Canadian economic outlook: Resilience to be tested (again) in 2020
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ECONOMICS I RESEARCH Canadian economic outlook: Resilience to be tested (again) in 2020 Burlington Chamber Economic Forecast December 3, 2019 Josh Nye | Senior Economist | (416) 974-3979 | josh.nye@rbc.com Visit our website: http://www.rbc.com/economics/
The global economy lost momentum in 2019, particularly in the
industrial sector
Global trade and industrial production
year-over-year % change
6%
5% Global trade volumes
Global industrial production
4%
3%
2%
1%
0%
-1%
-2%
2012 2013 2014 2015 2016 2017 2018 2019
Source: Netherlands Bureau for Economic Policy Analysis, RBC Economics
• Global trade is contracting for the first time since 2008-09 (unusual outside of a recession)
• Global GDP growth is slowest in a decade (3.0% in 2019 vs. 3.7% in 2018); only modest pickup expected in 2020
ECONOMICS I RESEARCH 2Protectionist trade policies have dampened growth; a US-China
trade deal would help resolve (some) uncertainty
Average US import tariff rate
customs duties as a percent of goods imports
4.0%
3.5%
US trade policy uncertainty (12-month avg.)
3.0%
US average import tariff (3-month avg.)
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: US Treasury, Census Bureau, PolicyUncertainty.com, RBC Economics
• The US has raised tariffs on $350 billion in Chinese imports; further hikes threatened but negotiations ongoing
• Uncertainty about trade policy (not just regarding China) is weighing on business sentiment and investment
ECONOMICS I RESEARCH 3Modest inflation (despite very low unemployment) is giving
central banks flexibility to lower interest rates
Unemployment rate Core inflation
quarterly average year-over-year % change (3-month average)
14% 2.4%
Canada
US
12% 2.2% US
Canada
10% 2.0% 2% target
8% 1.8%
6% 1.6%
4% 1.4%
2% 1.2%
0% 1.0%
65 70 75 80 85 90 95 00 05 10 15 20 13 14 15 16 17 18 19
Source: StatCan, BEA, RBC Economics Source: StatCan, BEA, RBC Economics
• Unemployment rates in Canada and the US are the lowest in decades; firms are complaining of labour shortages
• Canadian inflation has been close to the BoC’s target for nearly two years; the Fed has had less success hitting 2%
ECONOMICS I RESEARCH 4The BoC has held interest rates steady, but easing by other
central banks reduced borrowing costs in 2019
BoC overnight rate and 5-year yields
end of period
2.5%
Forecast
Bank of Canada overnight rate
2.0% GoC 5-year bond yield
1.5%
1.0%
0.5%
0.0%
2014 2015 2016 2017 2018 2019 2020
Source: Bank of Canada, RBC Economics
• The US Fed cut rates by 75 basis points in the second half of 2019; ~40 central banks eased globally in 2019
• Canadian borrowing costs have declined despite the BoC holding its policy rate steady
ECONOMICS I RESEARCH 5Growth in Canada and the US is expected to be below “trend”;
recession risk is elevated but not our base case
Real GDP growth
year-over-year % change
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
2015 2016 2017 2018 2019f 2020f 2015 2016 2017 2018 2019f 2020f
Canada United States
Source: Statistics Canada, BEA, RBC Economics
• Canada and the US have limited room to grow beyond their longer-run potential (demographics + productivity growth)
• Risk of a downturn is greater in the late stages of the business cycle, but hard to anticipate the trigger for a slowdown
ECONOMICS I RESEARCH 6Canada’s industrial sector slowed in 2019 but services activity has
remained solid
Canadian GDP growth: goods and services contributions
year-over-year % change and percentage point contributions
5%
Goods
4% Services
GDP
3%
2%
1%
0%
-1%
2014 2015 2016 2017 2018 2019
Source: Statistics Canada, RBC Economics
• Canada’s oil and gas sector slowed in 2019; transportation constraints remain a headwind
• Growth in manufacturing has slowed but not as sharply as in several other economies
