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Canadian Economic Update: Uncertainty in the Face of Low Oil Prices
ECONOMICS I RESEARCH
Nathan [email protected]
March 25, 2015
ECONOMICS I RESEARCH 2
On a global basis, lower oil prices mean a lower cost of production/consumption
Global GDP growth remains modest, but improving
3.73.53.33.3
-2
-1
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Year-over-year % changeWorld GDP growth
Source: International Monetary Fund, RBC Economics ResearchSource: International Monetary Fund, RBC Economics Research
IMF Forecast
ECONOMICS I RESEARCH 3
EA growth still sluggish, although at least positive. UK surprisingly solid
Euro area (EA) still struggling, UK doing significantly better
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Euro area GDP
UK GDP
Annual percent changeEuro area and UK GDP Growth
Source: Eurostat, RBC Economics Research
ECONOMICS I RESEARCH 4
China growth lower, but still solid. Gov’t has lots of reserves (~$1.3 trillion of U.S. government debt). Low oil prices will also help
Some concerns about china, but demand still growing
7.4 7.1 6.8
2
4
6
8
10
12
14
16
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
ProjectionChina real GDP
Annual percent changeChina GDP Growth
Source: IMF, RBC Economics Research
ECONOMICS I RESEARCH 55
Monetary Policy Has Provided Support
1
2
3
4
5
6
7
Jan-
1999
Dec
-199
9
Nov
-200
0
Oct
-200
1
Sep-
2002
Aug-
2003
Jul-
2004
Jun-
2005
May
-200
6
Apr-
2007
Mar
-200
8
Feb-
2009
Jan-
2010
Dec
-201
0
Nov
-201
1
Oct
-201
2
Sep-
2013
Aug-
2014
Canada U.S. Euro area UK
%Central Bank Policy Rates
Global economy still operating with spare capacity, monetary policy still highly stimulative.
ECONOMICS I RESEARCH 6
In Canada, Falling Oil Prices have Raised ConcernOil prices have fallen almost 60% since June, to close to 2008/09 recession lows. Price decline broadly-based by region (including western Canada)
20
40
60
80
100
120
140
160
Jan-
07
Aug-
07
Mar
-08
Oct
-08
May
-09
Dec
-09
Jul-
10
Feb-
11
Sep-
11
Apr-
12
Nov
-12
Jun-
13
Jan-
14
Aug-
14
Mar
-15
West Texas Intermediate (WTI)BrentWestern Canadian Select (WCS)
U.S. $/bblOil Prices
June 2014
ECONOMICS I RESEARCH 7
Reason for Oil Price Decline ImportantOil prices falling because of increased supply, not falling global demand. Increased U.S. production and OPEC’s non-response are large factors. U.S. production now roughly the same as Saudi Arabia!
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
United States
Canada
Thousands of bbl/d crude oil productionU.S. and Canada Crude Oil Production
3.5M bbl/d total production
Increase of ~4M bbl/d since 2007
Source: Statistics Canada, EIA, RBC Economics Research
ECONOMICS I RESEARCH 8
Takes time for production to slow
950
1000
1050
1100
1150
1200
1250
2010
M01
2010
M06
2010
M11
2011
M04
2011
M09
2012
M02
2012
M07
2012
M12
2013
M05
2013
M10
2014
M03
2014
M08
2015
M01
1000
1200
1400
1600
1800
2000
2200
2400
2600
U.S. Crude stockpiles (LHS)
North American oil & gas rig count
Millions of bbl/d
U.S. Crude Stockpiles and O&G Rig CountsNumber of rigs
Source: Baker Hughes, Energy Information Agency, RBC Economics Research
U.S. crude stockpiles have continued to rise despite cutbacks in drilling activity. Partial price rebound likely (current prices below MC for new investment) but not until H2/2015 or 2016 .
53 .0
77.0
2 6 .1
3 1.1
4 1.4
56 .5
6 6 .1
72 .4
9 9 .6
6 1.7
79 .4
9 5.1 9 4 .29 7.9
9 3 .3
20
40
60
80
100
120
2002 2004 2006 2008 2010 2012 2014 2016
WTI oil price per barrel
Forecast
Current spot price
Average $US/bblRBC WTI Oil Price Forecasts
Source: IEA, RBC
ECONOMICS I RESEARCH 9
Impact of Lower Oil Prices: Summary• Impact of lower oil prices depends on whether shock is supply or demand driven. Current bout
of weakness appears to be largely due to increased supply (with any demand factors occurring outside of the U.S.)
