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THE ECONOMIC & INVESTMENT OUTLOOK KEY ISSUES • Global demand decelerating, but still expanding at a healthy pace • U.S. economic growth down a notch • Canadian economy still adjusting to stronger dollar GLOBAL EXPANSION SLOWING, BUT WILL REMAIN ROBUST WORLD ECONOMIC GROWTH, 1970-2006 8 Per cent change in real GDP Average growth rate in real GDP, 1970-2004: 3.7% 7 6 5 4 3 2 1 0 70 72 74 76 78 80 82 84 86 88 90 Forecast by TD Economics as at March 2005 Source: International Monetary Fund, TD Economics 92 94 96 98 00 02 04 06 U.S. EXPANSION BROADLY BASED U.S. INSTITUTE FOR SUPPLY MANAGEMENT: PURCHASING MANAGERS' INDEXES 70 Index Index Non-Manufacturing 65 70 65 60 60 55 55 50 50 45 45 Manufacturing 40 40 35 35 96 97 98 99 00 01 Last month plotted: May 2005; Source: Bloomberg, U.S. Institute for Supply Management 02 03 04 05 U.S. EMPLOYMENT VOLATILE U.S. LABOUR MARKET 400 300 Thousands of jobs Net Job Change in Non-Farm Payrolls 200 100 0 -100 -200 Last month plotted: May 2005 -300 Jan. Apr. 2002 Jul. Oct. Jan. Apr. 2003 Jul. Oct. Jan. Apr. 2004 Seasonally-adjusted data; Source: U.S. Department of Labor Jul. Oct. Jan. Apr. 2005 OIL PRICES REMAIN HIGH REAL AND NOMINAL OIL PRICING 100 2005 U.S. dollars 2005 U.S. dollars 90 100 90 Inflation-adjusted oil price WTI Crude oil prices divided by core CPI 80 80 70 70 60 60 *55.01 50 50 40 40 30 30 20 20 10 10 Nominal WTI oil price 0 0 1974 1979 1984 1989 1994 1999 *Last Plotted: June 14, 2005 price of West Texas Intermediate (WTI) crude oil Core CPI: Consumer Price Index excl. food and energy Source: International Monetary Fund, The Globe and Mail, U.S. Dep't of Labor 2004 TWIN DEFICITS DRIVING U.S. DEPENDENCE ON FOREIGN CAPITAL U.S. TWIN DEFICITS* 4 Per cent of nominal gross domestic product Federal Budget Balance 2 0 -2 -4 Current Account Balance -6 -8 96 97 98 99 00 01 02 03 04 05F 06F *Current account data are for calendar years; budget data are for fiscal years; budget forecasts are from U.S. Congressional Budget Office (CBO) Jan. 2005 Budget and Economic Outlook; current account forecasts are by TD Economics as at March 2005; Source: U.S. Bureau of Economic Analysis, CBO HIGH CONSUMER INDEBTEDNESS WILL TAKE EDGE OFF CONSUMPTION GROWTH U.S. HOUSEHOLD DEBT 16 Per cent of pers. disp. income Per cent of pers. disp. income Total Household Debt (right scale) 120 14 Debt-Service Payments* (left scale) 100 12 80 10 8 60 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 * Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt; Last plotted:Q1-2005 for total household debt & Q4-2004 for debt-service payments; Source: U.S. Federal Reserve Board, U.S. Department of Commerce PROFIT REBOUND DRIVING INVESTMENT U.S. CORPORATE PROFITS AND BUSINESS INVESTMENT 35 30 25 Per cent Per cent Forecast Business Investment* (left scale) 15 14 13 20 12 15 11 10 10 5 9 0 8 -5 -10 -15 Corporate Profits** (right scale) -20 7 6 5 