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BC Recovery Continues Amid Greater Uncertainty Presented to: Canadian Association of Equipment Distributors, BC April 7, 2011 Ken Peacock Director Economic Research A Few Global Themes for 2011 Emerging markets driving global growth US recovery accelerates » additional monetary easing (QE2) and accommodative US gov’t fiscal policy Crisis continues to unfold in Europe (sovereign debt and banking system) Middle East turmoil creates a “new” geo-political risk Commodity prices stay high » food, fuel, minerals/metals, potash, etc. Some emerging markets (esp. China) struggling to manage inflation Global economic rebalancing will continue (a multi-year process) Earthquake and tsunami in Japan 2 3 World Economic Forecast Projected growth (per cent) 2010 e 2011 f 2012 f United States 2.9 2.9 2.7 Euro zone (EU 16) 1.7 1.4 1.6 Japan 3.4 1.0 2.9 China 10.3 9.5 9.7 India 8.7 8.5 8.8 World 4.9 4.4 4.4 Source: Scotiabank Global Economic Research, April 1, 2011. China Looming Larger World’s #1 exporter Surpassed Japan as the second biggest national economy Accounts for 12-15% of global imports Largest foreign currency reserves ($2.5 trillion US) In most years, #1 destination for inbound direct foreign investment Biggest global consumer of coal, steel, copper, cement, iron ore, aluminum, etc. Has eclipsed the US as the world’s largest market for new vehicle sales 4 US Near-Term Prospects Brighten Most forecasters now expect growth to exceed 3% in 2011 2010 fiscal and monetary policy actions expected to add one percentage point to growth this year Consumer spending is gaining traction Business investment on the rise » low interest rates, strong balance sheets, impact of federal tax incentives Housing markets remain weak » » housing starts climb to 680,000 this year, up from 590,000 in 2010 prices falling again in many urban markets Longer term, US faces huge fiscal problems – but these don’t matter much in 2011 5 6 US Job Picture (finally) Improving 600 US Employment, m/m change, thousands 400 200 0 -200 -400 -600 -800 -1000 05 06 07 Source: US Bureau of Labour Statistics, seasonally adjusted. 08 09 10 11 Latest: March 2011 But an Unusually Deep and Slow Recovery Source: Calculated Risk. 7 8 Slow Recovery – US Home Building 2,500 US Housing Starts, seasonally adjusted annual rate, thousands 2,000 1,500 1,000 500 0 99 00 01 02 03 Source: US Bureau of Labour Statistics, seasonally adjusted. 04 05 06 07 08 09 10 11 Latest: January 2011 Global Balance of Economic Power is Shifting Ten Biggest Economies (US$ GDP, billions)* 2009 US China Japan India Germany Russia UK France Brazil Italy Source: PWC, The World in 2050 (2011). 2050 14,256 8,888 4,138 4,752 2,984 2,687 2,257 2,172 2,020 1,922 China India US Brazil Japan Russia Mexico Indonesia Germany UK 59,475 43,180 37,876 9,762 7,664 7,559 6,682 6,205 5,707 5,628 * Measured in constant 2009 US dollars, at purchasing power parity exchange rates But…Don’t Underestimate the United States! GDP Per Capita, 2010 US$, measured at purchasing power parity) 50,000 46,931 45,000 40,000 35,000 40,125 39,110 34,798 33,777 30,000 25,000 US Australia Canada UK Japan Despite its recent troubles, the US remains the richest nation among the main advanced economies, with a per capita GDP 20% higher than Canada’s. Source: Economist Intelligence Unit. 10 Canadian Picture Upward revision to Canadian growth for 2011 reflects improved US outlook and strength in commodities Growth stronger in the West and Newfoundland High household debt a worry Canadian housing markets flat in 2011 Total employment almost back to