Moving forward in an uncertain world The economic outlook for Canada and Newfoundland and Labrador...

Moving forward in an uncertain world

The economic outlook for Canada and Newfoundland and Labrador

RBC ECONOMICS I RESEARCH

Robert HogueSenior [email protected]

Professional Engineers and Geoscientists Newfoundland and LabradorGanderJune 8, 2012

2ECONOMICS I RESEARCH

Economic indicators point to slow growth, not to an absolute decline

Another global recession is not upon us

-8

-6

-4

-2

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

35

40

45

50

55

60

65

% change year-over-year

OECD total GDP vs. Global PMI: composite output

Q2-2012 is quarter-to-date

Source: OECD, J P Morgan, RBC Economics Research

SA, >50 = Expansion

Total GDP (LHS)

Global PMI (RHS)


IMF projects 3.5% in 2012 vs. 3.7% average since 2000

Close to average global growth to continue this year

-2

-1

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Year-over-year % changeWorld GDP growth

Source: International Monetary Fund, RBC Economics Research

IMF Forecast


Contrast persists: emerging (≈6%) vs. advanced (1-2%) economies

China and other fast-growing economies carry the load

year-over-year % change

World GDP growth forecasts

Source: International Monetary Fund, RBC Emerging Markets Research, RBC Economics Research

2011a2012f2013f

2.62.5 2.6

Canada

3.0

1.72.5

United States

1.31.5

-0.1

Eurozone

1.80.80.8

United Kingdom

8.59.2 8.4

China

4.02.9 3.3

Brazil


Driven by faster-growing China et al. and recovering U.S. economy

Global demand for natural resources still generally solid…

0

20

40

60

80

100

120

140

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: RBC Economics Research

Index, J anuary 2008 = 100, monthly averageRBC Commodity Price Index

RBC Commodity Price Index

Excluding energy


With some exceptions, commodity prices are likely to stay elevated

… and will keep commodity prices at profitable levels

20

40

60

80

100

120

140

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

100

Source: Wall Street J ournal, Haver Analytics, RBC Economics Research

102

US$/ barrelCrude oil prices WTI


Yet, economy still quite vulnerable to negative shocks

U.S. growth on an gradually accelerating path

-10

-8

-6

-4

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Bureau of Economic Analysis, RBC Economics Research

U.S. real GDPQuarter-over-quarter annualized % change Forecasted Values:

Annual Growth Rates

2012f

2.5

2011

1.7

2010

3.0

2009

-3.5Real GDP

2013f

3.0


The Fed expected to leave its rate unchanged until 2014

U.S. monetary policy extremely stimulative

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Federal Reserve, RBC Economics Research

%

Forecast

Interest rates: U.S.

10 Year Bond Yield

Fed Funds Rate


We assume that some of the tax cuts set to expire will be prolonged

U.S. outlook contingent on the extension of fiscal measures…

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2009 2010 2011 2012 2013

Budget Control ActPayroll Tax Cuts2010 Tax PackageARRA Impact

Annual PPTFiscal assumptions contribution to GDP: U.S.

Source: Bureau of Economics Analysis, Macroeconomic Advisers, RBC Economics Research


Weather muddied the employment picture so far this year

…and stronger job creation

-1000

-800

-600

-400

-200

200

400

600

2007 2008 2009 2010 2011 2012

Monthly change (SA, Thousands)Nonfarm payroll employment in the United States

Source: Bureau of Labor Statistics, RBC Economics Research


Financing is becoming increasingly available

The U.S. credit mechanism is functioning better

-4

-2

0

2

4

6

8

10

12

14

16

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% change, year-over-year

U.S. household and business credit

Source: Federal Reserve Board, RBC Economics Research

Non-financial business credit

Household credit


Significant motor vehicle replacement cycle at play

U.S. consumers will bring it up a (small) notch

-6

-4

-2

2

4

6

2008 2009 2010 2011 2012 2013

Current

Past 3 recession average pace

Quarter-over-quarter % changeConsumer expenditures: U.S.

Source: Bureau of Economics Analysis, RBC Economics Research Forecasted values:


Facing intense competition and striving to enhance productivity

U.S. businesses will boost their capital investment

200

400

600

800

1000

1200

1400

1600

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

SAAR, Billions of chained 2005 $Nonresidential investment: U.S.

Source: Bureau of Labor Statistics, RBC Economics Research

Equipment and Software

Structures

Forecast


Slower-than-expected start to the year but pace will improve

Growth in Canada in 2012 will be little changed from 2011…

-8

-6

-4

-2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013

Canada's real GDP Quarter-over-quarter % change, annualized rate Forecasted values:

Annual Growth Rates2012f

2.6

2011

2.5

2010

3.2

2009

-2.8Real GDP

2013f

2.6

Source: Statistics Canada, RBC Economics Research


The biggest difference will be a turnaround in external trade

…but its composition will differ

-1

1

2

Consumer

spending

Government

spending

Residential

investment

Non-res.

investment

Net trade Inventories

2011 2012


Percentage points Canadian real GDP growth composition


Pick-up in E&S investment, industrial production, auto sector will be key

External trade will benefit from stronger U.S. demand

70

80

90

100

110

120

130

140

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

BoC U.S. Activity Index

Canada Exports

Index 2009=100

Canadian Exports and U.S. Activity

Forecast

Source: Statistics Canada, Bureau of Economics Analysis, Bank of Canada, RBC Economics Research


