Monthly Economic Monitor - National Bank of Canada · PDF fileNBF Economics and Strategy (data...

May 2018

Highlights

The global economy continued to expand in the first quarter, albeit at a more moderate pace. The persistence of low inflation should limit the extent of monetary policy tightening by major central banks this year, while fiscal policy is also expected to remain stimulative in both advanced and emerging economies. As such, we expect world GDP to match last year’s growth print of 3.8%, although that assumes world governments successfully manage risks posed by trade protectionism and record debt levels.

A good start to the year puts the U.S. economy firmly on track to grow about 2.8% in 2018, the best performance in years. Solid fundamentals suggests an acceleration of growth after Q1. A strong labour market, federal personal tax cuts, low interest rates, and easy access to credit are all positive for consumers. Solid profits, made even healthier by corporate tax cuts, will continue to lift business investment. But protectionist policies threaten to disrupt an otherwise promising economic outlook.

A weaker-than-expected start to the year prompts us to downgrade our 2018 forecast for Canadian GDP growth by three ticks to 2.2%. That assumes growth picks up in the second and third quarters as temporary factors which hurt Q1, turn into tailwinds. We have also pushed to July the timing of an expected interest rate hike from the Bank of Canada amidst a persistently dovish tone from a central bank that continues to fret about economic uncertainties while shrugging off a higher-than-target inflation rate.

Krishen Rangasamy 514-879-3140

Change fromPrevious Forecast

2017 2018 2019 2018 2019

United States

GDP 2.3% 2.8% 2.3% unch unch

CPI inf lation 2.1% 2.5% 2.3% unch unch

Fed Fund Target Rate* 1.50% 2.25% 3.00% unch unch

Ten-year bond yield* 2.40% 3.18% 3.47% +1 bp +9 bp

Canada

GDP 3.0% 2.2% 1.9% -0.3 pp +0.1 pp

CPI inf lation 1.6% 2.3% 2.1% unch unch

Overnight rate* 1.00% 1.75% 2.25% unch unch

Ten-year bond yield* 2.04% 2.63% 3.09% -5 bp +3 bp

* end of period

Monthly Economic Monitor

2

World: Fiscal boost The global economy continued to expand in the first quarter, albeit at a more moderate pace. The persistence of low inflation should limit the extent of monetary policy tightening by major central banks this year, while fiscal policy is also expected to remain stimulative in both advanced and emerging economies. As such, we expect world GDP to match last year’s growth print of 3.8%, although that assumes world governments successfully manage risks posed by trade protectionism and record debt levels. The world economy continued to expand in Q1, albeit at a slower pace. After reaching a multi-year high the prior month, Markit’s global composite purchasing managers index (PMI) fell back to 53.3 in March, the lowest since 2016, but still consistent with expansion. The good news is that expansion remains broadbased as evidenced by above-50 prints for major advanced and emerging economies.

The PMI’s are also consistent with hard data which suggest continued global expansion in Q1, albeit at a slower pace. Latest data from the CPB indeed points to a deceleration in world industrial output growth during the first quarter (+2.7% annualized based on results for the first two months of the year) as stronger growth in emerging markets (particularly Asia) was offset by a moderation in advanced economies (including the U.S. Japan, and the eurozone). While world industrial production expanded at a slower pace, global trade volumes moved up a gear, growing in Q1 at the fastest pace in years, and topping the former’s pace for the third consecutive quarter. So much so that, the ratio of world industrial production to global trade volumes, a proxy for world inventories, sank in Q1 to a 7-year low. That bodes well for restocking and hence production in subsequent quarters, although it’s also possible producers opt to delay inventory rebuilding until the ongoing wave of protectionist threats subside.

The strength observed in emerging economies during Q1 can be partly attributed to China’s resilient economy which seems to be having positive spillovers through Asia via supply chains. China’s real GDP reportedly grew 6.9% on a year-on-year basis during the first quarter and remains well on track to hit the government’s annual growth target of 6.5%. More importantly, Beijing seems to be succeeding in rebalancing its economy away from trade and investment ─ the share of consumption and government spending in overall growth was near all-time highs in Q1.

True, much of that is due to fiscal stimulus. But there is reason to be optimistic about China’s consumption growth as measures announced in the five-year plan continue to be implemented. For instance, Beijing’s promises to increase pensions and healthcare coverage should widen the safety net and encourage consumers to save less and spend more. There are already positive signs about domestic demand as evidenced by imports which are now growing faster than exports, something that also explains

50.5

51.0

51.5

52.0

52.5

53.0

53.5

54.0

54.5

55.0

2015 2016 2017 201848 50 52 54 56 58

India

Japan

Brazil

China

UK

Russia

WORLD

Italy

U.S.

Germany

Spain

France

World: Expansion but a slower pace

Index

NBF Economics and Strategy (data via Bloomberg)

Markit composite purchasing managers index for March 2018

Markit’s Global composite purchasing managers index

Mar.