pre-recession peak » …but private sector jobs still below previous high Policy interest rates to rise in second half of 2011 but will stay low Government fiscal restraint will start to weigh on growth Canadian dollar also weighing on exports 11 12 Canada/US Comparisons Fiscal Balance, % of GDP 120 4 2 0 -2 -4 -6 -8 -10 -12 -14 Government Debt, % of GDP 110 100 90 80 70 60 50 40 05 06 07 08 09 10 11 12 13 14 15 Canada Source: IMF, World Economic Outlook. US 05 03 07 08 09 10 11 12 13 14 15 Canada US Canadians Becoming Enthusiastic Borrowers 180 Household Debt as a Share of Personal Disposable Income, % 160 140 US 120 Canada 100 80 60 1990 Source: TD Economics. 1995 2000 2005 2007 2010 13 14 Interest Rates Will Move Higher 7 Canadian interest rates, monthly with quarterly forecasts, % forecast 10 year GoC bond yield 6 3-month T-bill 5 4 3 2 1 0 00 01 02 03 04 05 06 07 Source: Bank of Canada, Scotiabank Economic Research and TD Economics for forecasts. 08 09 10 11 12 Surging Loonie Re-Shaping the Competitive Landscape 110 Canada - US Exchange Rate, weekly with quarterly forecasts, US cents/Cdn$ 105 100 95 90 85 80 75 noon rate TD forecast RBC forecast 70 65 forecast 60 00 01 02 03 04 Source: Bank of Canada, TD Economics & RBC for forecasts. 05 06 07 08 09 10 11 12 15 16 Canadian Economic Outlook 2010 2011 2012 Real GDP (%) 3.1 3.1 2.6 Real consumer spending (%) 3.4 3.0 2.7 Real business non-residential investment (%) 5.2 10.9 7.6 Employment (%) 1.4 1.4 1.1 Housing starts (000) 190 175 175 Inflation (all items CPI, %) 1.8 2.5 2.3 Source: Scotiabank Global Economic Research, April 1, 2011. BC Background Economy recovering from 2008-09 downturn (but mixed) Brighter US outlook is positive for 2011 Asia providing a welcome lift Some pluses/differentiators for BC vs Canada… » gateway economy (esp. important to Metro Vancouver) » commodities (coal, minerals/metals, pulp, lumber is picking up) » in-migration and population growth foster ongoing demand for housing and consumer goods/services » relatively solid fiscal/tax setting » less dependent on US than other provinces 17 18 (Very) Modest Job Rebound 5 BC Employment Growth, annual % change 10 4 BC Unemployment Rate, S.A.,% 9 3 8 2 7 1 0 6 -1 5 -2 4 -3 3 -4 05 06 07 08 09 10 11 05 06 07 08 09 10 1.7% job growth in 2010 Source: Statistics Canada. Latest: February 2011 11 19 Private Sector Employment Lagging 125 BC Employment by Class of Worker, Indexed 2003=100 16,500 more jobs in the public sector than in July 2008 120 115 Private Sector Employees Public Sector Employees 63,000 fewer jobs in the private sector than in March 2008 110 105 100 95 2003 Source: Statistics Canada. 2004 2005 2006 2007 2008 2009 2010 2011 Latest: February 2011 20 Consumers Hesitant to Spend? 5100 BC Retail Sales, S.A., millions $ 4900 4700 4500 4300 4100 3900 3700 3500 04 Source: Statistics Canada. 05 06 07 08 09 10 Latest: January 2011 11 Housing Sales Picking Up, but Still Soft 17000 BC Housing Sales and New Listings S.A., units 25 15000 20 13000 15 11000 10 9000 5 7000 0 5000 sales -5 3000 listings -10 -15 1000 04 05 06 07 08 09 10 11 Source: CREA. Change in Average Price of Homes Sold in BC, % 04 05 06 07 08 09 10 11 Latest: February 2011 22 Housing Starts Flat 4500 BC Housing Starts S.A., units 4000 3500 3000 2500 2000 1500 1000 500 0 00 Source: Statistics Canada. 01 02 03 04 05 06 07 08 09 10 Latest: February 2011 11 23 Construction Activity Easing BC Building Permits S.A., millions $ 900 800 non res (with trend) 700 residential (with trend) 600 500 400 300 200 100 0 00 Source: Statistics Canada. 