Economic outlook: Post-election landscape November 19, 2015 Douglas Porter, CFA Chief Economist, BMO Financial Group douglas.porter@bmo.com 416-359-4887 Please refer to the next page for Important Disclosures A presentation of BMO Capital Markets Economic Research www.bmocm.com/economics 1-800-613-0205
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Global GDP: New leader, new laggards 2015:Q3 (y/y % chng) Real GDP India (e) 7.4 China 6.9 Mexico (e) 2.4 UK 2.3 Australia (e) 2.2 2.0 Eurozone Japan Brazil Russia -4.1-3.6 (e) (e) 1.1 0.8 13 14 15 16 World 3.3 3.4 3.1 3.4 Emerging markets 5.0 4.7 3.9 4.3 G7 1.2 1.7 1.8 2.0-6 -3 0 3 6 9 Another sub-par year (e) = estimate BMO Capital Markets www.bmocm.com/economics 1 North American growth divergence (q/q % chng : ar) Real GDP 9 13 14 15 16 2.0 2.4 1.2 2.1 1.5 2.4 2.5 2.6 6 3 0-3 Weather Two quarters sub zero -6 forecast -9 04 05 06 07 08 09 10 11 12 13 14 15 16 to outpace by most since 1996 : 2015:Q3 = BMO estimate BMO Capital Markets www.bmocm.com/economics 2
Jobless rates: falling fast not so much Unemployment rate (percent) 10 9 8 7 6 5 [33-year low] 5.8% 10.0% 8.7% Kelowna 7.2 Vancouver 5.9 7.0% 5.0% 4.4% British Columbia 6.3 forecast 4 06 07 08 09 10 11 12 13 14 15 16 Greece 24.6 Spain 2 Portugal 12.2 Italy 11.8 France 10.7 Ireland 8.9 7.0 Australia 5.9 UK 5.2 5.0 Germany 4.5 Japan 3.4 BMO Capital Markets www.bmocm.com/economics 3 Best. Recession. Ever. 10 5 0-5 Not a recession Real GDP (6-mnth % chng : ann) Not a recession This year: 171,000 jobs created Record auto sales Record home prices Housing starts rose Record household net worth Balanced Federal budget Canadian recession -10 81 86 91 96 01 06 11 16 BMO Capital Markets www.bmocm.com/economics 4
Commodities: Oil spill spreads (as of November 18, 2015) 150 120 Crude oil ($/bbl) Brent 8.0 6.4 Natural gas ($/mmbtu) 90 4.8 60 WTI¹ 3.2 30 09 10 11 12 13 14 15 16 Lumber² ($/1,000 bd ft) 500 400 300 200 100 09 10 11 12 13 14 15 16 09 10 11 12 13 14 15 16 12 9 6 Base metals ($000s/ton) Nickel (rhs) Copper (lhs) 3 09 10 11 12 13 14 15 16 32 24 16 8 ¹ West Texas Intermediate ² 2x4 kiln-dried, Prince George BMO Capital Markets www.bmocm.com/economics 5 Regional outlook: The changing of the guard (y/y % chng) Retail sales¹ (3-mnth ma) Employment² Real GDP³ BC 6.0 ON 1.7 BC 2.3 ON 4.6 BC 1.4 ON 2.0 NB 3.2 NL 1.1 MB 1.9 MB PE 0.3 NS NS 0.5 MB 0.2 QC 1.5 QC 0.3 NS -0.3 PE 1.5 PE 0.2 QC -0.4 NB 1.1 NL 0.2 NB -1.0 SK -0.1 SK AB -2.7-3.4 SK AB -2.6-1.4 AB NL -1.7-1.0 Oil producers -8 0 8-4 -2 0 2-3 0 3 ¹ August 2015 ² Survey of Employment, Payrolls and Hours (August 2015) ³ 2015 BMO forecast BMO Capital Markets www.bmocm.com/economics 6
Provincial deficits: Some progress, some trouble FY15/16 Budget balance (% of GDP) British Columbia Alberta Saskatchewan Manitoba Ontario Quebec New Brunswick Nova Scotia Prince Edward Island Newfoundland and Labrador All provinces Federal 0.1 $0.3 bln -1.8 -$6.1 bln -0.4 -$0.3 bln -0.6 -$0.4 bln -1.1 -$8.5 bln 0.4 $ bln -1.4 -$0.5 bln -0.3 -$0.1 bln -0.3 -$0.02 bln -3.5 -$1.1 bln -0.8 -$15.2 bln 0.1 $1.4 bln -4-3 -2-1 deficit surplus 0 1 2 Quebec: Before GF transfers Sources: Federal and provincial budgets/fiscal updates BMO Capital Markets www.bmocm.com/economics 7 Canadian election 2015 Federal election Justin Trudeau [Liberals] Political party 2015 2011 Votes Seats Votes Seats (%) (%) Liberals 39.5 184 18.9 34 Conservatives 31.9 99 39.6 166 NDP 19.7 44 30.6 103 Bloc Québécois 4.7 10 6.0 4 Stephen Harper [Conservatives] Other 4.2 1 4.9 1 Thomas Mulcair [NDP] Implications: Infrastructure spending $10 billion deficits Tax cuts / tax hikes Bigger child tax credit TFSA rollback 338 308 BMO Capital Markets www.bmocm.com/economics 8
Regional real estate outlook Okanagan Mainline Sales, starts rising slowly Population growth rebounding Rates to stay low Oil shock repercussion drags BMO Capital Markets www.bmocm.com/economics 9 Housing starts: recovering, resilient (mlns of units : 3-mnth ma) Housing starts 2.8 0.28 2.4 2.0 (rhs) 0.24 0.20 0.16 1.2 0.12 0.8 0.4 95 99 03 07 11 15 (lhs) 0.08 0.04 BMO Capital Markets www.bmocm.com/economics 10