Despite plunging in March, Markit’s composite PMI is

still consistent with continued expansion …

… in major developed

and emerging economies

Expansion

-4

-2

0

2

4

6

8

10

12

14

16

2010 2012 2014 2016 20180.988

0.992

0.996

1.000

1.004

1.008

1.012

1.016

1.020

2010 2012 2014 2016 2018

World: Inventories are relatively low

Q1** Assuming no change in March and no revisions in prior months NBF Economics and Strategy (data via CPB)

Q1*

Global trade volumes Ratio of world industrial production to global trade volumes

Trade volumes expanded

sharply in Q1 …

… leaving producers with lean inventories

q/q % chg. saar

5.2

5.6

6.0

6.4

6.8

7.2

7.6

8.0

8.4

8.8

2012 2013 2014 2015 2016 2017 2018-20

-10

0

10

20

30

40

50

60

70

80

2010 2011 2012 2013 2014 2015 2016 2017 2018

China: Stable y/y growth

NBF Economics and Strategy (data via Datastream)

%

Real GDP

q/q chg. saar

y/y chg.

Q1

Investment

Consumption& Government

%

Q1

Share of contribution to GDP growth

Trade


3

China’s declining trade surplus. All in all, the world’s second largest economy remains in good shape despite some downside risks (see further down) which for now are seemingly being managed well by Beijing. That bodes well for emerging Asia and the broader gobal economy.

Also positive for growth is the continuation of accommodative policies. True, monetary policy is being tightened in some parts of the world to reflect diminishing economic slack or output gaps. But even then, monetary policy is unlikely to become overly restrictive anytime soon. Inflation, while up recently in the OECD, remains low. Price pressures also remain low in emerging economies. Perhaps more importantly, expectations of inflation remain stable and at a low level in both the OECD and emerging economies. That certainly limits the ability of central bankers to tighten policy.

Moreover, fiscal policy may not be as tight as first thought. In its latest World Economic Outlook, the International Monetary Fund estimated advanced economies will see more fiscal stimulus in 2018 and 2019 than previously forecast. The IMF’s revised forecasts for changes in the

structural balance were partly due to the U.S. in light of tax cuts and increased spending from the Trump administration, although France, Germany and the UK were also deemed to have growth-oriented fiscal policy this year and next to a larger extent than what was expected back in October. Ditto for emerging economies whose fiscal policy is expected to be more stimulative than first thought especially in 2019.

That’s not to say the world economy is in the clear. Threatening to derail growth are major downside risks, including the significant amount of leverage in the global economy. China comes to mind as a major risk in that regard considering that economy’s high credit intensity. It now takes twice as much credit compared to pre-2007 to generate an additional unit of GDP in China. Credit intensity has also increased significantly elsewhere in emerging markets, including Malaysia, Turkey and Russia.

Blame low interest rates for too long for this problem. Of course, emerging economies are not the only ones feasting on cheap credit. The OECD has also indulged in leveraging for years. For instance, corporate bond issuance have generally tilted towards low-rated names. So much so that

-40

-30

-20

-10

0

10

20

30

40

50

60

70

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

China: Imports growing faster than exportsExports and imports


Q1

y/y % chg.

Imports

Exports

0.8

1.2

1.6

2.0

2.4

2.8

3.2

3.6

4.0

4.4

4.8

5.2

5.6

2016q1 2016q2 2016q3 2016q4 2017q1 2017q2 2017q3 2017q4 2018q10.8

1.2

1.6

2.0

2.4

2.8

3.2

3.6

4.0

4.4

4.8

5.2

5.6

2013 2014 2015 2016 2017 2018

World: Inflation remains mild

%

NBF Economics and Strategy (data via IMF)

Emerging

OECD

Core consumer price inflation, 3-month moving average annualized percentage change

Consumer price inflation expectation

Emerging

OECD

%

While core inflation has been rising in the OECD …

… inflation expectations have remained stable

-1.3

-1.2

-1.1

-1.0

-0.9

-0.8

-0.7

-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

2014 2015 2016 2017 2018 2019-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

0.6

2014 2015 2016 2017 2018 2019

World: Fiscal boost revised up for 2018-2019


%

Change in structural primary fiscal balance in advanced economies

%

Previous forecast

New forecast

Previous forecast

New forecast

Change in structural primary fiscal balance in emerging economies

0 50 100 150 200 250

Russia

Brazil

Turkey

India

Indonesia

Colombia

Malaysia

Mexico

China

2017

2007

World: Credit intensity has increased sharply over last decadeCredit to GDP ratio


%


4

the share of low-rated nonfinancial corporate bond issuance in total nonfinancial corporate bond issuance is now near multi-year highs in places such as the UK and the eurozone, and remains high in the U.S. In other words, the world economy could be in for a rough ride if there is a deleveraging process similar to the one seen during the Great recession of 2008-2009.

