Econoscope - March 2016 B · Canada’s nominal merchandise trade deficit was $0.66 billion in January 2016 rela-tive to December 2015’s deficit of $0.63 billion. Exports rose by

ISSN 0712-2012Printed in Canada

March 2016

C GDP D 2015

F

T 2016

2 C GDP D 2015December GDP rose a stronger-than-expected 0.2% which built further onto the 0.3% gain in November.

5 F The global economy entered 2016 little changed from 2015 with the advanced economies showing signs of continued moderate expansion while the emerging market economies remained on a slower growth tra-jectory. Investors found little comfort in economic data and focused on the risks to the global outlook associated with slower Chinese demand, falling commodity prices, the prospect of the UK leaving the European Union, and an expected divergence in monetary policy across central banks.

9 T 2016The outlook for provincial economies remains divided along the oil producer-consumer line. Lower oil prices for longer will cause further hardship for oil-producing provinces in 2016. We have downgraded our growth forecasts quite significantly for Alberta, Newfoundland and Labrador, and Saskatchewan this year.

I N B R I E F

H Volume 40, Number 3

March 2016

R B C E C O N O M I C S R E S E A R C H

CRAIG WRIGHT

SENIOR VICE PRESIDENT &CHIEF ECONOMIST

DAWN DESJARDINS

VICE PRESIDENT & DEPUTY CHIEF ECONOMIST

Financial Markets & Financial System

PAUL FERLEY

ASSISTANT CHIEF ECONOMISTMacroeconomics

ROBERT HOGUE

SENIOR ECONOMISTRegional Economies

NATHAN JANZEN

SENIOR ECONOMISTMacroeconomics

LAURA COOPER

ECONOMISTPublic Policy

JOSH NYE

ECONOMISTFinancial Markets and Macroeconomics

GERARD WALSH

ECONOMISTSector Analysis and Provincial Economies

E D I T O R

Brian [email protected]

S U B S C R I P T I O N I N F O R M A T I O N

[email protected]

ECONOSCOPE® is published and produced monthly by RBC Economics Research. Address all correspondence to the Editor, RBC Economics Research, RBC, 9th Floor, South Tower, 200 Bay Street, Toronto, Ontario, M5J 2J5.

© Royal Bank of Canada. The material contained in Econoscope is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, with-out express authorization of the copyright holder in writing.

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2 ECONOSCOPE, © ROYAL BANK OF CANADA

C U R R E N T T R E N D S

C GDP D 2015

LATEST AVAILABLE: DECEMBERRELEASE DATE: MARCH 1, 2016

December GDP rose a stronger-than-expected 0.2% which built further onto the 0.3% gain in November. Market expecta-tions going into the report were for no change in the level of GDP in December. The upward surprise was mainly con-centrated in broad-based increases in a number of services components which in aggregate rose 0.3% in the month. The increase occurred despite the retail trade sector dropping a sizeable 1.8% in the month. Goods-producing industries also contributed to the increase rising an expected 0.2% in December. The increase occurred despite mining activity drop-ping 0.7% in the month weighed down by declines in both oil and gas extraction and potash production. As well, utilities output fell 2.6% likely reflecting warmer-than-usual winter temperatures in the month. The main offsets were strong increases in manufacturing (1.1%) and construction (0.6%).

C FLATEST AVAILABLE: FEBRUARYRELEASE DATE: MARCH 11, 2016

Canadian employment in February 2016 was relatively flat, dropping by 2,300 following a 5,700 decline in January. Market expectations had been for a 10,000 increase. Flat employment and a 17,800 rise in the labour force contributed to the unemployment rate rising to 7.3% from 7.2% in January. Hiring in goods-producing sectors unexpectedly soared by 42,200 with service-producing jobs fall-

Real GDP % change, month-over-month

Source: Sta�s�cs Canada

0.8

0.6

0.4

0.2

0.0

-0.2

-0.4

-0.62011 2012 2013 2014 2015

Unemployment Rate% of labour force


9.0

8.5

8.0

7.5

7.0

6.5

6.0

5.5

5.02009 2010 2011 2012 2013 2014 2015 2016

PAUL FERLEY, DAWN DESJARDINS,NATHAN JANZEN, LAURA COOPER, JOSH NYE

H I G H L I G H T S

▲ December GDP rose a stronger-than-expected 0.2% which built further onto the 0.3% gain in November.