• As a result, impact on global economy likely positive reflecting a lower cost of production/consumption
• Net oil consumers (eg. UK, Europe, China, U.S.) should all benefit. Net oil producers more likely to be negatively impacted although not 'unambiguously.’ (slack in many economies implies little monetary policy offset)
• Canada is a net oil producer. Weakness in the oil & gas sector will weigh on growth in 2015 but offset from a few key factors:
1) Spill over from stronger growth in our key trading partner (the U.S.)
2) Weaker Canadian dollar improves competitiveness of Canadian exports
3) Lower gasoline prices boost household purchasing power and lower business costs.
• As a result, national impact potentially small although with more significant offsetting regional impacts (weaker SK, AB, and NFLD&L, stronger growth in net oil consuming provinces)
• Although national production not necessarily significantly impacted, real national income growth and nominal revenues will be lower due to deterioration in the Canadian terms-of-trade.
• Larger impact on corporate profits and government revenues with less spill over into household incomes.
ECONOMICS I RESEARCH 10
Canada is a net exporter of oil so, all-else-equal, lower oil prices should be a negative
Knee-jerk reaction suggests lower oil prices should be a clear negative; however, all else is not equal.
-3
-2
-1
0
1
2
3
4
5
Q1-
1981
Q4-
1982
Q3-
1984
Q2-
1986
Q1-
1988
Q4-
1989
Q3-
1991
Q2-
1993
Q1-
1995
Q4-
1996
Q3-
1998
Q2-
2000
Q1-
2002
Q4-
2003
Q3-
2005
Q2-
2007
Q1-
2009
Q4-
2010
Q3-
2012
Q2-
2014
Percent of GDPCanadian Crude Oil Trade Balance
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 11
Clear signs of weakness in Canadian oil & gas sector emerging… In Canada and U.S., drilling activity down to levels similar to those observed during the 2008/09 financial crisis.
100
200
300
400
500
600
700
2000
M01
2000
M11
2001
M09
2002
M07
2003
M05
2004
M03
2005
M01
2005
M11
2006
M09
2007
M07
2008
M05
2009
M03
2010
M01
2010
M11
2011
M09
2012
M07
2013
M05
2014
M03
2015
M01
0
500
1000
1500
2000
2500
Canada (LHS)
U.S.(RHS)
Number of rigs, seasonally adjusted by RBCNumber of Oil & Gas rigs running
Number of rigs
Source: Baker Hughes, RBC Economics Research
~-40% since December
ECONOMICS I RESEARCH 12
…which will have a significant impact on oil producing regions… Company announcements pointing to a ~25% drop in O&G capital spending in 2015
2
4
6
8
10
12
14
16
18
AB NFLD SK Rest of Canada
Percent of GDP in 2013Investment in O&G by Province
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 13
… although national impact not necessarily that largeSupport activities and oil & gas construction likely to see the largest immediate impact. Extraction and output from refineries could actually rise in 2015
Canada Oil & Gas Shares of GDP
Based on 2011 Input-Output tables
% of GDPOil & Gas Extraction 5.3
Support activities for O&G extraction 0.8
Oil & Gas Engineering Construction 1.1
Petroleum Refineries 0.5
Crude Oil Pipeline Transportation 0.2
Total 7.8
Indirect impact (from Natural Resources Canada) 3.5
Source: Statistics Canada, Natural Resources Canada, RBC Economics Research
ECONOMICS I RESEARCH 14
BoC already responded with surprise ‘insurance’ rate cut in JanuaryMarkets caught off-guard, longer-term rates have also declined. We think rates will drift higher, although questions remain as to whether the BoC is finished easing.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
%Canadian Government Bond Yields
Forecast
10-year rate
Overnight rate
Source: Bank of Canada, RBC Economics Research
5-year rate
ECONOMICS I RESEARCH 15
A number of potential offsets to lower oil prices: 1) Falling prices still likely a positive for the U.S. economy…
0.0
0.5
1.0
1.5
2.0
2.5
Consumer spending on gasoline Business investment in oil & gassector
percent of GDP, 2013
U.S. gas consumption and O&G investment
Source: Bureau of Economics Analysis, RBC Economics Research
U.S. still imports close to half of the crude used in its refineries. Consumer spending on gasoline still more than twice the size of business investment in the oil & gas sector
2000
4000