The rise of protectionism arguably remains the most pressing threat to global prosperity over the near to medium term. An increasingly inward-looking U.S. administration has moved beyond protectionist rhetoric and proposed tariffs on some imports, particularly from China. The latter has not surprisingly retaliated with tariffs of its own on imports of some U.S. goods should the U.S. government go ahead with its proposal. Should the current trade spat escalate into a full-blown trade war (one that covers most goods), global trade volumes will be curtailed. And if history is any guide, that would hurt world GDP growth. As such, investors will be hoping for some de-escalation of the situation sooner rather than later.

12

16

20

24

28

32

36

40

44

48

52

56

60

64

68

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018


%

Eurozone

U.S.

UK

Japan

OECD: Low-rated corporations dominate nonfinancial bond issuanceLow-rated nonfinancial corporate bond issuance as a share of total nonfinancial corporate bond issuance

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

-14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

@PC(TRADEVOLUMEWORLD)

SE

R0

1

World: Economic prosperity hinges on tradeGlobal real GDP versus World trade volumes

Trade volumes % chg.

NBF Economics and Strategy (data via IMF, CPB)

Rea

l GD

P %

ch

g.

2009

2001

20082016

2012

2015

2013 2014

2002

2017

20112003

2005

20072006 2004

2010

World Economic Outlook

Forecast

2017 2018 2019Advanced countries 2.3 2.4 2.1United States 2.3 2.8 2.3Euroland 2.3 2.4 1.9Japan 1.7 1.4 1.1UK 1.8 1.5 1.5Canada 3.0 2.2 1.9Australia 2.3 2.7 2.8New Zealand 3.0 2.8 2.7Hong Kong 3.8 3.2 2.7Korea 3.1 2.9 2.8Taiwan 2.8 2.7 2.5Singapore 3.6 3.2 2.8

Emerging Asia 6.5 6.4 6.4China 6.9 6.6 6.4India 6.7 7.4 7.6Indonesia 5.1 5.3 5.4Malaysia 5.9 5.4 5.2Philippines 6.7 6.6 6.5Thailand 3.9 4.0 3.7

Latin America 1.3 1.8 2.8Mexico 2.0 2.2 2.2Brazil 1.0 2.7 2.9Argentina 2.9 2.7 3.1Venezuela -14.0 -10.0 -2.1Colombia 1.8 3.4 3.5

Eastern Europe and CIS 3.8 3.2 2.9Russia 1.5 1.9 1.8Czech Rep. 4.3 3.5 3.0Poland 4.6 4.0 3.4Turkey 7.0 4.1 3.9

Middle East and N. Africa 2.2 3.2 3.6

Sub-Saharan Africa 2.9 3.4 3.7

Advanced economies 2.3 2.4 2.1Emerging economies 4.7 4.8 5.0World 3.7 3.8 3.8

Source: NBF Economics and Strategy


5

U.S.: Solid prospects for 2018 A good start to the year puts the U.S. economy firmly on track to grow about 2.8% in 2018, the best performance in years. Solid fundamentals suggests an acceleration of growth after Q1. A strong labour market, federal personal tax cuts, low interest rates, and easy access to credit are all positive for consumers. Solid profits, made even healthier by corporate tax cuts, will continue to lift business investment. But protectionist policies threaten to disrupt an otherwise promising economic outlook. The U.S. economy started 2018 rather well according to the Bureau of Economic Analysis (BEA), the latter showing a consensus-topping 2.3% annualized print for Q1 real GDP growth. Part of the upside surprise was due to trade which contributed to growth despite monthly reports suggesting otherwise. Domestic demand also contributed thanks to business investment, government and consumption, although the latter’s growth softened significantly as Americans opted to save more ─ the savings rate rose half a percentage point to 3.1% in the first quarter. Nominal GDP rose a solid 4.4%, the fourth consecutive quarter of above 4% growth. All in all, the good start to the year puts the U.S. economy firmly on track to grow about 2.8% in 2018, the best performance in years. That should close the output gap this year (based on the Congressional Budget Office’s estimates of potential GDP) and hence allow for more sustained upward inflation pressures.

Economic fundamentals remain strong and policy highly stimulative, which should assist growth going forward. Credit continues to grow at a healthy pace. An apparent moderation in business credit growth (particularly commercial and industrial loans) is seemingly being more than offset by higher growth for consumer and residential loans.

Don’t read too much into the moderation in business loan growth. Firms may be finding it cheaper to tap financial markets directly instead of relying on banks (see World section). More importantly, the moderation in loan growth is not reflective of business confidence, the latter in fact still near multi-year highs largely due to tax cuts dished out earlier this year by Congress. Flush with cash courtesy of solid after-tax profits, repatriated dollars, and access to cheap financing, firms are likely to increase investment spending further this year, although we’re cognizant of risks the windfall may be used instead on stock buybacks.

Despite the Q1 blip, the outlook for consumption spending, which accounts for nearly 70% of U.S. GDP, remains positive. Consumer confidence is high, no doubt thanks to support from federal personal income tax cuts, still-low interest rates, easy access to credit, and of course a buoyant labour market. For the second consecutive quarter, non-farm payrolls reportedly rose more than 600,000 in Q1.