Population growth revives (3-mnth ma : y/y % chng) Population growth 2.8 2.4 2.0 Kelowna 1.2 0.8 0.4 02 04 06 08 10 12 14 16 BMO Capital Markets www.bmocm.com/economics 11 And starts follow, gradually Kelowna 3.5 Housing starts¹ 3.0 2.5 2.0 Population growth² 1.5 1.0 0.5 02 04 06 08 10 12 14 16 ¹ (000s of units : 12-mnth ms) ² (3-mnth ma : y/y % chng) BMO Capital Markets www.bmocm.com/economics 12
Canadian house prices: Regional divide (y/y % chng : nsa : as of October 2015) Existing home prices¹ Vancouver 15.3 Average home price (y-t-d avg) $894,000 Toronto 10.3 $622,000 6.7 $441,000 Okanagan Mainline 2 2.5 $410,000 Edmonton 2 2.3 $370,000 Winnipeg 2 2.0 $279,000 Montreal 1.4 $336,000 Ottawa 0.5 $370,000 Calgary -1.1 $455,000 Saskatoon -1.4 $343,000-4 0 4 8 12 16 20 24 Okanagan Mainline sales up 5% y-t-d in October ¹ HPI composite benchmark where available ² Average home price (y-t-d) BMO Capital Markets www.bmocm.com/economics 13 Canadian consumers: Still borrowing Households¹ 1.8 Debt ratio (ratio to personal disposable income) 15 Debt growth² (y/y % chng) crossover 1.4 10 1.2 5 1.0 0 0.8 0.6 90 95 00 05 10 15 Debt ratio at record highs ¹ Households, nonprofits and unincorporated businesses ² Consumer credit and residential mortgages only -5 05 07 09 11 13 15 BMO Capital Markets www.bmocm.com/economics 14
Global debt comparison: not unusual Household debt-to-disposable income 2014 (ratio) High Low Denmark Netherlands Iceland Switzerland Norway Australia New Zealand Ireland Sweden South Korea UK Spain Finland Japan Belgium Austria Greece France Germany Italy Poland Hungary median 0 90 180 270 0 90 180 270 Source: Reserve Bank of New Zealand BMO Capital Markets www.bmocm.com/economics 15 Values supported by incomes and interest rates (% of household income) Average mortgage payments 45 44% Toronto bubble 40 35 30 36% Correction 37% 30% If R 2 ppt 25 20 20% Housing extremely cheap 15 88 91 94 97 00 03 06 09 12 15 18 Next decade: Price growth much more subdued Based on 25-year amortization, average of 1- and 5-year posted rate, average-priced house, down payment equal to half of annual income. Household income measured as personal income per labour force member. BMO Capital Markets www.bmocm.com/economics 16
Canadian dollar: Leaking oil Loonie drops to 75 Bank of cuts twice Commodities retreat $: Renewed strength Biggest two-year drop ever BMO Capital Markets www.bmocm.com/economics 17 Canadian dollar: Lower still? Canadian dollar 106 ( : as of November 18, 2015) Q4 2015 74.5 2016 76.5 98 parity 90 Poloz takes over at BoC (June 1, 2013) 82 Bank of Governor Stephen Poloz 74 11 12 13 14 15 Similar to other commodity currencies BMO Capital Markets www.bmocm.com/economics 18
Inflation plunges for now Consumer price index (y/y % chng) 4.5 United States 4.5 Total CPI (latest month) Brazil 9.9 3.0 1.5 0.0 Total Core 1.9% 0.2% 3.0 1.5 0.0 Total Core 2.1% 1.0% India China 1.3 1.0 0.2 5.1 Eurozone 0.1-1.5-1.5 Japan 0.0 forecast -3.0-3.0 09 11 13 15 09 11 13 15 high versus industrial world UK -0.1-5 0 5 10 British Columbia: 1.3% BMO Capital Markets www.bmocm.com/economics 19 Interest rates: rate hikes coming (% : as of November 18, 2015) 6 5 Overnight rate Year-end 2015 0.50 0.25-0.50 2016 0.50 1.00-1.25 forecast 6 5 10-year bonds Year-end 2015 1.70 2.35 2016 2.05 2.75 4 4 3 3 2 2 1 0.50% record lows 0 01 03 05 07 09 11 13 15 BoC back on sidelines 1 2.27% 5% 0%-0.25% 0 07 09 11 13 15 Record spread BMO Capital Markets www.bmocm.com/economics 20
Outlook in a nutshell expansion still improving Businesses hiring, consumers thriving, oil prices help Housing recovery ongoing tripped up by oil, other commodities Major regional re-shuffling underway Housing market concerns overdone Provincial governments tight-fisted Interest rates: Gradual upward drift in rates Exchange rates: dollar to hold firm, C$ on defensive Stocks: Bull market to resume, but valuations a headwind BMO Capital Markets www.bmocm.com/economics 21