6000
8000
10000
12000
14000
16000
18000
1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Crude oil production
Crude oil U.S. refineryinput
Thousands of bbl/dU.S. crude oil production and consumption
Source: EIA, RBC Economics Research
ECONOMICS I RESEARCH 16
Not so good in 2008/09 but serving us better now
… and what’s good for the U.S. is usually good for Canada
75.2
4.6 3.6 2.2 3.6
10.810
20
30
40
50
60
70
80
U.S. UK EU ex-UK Japan Other OECD Other
Percent of total merchandise exportsas of Q3/14
%Canadian exports by destination region
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 17
Already clear signs of life in the U.S. Weak U.S. demand clearly not behind lower oil prices. 3.3 million new jobs created the 12 months through February are the strongest since 2000. Employment growth even more impressive given demographic backdrop
-8000
-6000
-4000
-2000
0
2000
4000
6000
1988 1991 1994 1997 2000 2003 2006 2009 2012
U.S. payroll employment
February 2015 pace
Year-over-year difference
U.S. Payroll Employment Growth
-50
50
100
150
200
250
300
1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012
Population aged 25-54Population aged 16+
Average monthly increase in thousands
U.S. Population Growth by Age
Source: U.S. Census Bureau, RBC Economics Research
ECONOMICS I RESEARCH 18
Unemployment rate approaching “full employment” levelsDecline in unemployment rate largely due to stronger labour markets, undercounting of discouraged/part-time workers dissipating
-2
2
4
6
8
10
12
14
16
Aug-
2007
Mar
-200
8
Oct
-200
8
May
-200
9
Dec
-200
9
Jul-
2010
Feb-
2011
Sep-
2011
Apr-
2012
Nov
-
Jun-
2013
Jan-
2014
Aug-
2014
+ 'excess' part time for economic reasons+ other 'excess' marginally attached+ 'excess' discouraged workers'official' unemployment rate
%U.S. Unemployment Rate
Source: Bureau of Labor Statistics, RBC Economics Research Calculations
2
4
6
8
10
12
Jan-1990
Aug-1991
Mar-1993
Oct-1994
May-1996
Dec-1997
Jul-1999
Feb-2001
Sep-2002
U.S. rate
Canada rate, adjusted to U.S. definition
%
Source: Bureau of Labor Statistics, RBC Economics Research
U.S. vs. Canada Unemployment Rate
ECONOMICS I RESEARCH 19
Interest rates to rise, but slowly …
Canada rates lower due to oil price concerns as U.S. rates getting set to begin to rise. Fed sounding cautious tone recently
0.00
1.00
2.00
3.00
4.00
5.00
6.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
BoC overnight Rate
Fed funds rate
%Canada and U.S. Policy Rates
ECONOMICS I RESEARCH 20
…and only if, as we expect, the economy continues to growGDP growth has rebounded solidly after weather-related disruption in Q1 last year year. Lower oil prices, less fiscal drag, and still highly stimulative monetary policy to provide further support in 2015
-10
-8
-6
-4
-2
0
2
4
6
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Bureau of Economic Analysis, RBC Economics Research
U.S. real GDP growthQuarter-over-quarter annualized % change Forecast:
Annual Growth Rates20132.2Real GDP
2014f2.4
2015f3.1
2016f2.9
Bad weather
ECONOMICS I RESEARCH 21
2) Lower oil prices also mean a weaker CAD…Canadian dollar has weakened significantly relative to the U.S. dollar (-12% y/y, -13% since June/14) reflecting lower oil prices as well as Bank of Canada policy easing alongside a nearing Fed tightening cycle.
0.55
0.65
0.75
0.85
0.95
1.05
1.15
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
$US/$C exchange rateForecast (end of quarter)
$US/$C exchange rate
Canada vs U.S. dollar exchange rate
Parity
ECONOMICS I RESEARCH 22
…which, along with stronger U.S., should boost exports…Already signs that support is emerging, expect further gains in 2015
0.1
0.9
-3
-2
-2
-1
-1
0
1
1
2
2
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Net trade contribution
Contribution to annual real GDP growth (percentage points)Canada Net Trade
Source: Statistics Canada, RBC Economics Research
Increasing oil prices,
strengthening Canadian dollar
-10
-5
5
10
15
20
25
Jan-
10
Jul-
10
Jan-
11
Jul-
11
Jan-
12
Jul-
12
Jan-
13
Jul-
13
Jan-
14
Jul-
14
Jan-
15
Energy
Non-energy
Year-over-year percent change, chained 2007 $CCanada Energy and Non-energy Exports
Strong CAD, weak U.S.
