .... 1.5 1.0 6.5 1.9 16.8 .... 1.7 0.7 6.4 2.0 6.0 .... * or as noted Financial Forecast** Current 5-30-17 Q4 2016 Q4 2017 Q4 2018 2016 2017 2018 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Overnight rate 3 month T-Bills Treasury yield curve 2-Year 5-Year 10-Year 30-Year 0.50 0.53 0.50 0.51 0.50 0.50 0.50 0.63 0.75 0.74 0.50 0.46 0.50 0.63 1.25 1.37 0.70 0.94 1.41 2.06 0.74 1.05 1.57 2.21 0.97 1.47 2.10 2.70 1.09 1.56 2.18 2.75 1.20 1.64 2.25 2.78 0.75 1.12 1.72 2.31 1.09 1.56 2.18 2.75 1.98 2.32 2.68 3.09 CAD per USD Oil price (WTI), U.S.$ 1.35 50 1.36 47 1.36 52 1.32 55 1.29 57 1.34 54 1.32 55 1.30 60 ** end of period Quarterly pattern Q3 2016 Real GDP growth (q/q % chg. saar) CPI (y/y % chg.) Unemployment rate (%) Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 actual actual actual forecast forecast forecast forecast forecast 4.2 1.2 7.0 2.7 1.4 6.9 3.7 1.9 6.7 1.0 1.6 6.5 2.4 1.8 6.5 1.6 1.9 6.5 2.4 1.9 6.5 2.1 2.0 6.4 National Bank Financial 10 Monthly Economic Monitor Provincial economic forecast 2014 2015 2016e 2017f 2018f -2.0 2.0 1.2 1.0 1.9 2.5 2.0 1.1 2.9 2.9 2.4 4.0 1.5 1.1 1.0 1.5 2.2 1.9 1.6 2.1 2.2 2.0 -1.3 3.5 1.7 1.0 1.9 4.7 2.5 1.3 8.9 5.2 4.5 -2.3 2.1 0.9 0.3 1.5 1.2 1.0 0.6 1.0 2.9 1.4 -2.9 0.3 0.0 0.4 0.4 1.0 0.8 0.8 0.8 1.0 0.7 12.0 10.5 8.9 9.9 7.8 7.3 5.4 3.8 4.7 6.1 6.9 1.2 0.7 4.2 1.6 38.7 82.9 6.4 4.7 25.7 38.0 204.1 1.2 0.5 3.7 1.6 35.0 73.0 5.3 4.6 24.0 34.0 182.9 Real GDP (% growth) Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia Canada -1.0 1.5 0.8 -0.1 1.3 2.7 1.5 2.4 5.0 3.3 2.6 -2.0 1.3 1.0 2.3 1.2 2.5 2.2 -1.3 -3.6 3.3 0.9 2.0 2.4 1.1 1.4 2.0 2.7 2.4 -1.0 -3.8 3.7 1.5 -1.9 -0.4 -1.1 -0.2 -0.1 0.8 0.1 1.0 2.2 0.6 0.6 -1.0 -1.0 0.1 -0.4 1.0 0.7 1.5 0.6 1.2 1.3 0.9 -1.4 -2.3 -0.4 -0.1 0.9 1.1 -0.5 -0.9 -1.6 3.1 0.7 2.1 0.5 3.1 2.3 38.8 59.1 6.2 8.3 40.6 28.4 189.3 1.7 0.6 3.8 2.0 37.9 70.2 5.5 5.1 37.3 31.4 195.5 1.4 0.6 3.8 1.8 38.9 75.0 5.3 4.8 24.5 41.8 197.9 2016e 2017f 2018f -11.5 3.9 2.4 2.9 2.6 4.9 3.1 -5.7 -12.5 3.8 0.2 3.7 4.1 2.7 3.7 3.2 4.1 3.5 2.8 8.0 5.4 4.6 7.0 4.0 3.0 2.9 3.2 4.2 3.8 2.8 4.3 4.6 4.0 14.3 10.3 8.2 8.6 6.4 6.3 5.8 5.9 8.2 5.3 6.6 14.7 10.0 7.9 8.2 6.3 6.2 5.8 6.3 7.4 5.1 6.4 3.3 4.5 2.2 3.6 3.2 4.6 2.5 -5.8 -6.1 5.4 2.1 Unemployment rate (%) Housing starts (000) Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia Canada 2015 Nominal GDP (% growth) Employment (% growth) Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia Canada 2014 12.8 10.4 8.6 9.8 7.6 6.7 5.6 5.0 6.0 6.2 6.9 13.5 10.8 8.3 9.6 7.0 6.6 6.1 6.4 8.1 6.0 7.0 Consumer Price Index (% growth) 1.9 1.6 1.7 1.5 1.4 2.2 1.8 2.4 2.6 1.0 1.9 0.4 -0.6 0.4 0.5 1.1 1.1 1.2 1.6 1.2 1.1 1.1 2.7 1.2 1.2 2.2 0.7 1.8 1.3 1.1 1.1 1.9 1.4 2.5 1.6 1.3 2.3 1.4 1.8 1.7 1.6 1.9 1.9 1.8 2.0 2.0 1.9 2.0 1.9 1.9 2.2 2.1 2.2 2.0 2.0 e: estimate f: forecast Historical data from Statistics Canada and CMHC, National Bank of Canada's forecast. 11 Monthly Economic Monitor Economics and Strategy Montreal Office 514-879-2529 Stéfane Marion Marc Pinsonneault Kyle Dahms Chief Economist and Strategist Senior Economist Economist [email protected] [email protected] [email protected] Paul-André Pinsonnault Matthieu Arseneau Senior Fixed Income Economist Senior Economist [email protected] [email protected] Toronto Office 416-869-8598 Krishen Rangasamy Angelo Katsoras Warren Lovely Senior Economist Geopolitical Analyst MD, Public Sector Research and Strategy [email protected] [email protected] [email protected] General – National Bank Financial (NBF) is an indirect wholly owned subsidiary of National Bank of Canada. 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