-1

0

1

2

3

4

5

6

7

8

2014 2015 2016 2017 2018

U.S.: Economy grew 2.3% in the first quarter of 2018


q/q % chg. saar

Real and Nominal GDP Contributions to real GDP

Nominal GDP

Real GDP

Q1

2018Q1 2017Q4

GDP 2.3 2.9

Consumption 0.7 2.8

Business investm. Equip./Intell. 0.4 0.7

Business investm. Struct. 0.3 0.2

Residential investm. 0.0 0.5

Government 0.2 0.5

Domestic Demand 1.7 4.6

Exports 0.6 0.8

Imports -0.4 -2.0

Trade 0.2 -1.2

Final sales 1.9 3.4

Inventories 0.4 -0.5

0

1

2

3

4

5

6

7

8

9

10

11

12

13

2015 2016 2017 2018

U.S.: Credit still growing at healthy paceLoans and leases

y/y % chg.

NBF Economics and Strategy (data via Federal Reserve)

Commercial& Industrial

TOTAL

Residential real estate

Commercial real estate

Consumer loans

Q1

80

82

84

86

88

90

92

94

96

98

100

102

104

106

108

2005 2010 201512

14

16

18

20

22

24

26

28

2005 2010 2015

U.S.: Business confidence remained strong in Q1

% of NFIB respondents who think taxes are the single most important problem

NFIB small business optimism index at the end

%


2018Q1

2018Q1

Strong confidence for small businesses …

… fueled largely by tax cuts


6

But the jobless rate has failed to break below 4.1% due to a rising participation rate, the latter boosted by prime-age workers who now seem to be rejoining the labour force. That’s good news for spending, particularly on durable goods and housing.

But not all is rosy in the U.S. The favourable near to medium term growth outlook has been made possible by borrowing from longer term growth courtesy of ill-timed fiscal stimulus from Congress. As we’ve pointed out before, fiscal multipliers tend to be small when the economy is at capacity. So, while growth rewards of fiscal stimulus are small and temporary, the budget deficit it creates could be large and permanent. According to the Congressional Budget Office’s latest estimates, the U.S. budget deficit will be over US$1 trillion by 2020, or more than 5% of GDP. Those fiscal projections would be even more dire should expiring policies be extended to soothe beneficiaries or if there is a recession.

When Washington eventually addresses this unsustainable fiscal stance via spending cuts and tax hikes, perhaps after the 2020 elections, economic growth is likely to slow down sharply. That’s not to say all is clear over the near term. It’s always possible a fickle Congress will alter its fiscal stance sooner.

Protectionist measures from the Trump administration could also wreck the mood of businesses and consumers alike, with devastating consequences. Higher prices for imported goods (due to tariffs) may hurt consumers, while jobs in the export sector could be at risk if trade partners impose retaliatory measures. The impact on the corporate bottom line should also not be underestimated, especially considering a larger share of profits now comes from abroad. Recall that last year, growth in corporate profits was driven primarily by the “rest-of-the-world” component which again outperformed domestic profits. That allowed the rest-of-the-world component to increase its share of overall U.S. corporate profits to a four-year high of 20% in 2017.

Policy error should also not be excluded as a growth-busting possibility. Buoyed by solid economic activity and its confidence it will hit its 2% inflation target, the Federal Reserve is focused on monetary policy tightening. One can only hope that amidst Fed over-exuberance, the U.S. yield curve does not invert ─ in the past an inverted yield curve has often preceded recessions. Recall that the yield spread between 10-year and 2-year Treasuries is now less than 50 basis points, the tightest in over a decade.

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

3

4

5

6

7

8

9

10

2000 2005 2010 201562

63

64

65

66

67

68

80.5

81.0

81.5

82.0

82.5

83.0

83.5

84.0

84.5

2000 2005 2010 2015

U.S.: Another strong quarter of employment creation

Participation rateNon-farm payrolls and Jobless rate

%


%

Prime-age workers, i.e 25-54 years (R)

All workers (L)

2018Q1

%

2018Q1

q/q chg. thousands

Jobless rate (R)

Employment (L)

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

1985 1990 1995 2000 2005 2010 2015 2020 2025

CBO expects deficit to deteriorate sharply, even assuming no recessionU.S. budget balance

% of GDP

NBF Economics and Strategy (data via Congressional Budget Office)

Shaded areas are U.S. recessions

CBO forecasts

-4

-2

0

2

4

6

8

10

12

2010 2011 2012 2013 2014 2015 2016 201718.0

18.5

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

23.0

23.5

2010 2011 2012 2013 2014 2015 2016 2017

U.S.: Increasing share of corporate profits coming from abroad

Share of overall corporate profits attributed to rest-of-the-world component

Corporate profits from rest-of-the-world component

y/y % chg. %

NBF Economics and Strategy (data via Bureau of Economic Analysis)