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 *Annualized quarterly per cent change in non-residential fixed investment; **Corporate profits as a share of nominal GDP. Forecast by TD Economics as at March 2005 Source: U.S. Bureau of Economic Analysis U.S. ECONOMIC GROWTH TO TAPER OFF U.S. REAL GROSS DOMESTIC PRODUCT (GDP) 10 Annualized quarter/quarter per cent change (%) Forecast 8 7.4 Average annual growth 2004 4.4% 2005 3.6% 2006 3.2% 6 4.2 4.1 4 4.5 4.0 3.8 3.3 3.5 3.5 3.5 3.6 3.1 3.1 2.7 2.5 Q3 Q4 1.9 2 0 Q1 Q2 2003 Q3 Q4 Q1 Q2 2004 Q3 Q4 Forecast by TD Economics as at May 2005 Source: U.S. Bureau of Economic Analysis Q1 Q2 2005 Q3 Q4 Q1 Q2 2006 MIXED SIGNALS ON U.S. INFLATION U.S. INFLATION MEASURES Y/Y % Change 3-Month Ann. % Change Core CPI (to May 05) 2.2 2.2 Core PCE (to April 05) 1.6 2.2 Core PPI (to May 05) 2.6 1.6 Unit Labour Costs* (to Q1-05) 4.3 3.3 Benefit Costs (to Q1-05) 5.8 4.3 *Unit Labour Costs are for non-farm business Source: Bureau of Economic Analysis, Bureau of Labour Statistics FED TO STICK WITH MEASURED RATE HIKES IN NEAR TERM U.S. FEDERAL FUNDS RATE 7 Per cent Per cent 7 Forecast 6 6 5 5 4 4 3 3 2 2 1 1 0 0 Jan. 00 Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Actual data to June 15, 2005; Forecast by TD Economics as at May 2005 Source: U.S. Federal Reserve Board Jan. 06 Jan. 07 CANADIAN JOBS ARE PLENTIFUL CANADA: EMPLOYMENT RATE 64 Per cent 63 62 61 60 59 58 57 56 55 54 76 78 80 82 84 86 88 90 92 Last plotted: May 2005; Source: Statistics Canada 94 96 98 00 02 04 06 RED-HOT HOUSING MARKET WILL SLOW CANADIAN HOUSING STARTS 250 Thousands of units Thousands of units 250 Forecast 200 200 150 150 100 100 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 Data are for end of period; Forecast by TD Economics as at March 2005 Source: CMHC EXPORTS STILL STRUGGLING WITH STRONGER LOONIE CANADIAN DOLLAR AND REAL NET EXPORTS* 110 Index: 1992=100 Per cent of GDP 8 Trade-Weighted Canadian Dollar (left scale) 6 100 4 90 2 80 Real Net Exports (right scale) 0 70 -2 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 * Real exports minus real imports; Last plotted: Q1-2005; Source: Statistics Canada 05 COMMODITY PRICES TO REMAIN HIGH CANADIAN DOLLAR AND COMMODITY PRICES 120 US$ TDCI Index: 1992=100 C$ in US cents TD Commodity Price Index* excluding energy (left scale) 110 90 85 Canadian Dollar (right scale) 80 100 75 90 70 80 65 Forecast 70 93 94 95 96 97 98 99 00 01 02 03 60 04 05 06 * Index of Canadian resource commodity prices; Forecast by TD Economics as at May 2005; Most recent data: May 2005; Source: Bank of Canada CANADIAN ECONOMY TO GROW WEAKLY IN NEAR TERM CANADIAN REAL GDP Annualized quarter/quarter per cent change (%) 8 Average annual growth 2004 2.9% 2005 2.7% 2006 3.2% 6 5.0 3.6 4 3.5 3.2 3.1 2.6 2.1 2 2.3 3.4 3.2 3.3 3.4 Q1 Q2 2006 Q3 Q4 3.2 2.0 1.3 0 Forecast -2 -1.2 Q1 Q2 2003 Q3 Q4 Q1 Q2 2004 Q3 Q4 Q1 Q2 2005 Q3 Q4 Forecast by TD Economics as at May 2005; Source: Statistics Canada