ECONOMICS I RESEARCH 7Canadian housing rebounded after policy changes and rate hikes
slowed activity in 2018
Canadian home sales and prices
thousands of annualized units (left axis) / year-over-year price growth (right axis)
600 20%
Home sales (thous. units, SAAR)
550 MLS HPI benchmark price (y/y, right axis) 15%
500 10%
450 5%
400 2018 2019f 2020f 0%
Resales (y/y) -10.9% +4.6% +5.8%
Prices (y/y) +1.9% +0.8% +3.5%
350 -5%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: CREA, RBC Economics
• Home sales were up 11% y/y in October and homebuilding activity remains strong
• Supply-demand balance is back in favour of sellers, putting upward pressure on prices
ECONOMICS I RESEARCH 8Household debt and debt servicing costs are at record highs—
a challenging environment for the BoC
Canadian household debt and debt service ratio
household debt and debt payments as a share of personal disposable income
16% 200%
15% 180%
14% 160%
13% 140%
Debt service ratio
12% 120%
Debt-to-income
11% 100%
10% 80%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: Statistics Canada, RBC Economics
• Household debt-to-income is at a record high; the average Canadian owes $1.77 in debt for every $1 of income
• That makes households more sensitive to rising interest rates; debt service payments are now at a record high
ECONOMICS I RESEARCH 9A strong labour market has supported income growth and given
consumer spending a slight boost
Canadian income and spending growth
inflation-adjusted, seasonally-adjusted annualized percent change
4%
2018
3% 2019 YTD
2%
1%
0%
Aggregate real wages Aggregate consumer Durable and semi- Non-durable goods Services
spending durable goods
Source: Statistics Canada, RBC Economics
• Rising interest rates were a headwind for consumers last year; less pressure this year with market rates declining
• Robust job gains and rising wages have contributed to strong household income growth
ECONOMICS I RESEARCH 10We’re still waiting on a new budget, but the Liberals’ election
platform suggested more stimulative fiscal policy is on the way
Federal government deficit
billions of C$
20
PBO/Liberal
10
projections
0
-10
-20
-30
Liberal platform
-40 PBO baseline (June 2019)
-50
-60
05/06 07/08 09/10 11/12 13/14 15/16 17/18 19/20 21/22 23/24
Source: Department of Finance, PBO, Liberal platform, RBC Economics
• Last year’s $14 billion deficit represents 0.6% of GDP (compare with US deficit of ~4.5%)
• Canada has the lowest central government debt-to-GDP in the G7, leaving room for fiscal stimulus if the economy slows
ECONOMICS I RESEARCH 11Rising trade tensions have hurt business sentiment, and capital
spending has been sluggish
Business sentiment and investment
BoC business sentiment index (long-term average=0) and year-over-year investment growth (percent)
4 20%
Business sentiment (left axis)
3 15%
Business investment (right axis)
2 10%
1 5%
0 0%
-1 -5%
-2 -10%
-3 -15%
-4 -20%
2014 2015 2016 2017 2018 2019
Source: Bank of Canada, Statistics Canada, RBC Economics
• BoC survey shows overall business sentiment has softened amid slower growth and rising trade tensions
• Investment intentions remain solid but firms don’t seem to be following through—capex has been weak
ECONOMICS I RESEARCH 12Businesses see capacity constraints as a greater impediment to
sales growth than trade policy and foreign demand
CFIB: factors limiting sales growth BoC: factors supporting/limiting sales
% of firms reporting, Q4/19 balance of opinion, Q2/19
Shortage of skilled labor
Own efforts
Insufficient domestic demand
Domestic demand
Management skills, time
constraints
Shortage of un/semi-skilled Foreign demand
labor
Limited space Price environment
Shortage of working capital
Competition
Foreign competition
Trade policy
Product distribution constraints
Capacity
Insufficient foreign demand