Thanks to the best performance in seven years …

… foreign operations have increased their share of

overall U.S. corporate profits

-0.8

-0.4

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

3.2

1990 1995 2000 2005 2010 2015

U.S.: Yield curve flattest in more than a decade10-yr Treasury yield minus 2-yr Treasury yield


%

Shaded areas are U.S. recessions


7

Canada: 2018 downgrade A weaker-than-expected start to the year prompts us to downgrade our 2018 forecast for Canadian GDP growth by three ticks to 2.2%. That assumes growth picks up in the second and third quarters as temporary factors which hurt Q1, turn into tailwinds. We have also pushed to July the timing of an expected interest rate hike from the Bank of Canada amidst a persistently dovish tone from a central bank that continues to fret about economic uncertainties while shrugging off a higher-than-target inflation rate. Growth seems to have remained soft in the first quarter of 2018, with a third consecutive sub-2% print. While February output grew a decent 0.4% (thanks to contributions from both goods and services), the prior month’s weakness makes it difficult to have a stronger-than-2% first quarter growth, even assuming a good month of March.

There were strong headwinds hitting the economy during Q1. Some of those, including plant shutdowns in the auto sector and disruptions to pipeline operations in the energy sector, temporarily restrained goods sector output and exports, and should reverse and turn into tailwinds later in the year. But other headwinds that hurt Q1 may persist for longer. Take NAFTA renegotiations for example. While there have been positive signals from trade negotiators, a formal agreement remains elusive. Related uncertainties seem to be trumping the improved profit outlook of corporations and hence restraining overall business investment outlays. The housing market’s Q1 woes could also have more lasting impacts. Recall that home sales sank to multi-year lows in places such as Toronto. Resale prices in Canada’s largest city have accordingly dropped about 7% since last summer, the worst slump since the recession of 2009. The impact of negative wealth effects on consumption (which accounts for roughly 60% of GDP) should not be underestimated, more so after the sharp moderation in spending observed in Q1.

On net, we expect tailwinds to lift the economy and allow Canada’s growth to accelerate in the second and third quarters. But that will not fully compensate for the poor start to the year, which is why we are revising down our 2018 Canadian GDP growth forecast by three ticks to 2.2%. Like us, the IMF and Bank of Canada lowered their 2018 forecasts in light of the weak start to the year. While the central bank acknowledged the economy is near capacity, it left monetary policy unchanged in April on account of the slow start to the year and ongoing uncertainties with regards to trade and investment. We have accordingly pushed to July the timing of the next expected interest rate hike from the Bank of Canada (see May’s edition of the Monthly Fixed Income Monitor). But comes a point, the Bank of Canada will have to ditch its dovish language, even if that means the Canadian dollar appreciates a bit, and assume its responsibilities as an inflation-targeting central bank. To be sure, there are more than just temporary factors pushing up prices. For months, core prices have been on the rise, reflecting the erosion of economic slack. Note that the consumer price index excluding food and energy grew 2.9% in March on a six-month annualized basis, the highest in 15 years.

1.2

1.6

2.0

2.4

2.8

3.2

3.6

4.0

4.4

4.8

5.2

2017q1 2017q2 2017q3 2017q4 2018q1

Canada: Economic growth likely soft again in Q1Real GDP by industry

q/q % chg. saar

NBF Economics and Strategy (data via Statistics Canada)

-0.1%

+0.1%flat

Assume March m/m

chg.:

+0.2%

-3

-2

-1

0

1

2

3

4

5,5006,0006,5007,0007,5008,0008,5009,0009,50010,00010,500

2015 2016 2017 2018

Number of homes soldAverage sales from May 2015 to April 2017

Average sales from May 2017 to March 2018

%m/m

NBF Economics and Strategy (data from Teranet National Bank House Price Index, CREA and TREB data seasonally adjusted by NBF)

Canada: Toronto house prices sank following Non-Resident Spec. TaxSeasonally adjusted monthly home sales and House Price Index monthly change

Teranet-National Bank HPI

-0.4

0.0

0.4

0.8

1.2

1.6

2.0

2.4

2.8

3.2

3.6

2004 2006 2008 2010 2012 2014 2016 2018

Canada: Excluding food and energy, inflation highest in 15 years Ex-food/energy CPI, 6-month annualized chg.

%


Mar.

Highest since February 2003


8

Despite the rough start to the year, the outlook remains positive, at least according to the Bank of Canada’s own Business Outlook Survey whose aggregate indicator fell slightly in Q1 but was nonetheless the third highest since 2011 (topped only by Q2 and Q4 last year). While concerned about protectionism, firms still expect sales growth to accelerate over the next year, sentiment reinforced by improved foreign orders. A significant 47% of respondents still had some or significant difficulties in meeting an unexpected increase in demand, and roughly a quarter of respondents said they faced labour shortages. The majority of respondents still expect to increase employment and investment over the next 12 months, not surprising in light of capacity and labour pressures.