GDP growth
Weaker CAD,
stronger U.S. GDP
growth
ECONOMICS I RESEARCH 23
Drop in manufacturing share of GDP over the “aughts” decade likely related to CAD appreciation over the period
…and exchange rate sensitive industries like manufacturing…
8
10
12
14
16
18
20
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014
0.6
0.8
1.0
1.2
1.4
1.6
1.8
Manufacturing share of GDP (LHS)
C$/US$ (RHS)
Percent of GDP (2012 and 2013 projected) Manufacturing GDP Share and C$
C$/US$
Source: Statistics Canada, RBC Economics Research
20 40 60 80 100
Beverage and Tobacco ProductPrinting and Related Support Activities
Non-Metallic Mineral ProductFabricated Metal Product
Railroad Rolling StockTextile Product Mills
Petroleum and Coal ProductsOther Transportation Equipment
FoodMotor Vehicle Body and Trailer
MiscellaneousFurniture and Related Product
ClothingShip and Boat Building
Plastics and Rubber ProductsTotal
Leather and Allied ProductWood Product
Electrical Equipment, Appliance and ComponentMotor Vehicle Parts
Textile MillsPrimary Metal
ChemicalPaper
MachineryAerospace Product and Parts
Computer and Electronic Product
Exports as percent of total manufacturing sales by industry, 2014
Manufacturing Export Intensity
Source: Statistics Canada, Industry Canada, RBC Economics Research
ECONOMICS I RESEARCH 24
CAD weaker for three consecutive years likely responsible in part for stronger manufacturing output in 2014. Despite decade and a half of decline, industry still big enough to make a difference
…which is already showing some signs of life
-10 -8 -6 -4 -2 2 4 6 8
Miscellaneous
Electrical Equipment, Appliance & Component Mfg
Printing and Related Support Activities
Petroleum and Coal Product
Paper
Chemical
Computer & Electronic Product
Fabricated Metal Product
Plastics and Rubber Products
Machinery
Beverage and Tobacco Product
Furniture and Related Product
Primary Metal
All mfg industries
Wood Product
Non-Metallic Mineral Product
Food
Textile\Clothing & Leather Prod
Transportation Equipment
2014
10-year average
Percent change
Manufacturing GDP by Industry: 2014
Source: Statistics Canada, RBC Economics Research
2
4
6
8
10
12
O&G & related industries* Manufacturing
% of GDP (based on 2011 input-output tables)Share of GDP: Manufacturing and O&G
*includes oil & gas extraction, support activities for o&g extraction, oil & gas engineering construction, petroleum refineries, and crude oil pipeline transportation
ECONOMICS I RESEARCH 25
3) Consumers benefit from lower gasoline prices, although questions about how much of the savings will be spent
Less money spent at the pump frees up household income for other purchases or savings
Oil prices and Canadian consumer spendingbased on assumed 30% drop in oil prices $ Billions (C$)H1/14 Spending on mv fuel 48.5
Savings from lower oil prices 11.0
Amount saved rather than spent* 5.5
Increased spending 5.5
Imported content** 1.9
Net impact on GDP 3.6
Percent of GDP 0.2
*Assumes that just 50% of savings from lower gasoline prices are actually spent
**Import content of new consumer spending assumed to be 35%. Based on BoC Review, Autumn 2005
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 26
Risk to Q1 from bad weather/oil price impact, expecting stronger growth going forward
On balance, national real GDP growth to remain respectable…
2.4 2.32.5
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F
Projection
Canada real GDP growth
Bank of Canada forecast
Annual percent changeCanada Real GDP Growth
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 27
Relying on the consumer and exports. Business investment likely a drag in 2015, although rebound with oil prices in 2016
…led by stronger consumer spending and net trade
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
Consumerspending
Gov't Residentialinvestment
Businessinvestment
Net trade Inventories
2014
2015
2016
PPT contribution to annual GDP growthCanada GDP Composition
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 28
Limited impact on GDP means limited impact on nationallabour marketsO&G employment will fall, but offset from other regions/sectors. National U-rate to drift lower. Employment growth slow and participation rate falling, but largely due to demographic factors.