01 02 03 04 05 06 07 08 09 10 Latest: January 2011 24 Exports Climb…After Slumping in 2009 Annual BC Exports, billions $ 35 24 % decline 30 3,300 3,100 Monthly Exports S.A., millions $ 2,900 2,700 2,500 25 20 2,300 2,100 1,900 15 10 5 1,700 1,500 0 02 03 04 05 06 07 08 09 10 US Source: BC Stats. Japan China rest 06 07 08 09 10 total Latest: January 2011 11 25 Resources Dominate BC’s Exports 10 BC Exports by Commodity, billions $ 2004 8 2007 2008 2009 2010 6 4 2 0 Wood Prod Source: BC Stats. Pulp & Paper Metallic Mineral Prod Natural Gas Coal Mach. & Equip. Agriculture China and Other Markets Driving Export Growth 2,100 BC International Merchandise Exports, S.A. millions $ 1,900 US 1,700 Rest of World 1,500 1,300 1,100 900 700 06 Source: BC Stats. 07 08 09 10 Latest: January 2011 11 26 China Buying More Wood! 900 BC Wood Product Exports to China, millions $ 800 700 600 500 400 300 200 100 0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: Statistics Canada. 27 28 China Buying More BC Pulp Than the US 180 BC Pulp and Paper Exports to China, US, millions $ 160 140 120 100 80 60 China 40 United States 20 0 Feb. 2009 Source: Statistics Canada. Jan. 2010 Jan. 2011 29 Little Improvement for US Wood Sales 300 BC Wood Product Exports to US, millions $ 280 260 240 220 200 180 160 140 120 100 Feb. 2009 Source: Statistics Canada. Jan. 2010 Jan. 2011 30 BC Growth Eases Slightly BC Economic Forecast – BCBC actual forecast 2009 2010 2011f 2012f Real GDP -1.8 3.2* 2.8 2.9 Employment -2.4 2.1 1.9 2.2 Retail sales -5.7 6.0* 5.0 5.0 Corporate profits -30.0 15.0* 10.0 10.0 16,100 27,000 24,000 25,000 Housing starts (units) Source: Business Council, Statistics Canada for history. *estimates HST Reduces business costs (almost $2 billion) » lowers the cost of investing in machinery, equipment, structures, technology, etc. » improves competitive position of exporters Decreased compliance costs – single tax system More efficient tax » avoids cascading tax effect of PST » a more stable and growing tax base $1.6 billion in “transition” funding from Ottawa A few sectors adversely affected Business savings passed on to consumers 31 Equipment Sales: Reasons for Optimism Business investment poised to rise Transportation sector – Gateway activity Mining industry expanding » construction / pre op: Mt. Milligan, Copper Mountain, Quintette » final permitting: Tusequah Chief, Kitsalt, Red Chris Forestry: pulp prices strong; lumber exports growing Agriculture exports – steady growth High level of major project investment ($62 billion underway now) Selected projects: Rio Tinto Kitimat expansion, Kitimat LNG terminal, Highway 37, transmission lines, Site C, IPPs Sustained levels of immigration / population growth 32 Risks and Negative Factors Strong Canadian dollar is impinging on the competitiveness of tradeexposed industries and contributing to current account deficit Uncertainty over HST High household debt burdens Recent job market wobbles / soft domestic economy – blip or trend? End of government “economic stimulus” Escalating energy costs (fuel, electricity), geopolitical instability 33 Summary and Key Messages Global economy growing at a reasonable pace » » » led by emerging economies US near-term growth prospects have improved, but housing recovery will be slow balance of power / economic growth shifting BC economy is in decent shape » » » average growth over next couple years export sector stronger, domestic side softer in 2011 resource industries remain important Sound fiscal setting (both federal and provincial), although spending restraint a drag on growth BC is positioned to succeed, but deliberate and proactive policy work is necessary 34