As such, we don’t believe the Q1 employment slump (-40K in total or -69K in the private sector) is the start of a concerning trend. Note that despite the first quarter’s challenges in the labour market, hourly earnings still managed to grow 3.2% on a year-on-year basis in Q1, the fastest since 2015. The tilt towards full-time positions clearly helped in that regard, something that adds to evidence that Canada’s labour market remains in good shape.

Another reason why we remain positive on employment prospects is the improved efficiency of the labour market.

The Beveridge curve, the relationship between the jobless rate and the job vacancy rate ─ the number of job vacancies as a share of the sum of all occupied and vacant jobs ─, is indeed moving closer to the origin. Recall that the jobless rate has managed to fall by half a percentage point since 2017Q2, even with an unchanged job vacancy rate. The country’s largest provinces are seeing a similar phenomenon. In other words, workers are finding jobs without needing a higher vacancy rate, a sign that labour market mismatches are diminishing.

Employment creation will not top last year’s blistering pace, but will still provide support to consumption and housing, both of which are nonetheless expected to soften somewhat in 2018 after years of unsustainable debt-fuelled growth. We are still counting on fiscal stimulus to provide a lift to domestic demand as pre-election handouts in Quebec and Ontario complement an expected uptick in infrastructure spending at the federal level. Trade is likely to remain a drag on growth again this year as Canadian exporters of non-energy goods continue to struggle amidst competitiveness challenges. But we continue to expect a turnaround in 2019 as exporters are better able to exploit opportunities brought by a revamped NAFTA, and other trade agreements including CETA and CPTPP.

-40

-30

-20

-10

0

10

20

30

40

50

60

2005 2010 2015-8

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

2005 2010 2015

Balance of opinion on employment and investment intentions, i.e. percentage of firms expecting higher minus the percentage expecting lower

Business Outlook Survey indicator

NBF Economics and Strategy (data via Bank of Canada)

Investment

Employment

Canada: Businesses still keen to hire and invest

%Business sentiment remains positive …

2018Q1

2018Q1

… and that’s reflected in still-high intentions

to hire and invest

80.2

80.4

80.6

80.8

81.0

81.2

81.4

81.6

81.8

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Canada: Wages heat up as share of full-time employment surgesFull-time share of total employment versus Average hourly wage rate of employees

%


y/y % chg.

Hourlyearnings (R)

Full-time positions as a shareof total employment (L)

Q1

1.4

1.6

1.8

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6 4.8 5.0 5.2 5.4 5.6 5.8 6.0 6.2 6.4 6.6 6.8 7.0 7.2 7.4 7.6 7.8 8.0 8.2 8.4 8.6 8.8

Canada: Is the labour market becoming more efficient?


Unemployment rate (%)

AB

BC

QC

ON

17Q4

17Q4

17Q4

17Q4

2.0

2.1

2.2

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

5.9 6.0 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8 6.9 7.0 7.1 7.2

SER10

SE

R0

9

17Q4

Unemployment rate (%)

Job

vac

ancy

ra

te (

%)

Canada: Jobless rate versus Job vacancy rate Four largest provinces: Jobless rate versus Job vacancy rate

17Q3 17Q2 15Q2

15Q1

17Q1

15Q3 16Q3

16Q2

16Q4

15Q4

16Q1

Jo

b v

aca

nc

y ra

te (

%)

17Q2

17Q2

17Q2

17Q2

60

70

80

90

100

110

120

130

140

150

160

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Canada: Exports of non-energy goods have stagnated over last four yearsReal exports of goods

Index=100 in April 2007


Energy

TOTAL

Non-energy


9

Q4/Q4(Annual % change)* 2015 2016 2017 2018 2019 2006 2017 2018 2019

Gross domestic product (2009 $) 2.9 1.5 2.3 2.8 2.3 2.6 2.8 2.1Consumption 3.6 2.7 2.8 2.5 2.1 2.8 2.2 2.0Residential construction 10.2 5.5 1.8 1.9 1.8 2.6 1.5 2.0Business investment 2.3 (0.6) 4.7 5.3 3.0 6.3 4.6 2.0Government expenditures 1.4 0.8 0.1 1.8 2.1 0.7 2.0 2.0Exports 0.4 (0.3) 3.4 3.9 1.2 5.0 2.7 1.0Imports 5.0 1.3 4.0 3.7 1.4 4.7 1.9 1.2Change in inventories (bil. $) 100.5 33.4 15.2 32.3 30.3 15.6 31.6 29.6Domestic demand 3.3 2.1 2.5 2.7 2.2 2.9 2.5 2.0

Real disposable income 4.2 1.4 1.2 2.0 1.7 1.8 2.1 1.7Household employment 1.7 1.7 1.3 1.5 1.1 1.2 1.6 1.0Unemployment rate 5.3 4.9 4.4 3.9 3.7 4.1 3.7 3.6Inflation 0.1 1.3 2.1 2.5 2.3 2.1 2.5 2.4Before-tax profits (1.1) (2.1) 4.4 7.5 5.6 2.7 8.0 4.5Federal balance (unified budget, bil. $) (438.0) (586.0) (666.0) (800.0) (1,200.0) ... ... ...Current account (bil. $) (434.6) (451.7) (466.2) (497.5) (510.0) ... ... ...