Employment in Oil & Gas Sector
Direct oil & gas employment* 190.2 1.1
Oil & gas construction 170.7 0.9
Total 360.8 2.0
Source: Natural Resources Canada Energy M arket Fact Book - 2014-2015 , RBC Economics Research
Thousands% of total
employment
1.0 1.00.6
6.96.4 6.3
1
2
3
4
5
6
7
8
9
10
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Employment (RHS)
Unemployment rate (LHS)
Annual average percentCanada Labour Markets Forecast
Annual percent change
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 29
More significant regional implications, although oil producing provinces starting from position of strengthUnemployment rates in oil producing provinces have increased substantially early in 2015, but are still below the national average.
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
NL&
L
PEI
NS
NB
QC
ON
MB SK AB BC
Change in u-rate ytd 2015 (datathrough February 2015)
National average
Percentage pointsCanada Unemployment Rate Changes
Source: Statistics Canada, RBC Economics Research
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
NL&
L
PEI
NS
NB
QC
ON
MB SK AB BC
Feb 2015 Unemployment rate
National average
Percent as of February 2015Canada Regional Unemployment Rates
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 30
Earlier strength means per-capita income higher in oil producing provinces
1
2
3
4
5
6
NFLD PEI NS NB QC ON MB SK AB BC
Average annual growth since 2000
Growth in Per-Capita Household Disposable Income
Source: Statistics Canada, RBC Economics Research
Canada average
Strong growth in household PDI per-capita in oil producing regions since 2000 have resulted in above-average income levels
15
20
25
30
35
40
45
NFLD PEI NS NB QC ON MB SK AB BC
Thousands of $CPer-Capita Household Disposable Income
Canada average
ECONOMICS I RESEARCH 31
Saskatchewan not all about oil
2
4
6
8
10
12
14
16
18
Agriculture O&G extraction Potash Other mining
Percent of nominal GDPSaskatchewan GDP by Industry
Source: Statistics Canada, RBC Economics Research
Oil & gas extraction important contributor to provincial economy but other sectors also important. Other industries, like Agriculture, likely net beneficiaries of lower oil prices
21.1
32.1
15.4
0.5
5
10
15
20
25
30
35
AB NFLD SK Rest of Canada
% of GDP, based on 2011 input-output tablesOil & gas production share of GDP
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 32
Offset to O&G weakness in Sask. from stronger potash production and agriculture
200000
400000
600000
800000
1000000
1200000
2007 2008 2009 2010 2011 2012 2013 2014
Thousands of tonnes, seasonally adjustedSaskatchewan Potash Production
Source: Saskatchewan Industry and Resources, RBC Economics Research
Potash production up 30% year-over-year in Q4/14, will benefit from strengthening demand (low oil prices should be positive for int’l potash demand). Agriculture weak in 2014, assume better year in 2015.
2.14.1
-13.4
-30
-20
-10
10
20
30
40
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Year-over-year, % changeSaskatchewan GDP by industry : Agriculture
Source: Statistics Canada, RBC Economics Research
Forecast
ECONOMICS I RESEARCH 33
Greater signs of weakness in housing markets…Negative headlines have weighed on household confidence with large declines in home re-sales in SK and AB early in 2015. RBC forecast assumes some retracement later this year. Prices to fall 3% in SK in 2015, less of a decline in Alberta.
13.912.7 12.4
3
5
7
9
11
13
15
17
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Saskatchewan annual home sales
Monthly sales (annualized rate)
ThousandsSaskatchewan Home Sales
Source: CREA, RBC Economics Research
71.8
59.360.5
20
30
40
50
60
70
80
90
100
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Alberta annual home sales
Monthly sales (annualized rate)
ThousandsAlberta Home Sales
Source: CREA, RBC Economics Research
ECONOMICS I RESEARCH 34
…in part reflecting higher, although still comparably low, unemployment Higher unemployment rate in 2015, although still below the national average
2
4
6
8
10
12
14
N.& L. P.E.I N.S. N.B. QUE. ONT. MAN. SASK. ALTA. B.C. CANADA
2014 actual
2015 forecast
Series3
Annual average, %Canada Regional Unemployment Rates
ECONOMICS I RESEARCH 35
Provincial Forecasts
Saskatchewan forecast at a glance% change unless otherwise indicated
2012 2013 2014F 2015F 2016F
Real GDP 3.1 5.0 1.1 2.1 2.1
Nominal GDP 5.7 5.5 0.3 -1.2 7.7
Employment 2.4 3.1 1.0 0.7 1.2
Unemployment rate (%) 4.7 4.1 3.8 4.8 4.4
Retail sales 7.4 5.1 4.5 2.6 3.8
Housing starts (units) 9,968 8,290 8,257 5,600 6,900
Consumer price index 1.6 1.4 2.4 1.5 3.3
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
ONT. B.C. MAN. N.S. SASK. QUE. N.B. P.E.I N.&L.