This provides a huge lift to incomes in our country

Canada enjoys favourable terms of trade…

95

100

105

110

115

120

125

130

135

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011Source: Statistics Canada, RBC Economics Research

SAAR, 2002=100Terms of trade: Canada


Although Canadians will show more restraint than pre-recession

…and this lends continued support to consumers…

-4

-2

2

4

6

8

10

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Quarterly % change at annualized rateConsumer expenditures in Canada

Forecast

Annual Growth Rates

2012f

2.0

2011

2.4

2010

3.3

2009

0.4

2013f

2.4


At the very least, accumulation of debt will slow

…although heavy debt loads will beg increased prudence

60

80

100

120

140

160

180

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Source: Statistics Canada, Bureau of Economic Analysis, RBC Economics Research

Credit market debt as a % of personal disposable incomeHousehold debt-to-income ratio

Canada

U.S.


No crash in view, however

Canada’s housing market will show some moderation

460470

0

100

200

300

400

500

600

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Source: Canadian Real Estate Association, RBC Economics Research

Thousands of unitsHome resales: Canada

Forecasted values:


Spending boom in the resource sector

Business investment still a key driver of activity

-50

-40

-30

-20

-10

10

20

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

% changeNon-residential investment in Canada

Forecast

Annual Growth Rates2012f

6.1

2011

13.1

2010

7.3

2009

-20.8

2013f

7.2



Stimulus is over; now comes the drag from the Action Plan

Fiscal policy will be restrictive as governments fight deficits

-1.0

-0.5

0.0

0.5

1.0

1.5

2009 2010 2011 2012 2013

Annual PPTsImpact of Economic Action Plan on Canadian GDP growth



We expect the output gap to close early next year

Bank of Canada will start raising rate late this year…

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Bank of Canada, RBC Economics Research

%

Forecast

Interest rates in Canada

10 Year Bond Yield

BoC Overnight Rate


BoC’s move will precede the Fed by more than a year

…pressuring short-term spreads with U.S. rates upwards…

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Canada 3-month T-Bill yield - U.S. 3-month T-Bill yield

Canadian/U.S. 3-month T-Bill spread

Forecast

Source: Bank of Canada, Federal Reserve, RBC Economics Research


Substantial near-term volatility as investor risk appetite fluctuates

…and eventually the C$ higher

0.60

0.70

0.80

0.90

1.00

1.10

19951996 1997 1998 1999 2000 20012002 2003 2004 2005 2006 20072008 2009 2010 2011 2012 2013

Forecast

Source: Bank of Canada, RBC Economics Research

Parity

Canadian dollar forecastUS$/ C$

End of period rates

2013f

1.04

2012f

1.02

2011

0.98

2010

1.00US$/C$


Newfoundland and Labrador ‘reloading’ this year

Western Provinces benefiting from the commodities boom

1 2 3 4 5

N.S.

N.B.

QUE.

P.E.I

N.& L.

ONT.

CANADA

B.C.

MAN.

SASK.

ALTA.


% change

Real GDP growth in 2012


Outpaced the national average in the past two years

Newfoundland and Labrador economy in growth mode

-15

-10

-5

5

10

15

20

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

% changeReal GDP growth in Newfoundland and Labrador


Newfoundland and Labrador

Canada


Mining and oil and gas extraction accounts for half of provincial GDP

Performance heavily depends on resource production

Mining/ oil & gas extraction

Utilities

Construction

Manufacturing

Wholesale/ retail

Transportation

Finance

Personal services

Public administration

Other services

% share of GDP, 2008Composition of Newfoundland and Labrador economy



Maintenance shutdowns at Terra Nova and White Rose

Lower offshore oil production to slow things down this year…

0

1

2

3

4

5

6

7

8

9

10

J an-11 Mar-11 May-11 J ul-11 Sep-11 Nov-11 J an-12 Mar-12 May-12 J ul-12 Sep-12 Nov-12

Barrels per month, millionsN.& L. oil production

NEB Forecast

Source: Canada-Newfoundland and Labrador Offshore Petroleum Board, National Energy Board, RBC Economics Research


Strong increase in iron ore output

…but mineral production will kick into higher gear

1

2

3

4

5

6

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011e2012f

Billion $Gross value of mineral shipments in Newfoundland & Labrador

Source: N&L Department of Natural Resources, RBC Economics Research


Will support consumer spending and housing

Employment is on an upswing in the province

190

195

200

205

210

215

220

225

230

235

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012


Thousands, SAEmployment: Newfoundland & Labrador


Record spending projected this year

Capital investment a catalyst of activity in N&L

7.6*

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Billions of dollars

Non-residential capital investment: Newfoundland & Labrador

*Intentions



Better economic prospects should retain and attract workers

Demographic situation on an improving trend

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

% changePopulation growth in Newfoundland and Labrador



Disclaimer

The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authorization of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities.

®Registered trademark of Royal Bank of Canada.©Royal Bank of Canada.

Moving forward in an uncertain world The economic outlook for Canada and Newfoundland and Labrador...

Documents

Transcript of Moving forward in an uncertain world The economic outlook for Canada and Newfoundland and Labrador...