-304

* or as noted

Current Q4 2017 Q4 2018 Q4 20194-30-18 Q2 2018 Q3 2018 Q4 2018 Q1 2019 2017 2018 2019

Fed Fund Target Rate 1.75 2.00 2.25 2.25 2.50 1.50 2.25 3.00 3 month Treasury bills 1.84 1.91 2.13 2.08 2.25 1.37 2.08 2.83 Treasury yield curve 2-Year 2.49 2.55 2.68 2.77 2.89 1.89 2.77 3.20 5-Year 2.79 2.88 2.95 3.03 3.09 2.20 3.03 3.32 10-Year 2.95 3.03 3.07 3.18 3.29 2.40 3.18 3.47 30-Year 3.11 3.18 3.20 3.30 3.40 2.74 3.30 3.55 Exchange rates U.S.$/Euro 1.21 1.22 1.25 1.26 1.28 1.20 1.26 1.27 YEN/U.S.$ 109 110 110 111 112 113 111 108

** end of period

Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019actual actual actual actual forecast forecast forecast forecast

Real GDP growth (q/q % chg. saar) 3.1 3.2 2.9 2.3 3.2 3.1 2.4 1.8CPI (y/y % chg.) 1.9 2.0 2.1 2.3 2.7 2.7 2.5 2.2CPI ex. food and energy (y/y % chg.) 1.8 1.7 1.7 1.9 2.3 2.5 2.5 2.4Unemployment rate (%) 4.3 4.3 4.1 4.1 4.0 3.8 3.7 3.7

National Bank Financial

Financial Forecast**

Quarterly pattern

United StatesEconomic Forecast


10

Q4/Q4(Annual % change)* 2015 2016 2017 2018 2019 2017 2018 2019

Gross domestic product (2007 $) 1.0 1.4 3.0 2.2 1.9 2.9 2.4 1.6Consumption 2.1 2.4 3.5 2.6 1.9 3.5 2.3 1.6Residential construction 3.8 3.3 3.1 1.5 (3.0) 4.7 (1.8) (3.0)Business investment (11.3) (9.4) 2.6 3.4 2.5 8.8 0.4 4.2Government expenditures 1.4 2.7 2.5 3.0 2.2 3.1 2.5 2.0Exports 3.5 1.0 1.0 0.9 3.3 0.2 3.0 2.7Imports 0.7 (1.0) 3.6 1.2 2.2 6.6 (0.0) 2.7Change in inventories (millions $) 4,711 978 13,725 2,095 731 13,807 -1,581 902Domestic demand 0.3 1.1 3.0 2.7 1.6 4.0 1.8 1.6

Real disposable income 3.5 1.3 3.7 2.7 1.6 3.4 1.7 1.5Employment 0.9 0.7 1.9 1.3 0.9 2.1 0.9 0.8Unemployment rate 6.9 7.0 6.3 5.6 5.5 6.0 5.5 5.5Inflation 1.1 1.4 1.6 2.3 2.1 1.8 2.2 2.4Before-tax profits (19.8) (1.9) 20.2 7.0 5.6 8.9 7.7 5.0Current account (bil. $) (71.5) (65.4) (63.9) (55.4) (42.4) .... .... ....

* or as noted

Current Q4 2017 Q4 2018 Q4 20194-30-18 Q2 2018 Q3 2018 Q4 2018 Q1 2019 2017 2018 2019

Overnight rate 1.25 1.25 1.50 1.75 2.00 1.00 1.75 2.25 3 month T-Bills 1.20 1.43 1.65 1.88 1.96 1.06 1.88 2.21 Treasury yield curve 2-Year 1.89 1.99 2.11 2.17 2.32 1.69 2.17 2.55 5-Year 2.12 2.25 2.30 2.35 2.50 1.87 2.35 2.78 10-Year 2.37 2.42 2.54 2.63 2.82 2.04 2.63 3.09 30-Year 2.40 2.53 2.63 2.70 2.89 2.26 2.70 3.14

CAD per USD 1.28 1.27 1.23 1.21 1.20 1.25 1.21 1.22 Oil price (WTI), U.S.$ 69 65 65 66 68 60 66 66

** end of period

Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019actual actual actual forecast forecast forecast forecast forecast

Real GDP growth (q/q % chg. saar) 4.4 1.5 1.7 1.5 2.6 3.1 2.2 1.6CPI (y/y % chg.) 1.3 1.4 1.8 2.1 2.5 2.6 2.2 1.7CPI ex. food and energy (y/y % chg.) 1.4 1.4 1.6 1.8 2.0 2.1 2.2 1.9Unemployment rate (%) 6.5 6.2 6.0 5.8 5.6 5.5 5.5 5.5