ALTA.
2014 forecast
2015 forecast
2016 forecast
Annual percent changeCanada Provincial Real GDP Forecast
Source: Statistics Canada, RBC Economics Research
Saskatchewan in the middle of the pack in GDP rankings for 2015 despite low oil prices. Alberta lagging, although growth still above zero and following outsized earlier gains
Alberta forecast at a glance% change unless otherwise indicated
2012 2013 2014F 2015F 2016F
Real GDP 4.5 3.8 4.2 0.6 1.1
Nominal GDP 5.6 7.1 7.2 -10.5 10.8
Employment 3.5 2.5 2.2 -0.1 0.7
Unemployment rate (%) 4.6 4.6 4.7 5.7 5.4
Retail sales 7.0 6.9 7.6 1.0 3.2
Housing starts (units) 33,396 36,011 40,590 29,300 30,800
Consumer price index 1.1 1.4 2.6 0.8 2.6
ECONOMICS I RESEARCH 36
More clearly negative implications on “nominal” measures from a weaker Terms-of-TradeWeaker terms-of-trade mean reduced economy-wide income (nominal GDP) and reduced purchasing power of real GDP.
•Terms of Trade = ratio of export to import prices
•Lower oil (export) prices mean lower CPI and GDP inflation which means lower ‘nominal’ GDP even if the volume of production is unchanged (ie. lower economy-wide income)
•Corporate profits and government revenues significantly impacted
•Likely more moderate impact on household incomes
•Weaker terms-of-trade implies fewer imports can be purchased with a given volume of exports (ie. lower purchasing power of real GDP)
•Not much policy makers can do about international commodity prices
•Terms of trade gains over the last 15 years represent a sizeable windfall in terms of domestic purchasing power. Declines expected will only partially reverse prior gains with a partial recovery likely as oil prices strengthen.
ECONOMICS I RESEARCH 37
CPI inflation will fall, but ex-energy strongerConsumer savings from lower gasoline prices (and resulting increased spending) and a weaker currency could actually cause an increase in underlying inflation trends. Reduced retail competition could also play a role.
10
20
30
40
50
60
70
80
90
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Diffusion index* (LHS)
Core CPI (RHS)
Index levelCanada Core CPI and Diffusion Index
Year-over-year
Source: Statistics Canada, RBC Economics Research
Effect of increased retail
competition?
*The dif fusion index measures the percentage of 28 sub-components of the core CPI that are growing at a 2% or faster pace
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Q1-
2005
Q1-
2006
Q1-
2007
Q1-
2008
Q1-
2009
Q1-
2010
Q1-
2011
Q1-
2012
Q1-
2013
Q1-
2014
Q1-
2015
Q1-
2016
'Headline' CPI
Core CPI (excludes 8 most volatile components, including gasoline)
Year-over-year percent changeCanada CPI Inflation
Source: Statistics Canada, RBC Economics Research
BoC Target
Forecast
ECONOMICS I RESEARCH 38
Household disposable income not likely significantly impacted, even in Saskatchewan
-20
-15
-10
-5
5
10
15
Q1-
2000
Q3-
2001
Q1-
2003
Q3-
2004
Q1-
2006
Q3-
2007
Q1-
2009
Q3-
2010
Q1-
2012
Q3-
2013
Q1-
2015
Q3-
2016
Terms-of-trade
Household disposable income
Year-over-year percent changeCanada Terms-of-Trade and Household Incomes
Source: Statistics Canada, RBC Economics Research
Direct negative impact on corporate profits and lower government revenues (lower royalties provincially and lower corporate income tax provincially and federally); however, little correlation between terms-of-trade shocks and household disposable income
-15
-10
-5
5
10
15
20
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Saskatchewa real household disposable income
Canada terms-of-trade
Annual percent change
SK household income and Canada's terms-of-trade
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 39
Government Fiscal Balances Relatively GoodRegions impacted the most are also in the strongest fiscal positions. No need to take drastic short-term action but risk of political pressure forcing gov’t hands
-10
10
20
30
40
50
60
BC AB SK MB ON QC NB NS PEI NL Federal
Percent of GDPNet Debt to GDP Ratios by Region
Source: Provincial and Federal governments, Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 40
Terms-of-trade drop likely to be substantial, but measure still historically elevatedToT determined largely by international commodity markets (not much we can do about it policy-wise), and, even at its lowest, will still be about 10% above its average 1990s level according to our forecast.