OUTPUT GAP HAS BEEN VIRTUALLY CLOSED CANADA'S OUTPUT GAP Actual Real GDP Less Potential Real GDP Per cent 3 Forecast Full Capacity 2 Excess Demand 1 0 -1 Excess Supply -2 -3 -4 Actual data to Q1-2005 -5 91 92 93 94 95 96 97 98 Forecast by TD Economics as at May 2005 Source: Statistics Canada, Bank of Canada 99 00 01 02 03 04 05 06 CORE INFLATION TO GRADUALLY EDGE UP TO 2% CANADIAN CONSUMER PRICE INFLATION (CPI) 5 Per cent change year/year Per cent change year/year Forecast Bank of Canada Core CPI ex. 8 most volatile items 4 5 4 3 3 2 2 1 1 Total CPI 0 0 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Actual data to April 2005; Forecast by TD Economics as at March 2005 Source: Statistics Canada Jul-06 BANK OF CANADA TO KEEP RATES LOW BANK OF CANADA OVERNIGHT TARGET RATE 7 Per cent Per cent 7 Forecast 6 6 5 5 4 4 3 3 2 2 1 1 0 0 Jan. 00 Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Actual data to June 15, 2005; Forecast by TD Economics as at May 2005 Source: Bank of Canada Jan. 06 Jan. 07 BOND YIELDS TO RISE...BUT NOT MUCH CANADA - NOMINAL 3-MONTH T-BILL RATE & 10-YEAR GOVERNMENT BOND YIELD 22 Per cent 22 20 3-month T-bill Rate (left scale) 20 18 10-yr. Gov't Bond Yield (right scale) 18 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 Actual data to: May 2005; Forecast by TD Economics as at May 2005; Source: Bank of Canada, Global Insight REAL INTEREST RATES HISTORICALLY LOW CANADA - REAL 3-MONTH T-BILL RATE & 10-YEAR GOVERNMENT BOND YIELD* 12 Per cent 12 10 10 8 8 6 6 4 4 2 2 0 0 -2 -2 Real 3-month T-bill Rate (left scale) Real 10-yr. Gov't Bond Yield (right scale) -4 -4 -6 -6 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 *Nominal 3-mth. T-bill Rate and 10-yr. Gov't Bond Yield deflated by Core CPI; Actual data to: May 2005; Forecast by TD Economics as at May 2005; Source: Bank of Canada, Global Insight PROFIT GROWTH WILL BE MODEST U.S. CORPORATE PROFITS & EQUITIES Indexes: Q1-1990=100 500 Indexes: Q1-1990=100 450 Fcst . S&P500 500 450 400 400 350 350 300 300 250 250 200 200 150 150 Pre-Tax Corporate Profits 100 100 50 50 0 0 90 91 92 93 94 95 96 97 98 99 00 01 02 Last actual: Q1-2005; Forecast by TD Economics as at March 2005; Source: U.S. Bureau of Economic Analysis, Global Insight 03 04 05 06 CANADIAN DOLLAR A KEY RISK TO OUTLOOK CANADIAN DOLLAR 92 US cents C$/US$ 1.087 Forecast 88 1.136 84 1.190 80 1.250 76 1.316 72 1.389 68 1.471 64 1.563 60 1.667 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Data are for end of period; Forecast by TD Economics as at April 2005 Source: Bank of Canada WHAT IS FAIR VALUE FOR THE LOONIE? APPROACHES TO AN ANCHOR FOR THE DOLLAR Productivity Gap: Canada/U.S. Total Labour Compensation Gap: Canada/U.S. 0.77-0.835 0.84 Purchasing Power Parity (PPP) Statistics Canada 0.85 OECD (2002) 0.81 IMF 0.83 Penn World Table - University of Pennsylvania (IMF) 0.85 Big Mac PPP (The Economist ) 0.85 Latté PPP (The Economist ) 0.82 TD Economics www.td.com/economics