ECONOMIC VIEWPOINT

François Dupuis, Vice-President and Chief Economist • Mathieu D’Anjou, Deputy Chief Economist Carine Bergevin-Chammah, Economist • Benoit P. Durocher, Senior Economist • Francis Généreux, Senior Economist • Hendrix Vachon, Senior Economist

Desjardins, Economic Studies: 514-281-2336 or 1 866-866-7000, ext. 5552336 • desjardins.economics@desjardins.com • desjardins.com/economics

NOTE TO READERS: The letters k, M and B are used in texts and tables to refer to thousands, millions and billions respectively.IMPORTANT: This document is based on public information and may under no circumstances be used or construed as a commitment by Desjardins Group. While the information provided has been determined on the basis of data obtained from sources that are deemed to be reliable, Desjardins Group in no way warrants that the information is accurate or complete. The document is provided solely for information purposes and does not constitute an offer or solicitation for purchase or sale. Desjardins Group takes no responsibility for the consequences of any decision whatsoever made on the basis of the data contained herein and does not hereby undertake to provide any advice, notably in the area of investment services. The data on prices or margins are provided for information purposes and may be modified at any time, based on such factors as market conditions. The past performances and projections expressed herein are no guarantee of future performance. The opinions and forecasts contained herein are, unless otherwise indicated, those of the document’s authors and do not represent the opinions of any other person or the official position of Desjardins Group. Copyright © 2018, Desjardins Group. All rights reserved.

Despite recent concerns, the global economy fared very well in 2018. The annual growth of global real GDP should reach 3.8% for the year, its highest increase since 2011.

Protectionism loomed heavily over 2018. The first salvos came from the United States, which launched higher tariffs on washing machines and solar panels, followed by steel and aluminum. The European Union, Canada, Mexico, China and other countries subsequently retaliated. Then the United States targeted China, imposing new tariffs of US$50B on Chinese products, followed by an additional US$200B. Trade tensions were reflected in slower international trade (graph 1) and greater investor edginess.

After a good year in 2017, the euro zone’s GDP slowed in 2018. The German and Italian GDP even fell in Q3. Household and business confidence indexes declined throughout the year and social tensions escalated, especially in France. Things were no better in the United Kingdom, where the Brexit issue continues to dominate economic news. As 2018 comes to a close and March 29, 2019 draws ever nearer, nothing has been settled in an issue where nothing has been easy for almost two years.

2018 turned out great for the U.S. economy. The annual growth of real GDP should reach 2.9%, making this the best progression of the current cycle, along with 2015. The unemployment rate fell to 3.7% for the first time since 1969. Household and business confidence remained strong throughout the year. This good economic climate was bolstered by the tax cuts enacted by Congress and the Trump administration, although the budget cost of that policy jacked up the federal deficit in 2018 (graph 2).

A Look Back at 2018: Strong Economic Growth despite Increased Volatility

ECONOMIC STUDIES | DECEMBER 20, 2018

GRAPH 1International trade slowed in 2018

Sources: CPB - Netherlands Bureau for Economic Policy Analysis and Desjardins, Economic Studies

Annual change in international trade volume

In %

0

1

2

3

4

5

6

2012 2013 2014 2015 2016 2017 2018 2019

GRAPH 2U.S. public finances continued to slump despite strong economic growth

Sources: U.S. Treasury, Bureau of Labor Statistics and Desjardins, Economic Studies

In % (inverted scale)

-12-10-8-6-4-20242

4

6

8

10

121955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Unemployment rate (left, inverted scale) Federal deficit (right)

In % of GDP

Now is the time to assess the year 2018. Here are the main aspects that caught our attention.

#1 BEST OVERALLFORECASTER - CANADA

ECONOMIC STUDIES

2DECEMBER 20, 2018 | ECONOMIC VIEWPOINT

In Canada, 2018 started with a new guideline from the Office of the Superintendent of Financial Institutions (OSFI) aimed at reining in mortgage credit. Combined with other recent restrictive measures and the gradual rise in interest rates, that new initiative resulted in a net housing market slowdown in several regions of Canada (graph 3). In Quebec, however, real estate remained relatively robust due to favourable conditions, especially with regard to the labour market. The Greater Montreal market even reached the point of overheating in the fall, as the number of buyers exceeded the supply of properties for sale.

After several months of uncertainty, Canada, the United States and Mexico arrived at an agreement last September to replace the North American Free Trade Agreement (NAFTA) with a new trade agreement: the Canada–United States–Mexico Agreement (CUSMA). Even though the ratification process will continue through 2019, anxieties about international trade have moderated considerably.

With the increase in energy production in recent years, 2018 has been afflicted by a serious crude oil transportation problem in Canada. As a result, investments in the energy sector experienced difficulties throughout the year, which affected the oil producing provinces. The drop in gasoline prices that started in mid‑2018 lowered inflation throughout the country (graph 4), which was good for provinces like Quebec that import most of their oil. Quebec has stand out for some months, with one of the lowest inflation rate in the country.