Shortage of input products Regulation
0% 10% 20% 30% 40% 50% -20 -10 0 10 20 30 40 50
Source: CFIB, RBC Economics Source: BoC Business Outlook Survey, RBC Economics
• Trade tensions grab headlines, but capacity constraints and labour shortages seem to be a bigger issue for SMEs
• BoC Business Outlook Survey: regulation and capacity constraints are restraining sales more than trade policy
ECONOMICS I RESEARCH 13Non-energy goods exports have lost momentum amid a slowdown
in key drivers of trade
Canadian non-energy export growth
year-over-year % change, 3-month average
12%
10%
Canadian non-energy goods exports
8%
US industrial production
6%
4%
2%
0%
-2%
-4%
-6%
2015 2016 2017 2018 2019
Source: Federal Reserve, Statistics Canada, RBC Economics
• A slowdown in US manufacturing and capital spending, and slower global trade, doesn’t bode well for Canadian exports
• Services exports, which account for 17% of total exports, are consistently growing at a 3-4% pace
ECONOMICS I RESEARCH 14A steady year for the Canadian dollar could continue into 2020 if
global growth (and demand for commodities) doesn’t falter
Canadian dollar and oil prices
WTI (US$/barrel) and US$/C$
120 1.10
110 1.05
WTI oil price (left axis)
100 1.00
US$/C$ (right axis)
90 0.95
80 0.90
70 0.85
60 0.80
50 2018 2019f 2020f 0.75
US$/C$ (eop) $0.73 $0.77 $0.75
40 WTI (avg) $65 $57 $58 0.70
30 0.65
20 0.60
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Bank of Canada, EIA, RBC Economics
• The Canadian dollar has been remarkably steady around 75 cents this year
• Oil prices have been bounced around by growth concerns (negative for prices) and geopolitical tensions (positive)
ECONOMICS I RESEARCH 15Capital spending boosting growth in BC; Ontario facing external
and fiscal headwinds
Provincial GDP growth
real GDP, year-over-year % change
N&L 2.6 BC 2.4
QC 2.4 PEI 2.0
PEI 2.2 QC 2.0
BC 2.2 SK 1.9
Canada 1.6 AB 1.9
ON 1.5 Canada 1.7
MB 1.3 MB 1.6
NS 0.9 ON 1.5
NB 0.8 NS 0.9
SK 0.6 2019 NB 0.9 2020
AB 0.6 N&L 0.2
Source: Statistics Canada, RBC Economics
• Major construction projects boosting BC and N&L economies; energy slowdown hitting Alberta
• Quebec’s labour and housing markets are booming; Ontario facing some fiscal restraint
ECONOMICS I RESEARCH 16Latest research from RBC Economics and Thought Leadership
The recession roadblock
• Canadians who graduated during the recession have seen slower wage growth
than past cohorts and are less likely to be in skilled/management positions
Untapped potential: Canada needs to close its immigrant wage gap
• Immigrants earn 10% less than those born in Canada; closing the gap could add
$50 billion to GDP
Big city rental blues: a look at Canada’s rental housing deficit
• A rental housing deficit is driving up rents in Canada’s largest cities; greater
rental supply (particularly in Toronto) is needed to balance these markets
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https://thoughtleadership.rbc.com
ECONOMICS I RESEARCH 17Summary
• Global economy lost momentum in 2019, but industrial slowdown might be
bottoming out and spill-over into other sectors appears to be modest
• A US-China trade deal would resolve some (but maybe not all) of the
uncertainty that has held back business investment
• Central banks lowered rates this year but the BoC has been reluctant to
follow; we see potential for a rate cut early next year amid slowing growth
• Canada’s economy is getting a bit more support from the household sector but
business investment remains sluggish—not the BoC’s preferred combination!
• Geopolitical risks aren’t the only issue for Canadian businesses—many firms
point to labour shortages, capacity pressures and burdensome regulation
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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
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