70
75
80
85
90
95
100
105
110
115
Q1-
1990
Q3-
1991
Q1-
1993
Q3-
1994
Q1-
1996
Q3-
1997
Q1-
1999
Q3-
2000
Q1-
2002
Q3-
2003
Q1-
2005
Q3-
2006
Q1-
2008
Q3-
2009
Q1-
2011
Q3-
2012
Q1-
2014
Q3-
2015
Forecast
Terms-of-trade (ratio of export to import prices
Average 1990s level
Ratio of export to import prices, index=100 in 2007 Canada Terms-of-Trade
Source: Statistics Canada, RBC Economics Research
2008/09 recession
ECONOMICS I RESEARCH 41
The cost of insurance?
70
80
90
100
110
120
130
140
150
160
170
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
US measure
Canada adjusted to US definitions
Debt to income ratio (%)Debt-to-Income Comparison: Canada vs US
Source: Statistics Canada, RBC Economics Research
By the time BoC rate cuts begin to affect real activity (4-6 quarters) oil prices are expected to have strengthened. Risk of further elevating household imbalances without really doing much to offset oil related weakness
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
%Canadian Government Bond Yields
10-year rate
Source: Bank of Canada, RBC Economics Research
5-year rate
ECONOMICS I RESEARCH 42
Despite higher debt, payments still manageable…for nowLow interest rates mean lower payments for higher debt levels. Eventually, higher rates will mean less support to growth from household spending
6
7
8
9
10
11
12
Q1-
1990
Q2-
1991
Q3-
1992
Q4-
1993
Q1-
1995
Q2-
1996
Q3-
1997
Q4-
1998
Q1-
2000
Q2-
2001
Q3-
2002
Q4-
2003
Q1-
2005
Q2-
2006
Q3-
2007
Q4-
2008
Q1-
2010
Q2-
2011
Q3-
2012
Q4-
2013
Interest paid on householddebt as share of disposableincome
%Canada Household Debt Servicing Costs
Source: Statistics Canada, RBC Economics Research
ECONOMICS I RESEARCH 43
Housing affordability varies significantly by region
0
20
40
60
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
RBC Housing Affordability Measures - Canada
Two-storey
Condo
Bungalow
Ownership costs as % of household income
0
20
40
60
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Saskatchewan
Two-storey
Condo
Bungalow
Ownership costs as % of household income
0
20
40
60
80
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
British Columbia
Two-storey
Condo
Bungalow
Ownership costs as % of household income
Affordability strained in BC and Ontario, payments share of income slipping lower in other regions.
0
20
40
60
80
86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Ontario
Two-storey
Condo
Bungalow
Ownership costs as % of household income
ECONOMICS I RESEARCH 44
Despite regional weakness, national home sales to increase in 2015
481458
490
200
250
300
350
400
450
500
550
600
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Canada annual home sales
Monthly sales (annualized rate)
ThousandsCanada Home Sales
Source: CREA, RBC Economics Research
Sales have been strong in B.C. (Vancouver) and Ontario (Toronto). Low oil prices, low interest rates to boost demand in those regions in 2015. Prices to rise 3% in 2015 at the national level
189 179184
50
100
150
200
250
300
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Canada annual house starts
Monthly starts (annualized rate)
ThousandsCanada House Starts
Source: CMHC, RBC Economics Research
ECONOMICS I RESEARCH 45
Vehicle sales have remained strong despite bad weather and oil price impactThe pace of auto sales has moderated through Jan/Feb relative to 2014 average, but still selling at a historically strong pace
1.59 1.60
1.73
1.631.58
1.63 1.67 1.69 1.67
1.481.58 1.62
1.721.78
1.89 1.86 1.85
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
RBC Economics forecast
Annual new motorvehicle sales
2015 year-to-date
MillionsCanada New Motor Vehicle Sales
Source: Statistics Canada, Global Automakers of Canada, RBC Economics Research
ECONOMICS I RESEARCH 4646
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ECONOMICS I RESEARCH 47
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