Download Monthly Economic Monitor

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]
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to product prospectus for full details.
There may be conflicts of interest relating to NBCFMA or its affiliates’ businesses. These activities and interests include potential multiple advisory, transactional and financial and other interests in securities and
instruments that may be purchased or sold by NBCFMA or its affiliates, or in other investment vehicles which are managed by NBCFMA or its affiliates that may purchase or sell such securities and instruments.
No other entity within the National Bank of Canada group, including NBF, is licensed or registered with the SFC. Accordingly, such entities and their employees are not permitted and do not intend to:
(i) carry on a business in any regulated activity in Hong Kong; (ii) hold themselves out as carrying on a business in any regulated activity in Hong Kong; or (iii) actively market their services to the Hong Kong public.
Copyright – This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the information, opinions or conclusions contained in it be
referred to without in each case the prior express written consent of National Bank Financial.