National Bank Financial

Quarterly pattern

CanadaEconomic Forecast

Financial Forecast**


11

Provincial economic forecast

2015 2016 2017e 2018f 2019f 2015 2016 2017e 2018f 2019f

Real GDP (% growth) Nominal GDP (% growth)

Newfoundland & Labrador -1.7 1.9 -2.0 1.5 3.5 -11.5 2.6 4.5 7.6 4.1Prince Edward Island 1.3 2.3 2.0 1.9 1.5 3.9 4.0 4.2 4.0 4.1Nova Scotia 1.4 0.8 1.2 1.1 1.0 2.1 2.8 2.9 3.7 3.1New Brunswick 2.4 1.2 1.2 1.2 1.3 2.0 3.6 4.8 4.7 3.7Quebec 1.0 1.4 3.1 2.2 1.8 2.4 2.7 5.3 4.0 3.5Ontario 2.9 2.6 2.7 2.3 1.8 5.0 4.3 4.5 4.5 3.9Manitoba 1.3 2.2 2.6 2.0 1.5 3.3 2.3 4.7 4.7 3.6Saskatchewan -1.0 -0.5 2.2 1.5 2.5 -5.4 -4.0 5.9 6.0 4.3Alberta -3.7 -3.7 4.2 2.6 1.9 -12.0 -4.9 7.2 5.1 3.4British Columbia 3.5 3.5 3.2 2.4 2.0 4.0 4.8 6.5 5.1 3.8Canada 1.0 1.4 3.0 2.2 1.9 0.2 2.0 5.3 4.7 3.7

Employment (% growth) Unemployment rate (%)

Newfoundland & Labrador -1.0 -1.5 -3.7 -0.2 -0.5 12.8 13.4 14.8 13.9 13.7Prince Edward Island -1.1 -2.3 3.1 2.4 0.7 10.4 10.7 9.8 8.4 8.2Nova Scotia 0.1 -0.4 0.6 1.4 0.2 8.6 8.3 8.4 7.7 7.3New Brunswick -0.6 -0.1 0.4 0.9 -0.3 9.8 9.5 8.1 7.6 8.1Quebec 0.9 0.9 2.3 1.2 0.7 7.6 7.1 6.1 5.3 5.1Ontario 0.7 1.1 1.8 1.6 1.0 6.8 6.5 6.0 5.4 5.4Manitoba 1.5 -0.4 1.6 0.8 0.4 5.6 6.1 5.4 5.2 5.0Saskatchewan 0.5 -0.9 0.0 0.3 0.7 5.0 6.3 6.3 5.7 5.5Alberta 1.2 -1.6 1.1 1.6 1.2 6.0 8.1 7.8 6.2 5.8British Columbia 1.2 3.2 3.7 1.3 1.3 6.2 6.0 5.1 4.7 4.7Canada 0.8 0.7 1.9 1.3 0.9 6.9 7.0 6.3 5.6 5.5

Housing starts (000) Consumer Price Index (% growth)Newfoundland & Labrador 1.7 1.4 1.4 1.7 1.3 0.4 2.7 2.3 2.3 2.2Prince Edward Island 0.6 0.6 0.9 0.8 0.7 -0.6 1.2 1.8 2.3 2.0Nova Scotia 3.8 3.8 4.0 3.8 3.4 0.4 1.2 1.1 2.2 2.1New Brunswick 2.0 1.8 2.3 1.7 1.6 0.5 2.2 2.3 2.3 2.0Quebec 37.9 38.9 46.5 44.8 40.0 1.1 0.7 1.1 2.1 1.8Ontario 70.2 75.0 79.0 78.3 69.0 1.2 1.8 1.7 2.8 2.4Manitoba 5.5 5.3 7.5 5.5 5.0 1.2 1.3 1.6 2.7 2.0Saskatchewan 5.1 4.8 4.9 4.7 4.0 1.6 1.1 1.7 2.6 2.0Alberta 37.3 24.5 29.5 25.2 24.0 1.1 1.1 1.5 2.3 2.2British Columbia 31.4 41.8 43.7 42.5 35.0 1.1 1.8 2.1 2.2 2.2Canada 195.5 197.9 219.7 209.0 184.0 1.1 1.4 1.6 2.3 2.1

e: estimate f: forecastHistorical data from Statistics Canada and CMHC, National Bank of Canada's forecast.


Economics and Strategy

Montreal Office Toronto Office 514-879-2529 416-869-8598

Stéfane Marion Marc Pinsonneault Kyle Dahms Warren Lovely Chief Economist and Strategist Senior Economist Economist MD, Public Sector Research and Strategy [email protected] [email protected] [email protected] [email protected]

Paul-André Pinsonnault Matthieu Arseneau Jocelyn Paquet Senior Fixed Income Economist Senior Economist Economist [email protected] [email protected] [email protected]

Krishen Rangasamy Angelo Katsoras Senior Economist Geopolitical Analyst [email protected] [email protected]

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