The Canadian labour market smashed two records in November: it boasted the lowest unemployment rate (5.6%) since 1976 and the strongest job creation (+94,100 new hires) in a single month. As the working population ages, those figures highlight the labour shortage problems that appear in certain regions and sectors. Quebec is one of the hardest hit provinces, as evidenced by the high job vacancy rate (graph 5).

GRAPH 3Slowdown in Canada’s housing market since the start of 2018

Sources: Canadian Real Estate Association, Canada Mortgage and Housing Corporationand Desjardins, Economic Studies

Annualized

In thousands of units

170180190200210220230240250260

420

440

460

480

500

520

540

560

2016 2017 2018 2019

Mill

iers

Existing home sales (left) Housing starts (right)

In thousands of units

GRAPH 4The recent drop in gas prices has calmed inflationary tensions in Canada

Sources: Statistics Canada and Desjardins, Economic Studies

Annual variation in %

-30

-20

-10

0

10

20

30

0.5

1.0

1.5

2.0

2.5

3.0

2015 2016 2017 2018 2019

Total consumer price indexes (left) Regular gas prices (right)

Annual variation in %

GRAPH 5Labour shortages are especially prevalent in British Columbia and Quebec

* Number of vacant positions expressed as a percentage of the total amount of occupied and vacant positions.Sources: Statistics Canada and Desjardins, Economic Studies

Job vacancy rate* – August 2018 (seasonally adjusted)

In %

2.2

2.7

1.91.8

1.7

2.2

2.42.3

1.5

1.8

1.3

1.01.21.41.61.82.02.22.42.62.8

Canada B.C. Alta. Sask. Man. Ont. Que. N.B. N.S. P.E.I. N.L.

3DECEMBER 20, 2018 | ECONOMIC VIEWPOINT

ECONOMIC STUDIES

Greater volatility has hurt markets. While 2018 got off to a flying start, with the S&P 500 climbing more than 7% during the first weeks of January, fears of rising interest rates quickly pushed the indexes back down. Volatility remained high throughout the year, with trade tensions and growing doubts as to the health of the global economy feeding investor anxiety. A second correction at the end of the year plunged most stock indexes below their 2017 closing levels (graph 6).

Oil prices were on a roller-coaster ride in 2018. Production cuts by members of the Organization of the Petroleum Exporting Countries (OPEC) and renewed sanctions against Iran led to fears of a shortage. The situation quickly reversed as the United States, Russia and Saudi Arabia boosted outputs. The volatility was reflected in the WTI (West Texas Intermediate) barrel price, which dropped from US$75 to US$50 in just over a month. The WCS (Western Canadian Select) barrel price experienced more difficulties, as its spread with the WTI temporarily reached a record at US$50 (graph 7).

After a difficult first quarter, the U.S. dollar was once again on the rise against most other currencies. Economic growth improved in the United States, but decreased elsewhere, including Europe and several emerging countries. That shored up investor risk aversion and boosted the demand for the U.S. dollar as a safe-haven currency. The protectionist measures applied by the United States also contributed to the appreciation of the U.S. dollar.

Key rates climbed faster throughout North America. The generally favourable economic environment and rising inflation spurred several central banks to continue normalizing their monetary policies in 2018. The European Central Bank stopped buying financial assets in December 2018, while the Bank of England raised its key rates by 0.25%. In North America, key rate hikes even accelerated, with the Federal Reserve making four 0.25% hikes compared to three in Canada. However, investor anxiety curtailed the uptick in longer-term bond yields (graph 8).

All in all, it was a tough year for Canadian assets. Low returns on bond and stock markets were amplified by the depreciation of the Canadian dollar, which is now hovering around US$0.75. Low oil prices, unfavourable interest rate spreads and a stronger greenback all contributed to the loonie’s tumble.

GRAPH 6Stock markets underwent two corrections in 2018

Sources: Datastream and Desjardins, Economic Studies

Index

14,000

14,500

15,000

15,500

16,000

16,500

17,000

2,200

2,300

2,400

2,500

2,600

2,700

2,800

2,900

3,000

JAN. APR. JUL. OCT. JAN. APR. JUL. OCT. JAN.

S&P 500 (left)S&P/TSX (right)

2017 2018

Index

2019

GRAPH 7The spread between Canadian and U.S. oil prices reached aUS$50 peak in October

Oil prices

US$/barrel

10

20

30

40

50

60

70

80

90

2016 2017 2018 2019

WTI WCS Brent

WTI : West Texas Intermediate; WCS : Western Canadian SelectSources: Datastream, Bloomberg and Desjardins, Economic Studies

GRAPH 8Long-term yields increased only slightly despite the ongoing normalization of monetary policies

Sources: Datastream and Desjardins, Economic Studies

In %

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Target overnight rateFederal 10-year yield

Target overnight rate