▲ Canadian employment in Febru-ary 2016 was rela vely fl at, dropping by 2,300 following a 5,700 decline in January. Market expecta ons had been for a 10,000 increase.

▲ Canadian retail sales rebounded by 2.1% in January 2016 from the 2.1% drop (was -2.2%) in December 2015 that in turn had more than retraced the 1.5% increase (was 1.7%) in November. Market expecta- ons had been for a 0.6% month-over-

month gain in January.

▲ Housing starts rebounded strongly in February 2016, rising by 28.8% to 212,600 annualized units, thereby exceeding market expecta ons for a modest increase to 180,000 units.

▲ Canada’s nominal merchandise trade defi cit was $0.66 billion in January 2016 rela ve to December 2015’s defi cit of $0.63 billion.

▲ Consumer prices rose by 0.2% in February 2016, but with an even larger energy-driven increase last February, the year-over-year rate of infl a on fell to 1.4% from 2.0% in January. Market expecta ons had been for a stronger 0.4% monthly increase and 1.5% annual rate in February.

ECONOSCOPE, © ROYAL BANK OF CANADA 3

ing by 44,500. Despite a rising unemployment rate, the annual increase in wage growth rose to 3.3% from 2.7% in January. Flat employment was a reflection of the weakness in natural resource sector where low oil and other natural resource prices contributed to further job cuts. This was just offset by gains elsewhere.

C 2.1% JLATEST AVAILABLE: JANUARYRELEASE DATE: MARCH 18, 2016

Canadian retail sales rebounded by 2.1% in January 2016 from the 2.1% drop (was -2.2%) in December 2015 that in turn had more than retraced the 1.5% increase (was 1.7%) in November. Market expectations had been for a 0.6% month-over-month gain in January. Controlling for the effect of prices, the volume of retail sales also rose by 2.1% in January following a 2.3% December drop and 1.2% (was 1.4%) November gain. Nominal sales rose in eight of 10 provinces, with the only offsets of modest declines in Prince Edward Island (-0.1%) and Alberta (-0.2%). The gain in the volume of retail sales in January provided confirmation that much of the weak-ness in December (which in turn followed a large increase in November) reflected difficulties seasonally adjusting the data around the holiday shopping season, with the average 0.3% monthly gain in sale volumes during the last three months likely a better indicator of underlying trends.

C FLATEST AVAILABLE: FEBRUARYRELEASE DATE: MARCH 8, 2016

Housing starts rebounded strongly in February 2016, rising by 28.8% to 212,600 annualized units, thereby exceeding market expectations for a modest increase to 180,000 units (see Housing Starts chart on page 4). The monthly surge more than offset two consecutive months of declines that included a 4.5% drop in January to 165,100 units. The increase in overall housing starts reflected a strong recovery in urban multiple-unit starts (46.0%) while urban single-unit starts (6.1%) and rural starts (2.2%) posted modest increases. New home construction advanced strongly across the country, with the excep-tion of the Prairies (-2.1%) where confidence is taking a hit from the persistence of weak crude oil price conditions. Urban housing starts in British Columbia surged by a whopping 60.5% in February to the highest level since records began in 1990. Solid increases were also recorded in Ontario (33.5%), Quebec (27.6%), and in Atlantic Canada (26.2%).

E C O N O M Y A T A G L A N C E

% change from: Latest Previous Year month month agoReal GDP Dec 0.2 0.5Industrial produc on Dec 0.0 -2.2Employment Feb 0.0 0.7Unemployment rate* Feb 7.3 6.9Manufacturing Produc on Dec 1.1 -1.1 Employment Feb 0.4 2.4 Shipments Jan 2.3 5.6 New orders Jan 6.8 -9.1 Inventories Jan 0.6 1.7Retail sales Jan 2.1 6.4Car sales Jan 0.3 9.7Housing starts (000s)* Feb 212.6 151.3Exports Jan 1.0 7.3Imports Jan 1.1 4.4Trade balance ($billlions)* Jan -0.7 -1.8Consumer prices Feb 0.2 1.4* Levels are shown for the latest period and the same period a year earlier.Source: Sta s cs Canada, RBC Economics Research

Retail Sales% change, month-over-month


3.0

2.0

1.0

0.0

-1.0

-2.0

-3.02012 2013 2014 2015 2016


C ’ JLATEST AVAILABLE: JANUARYRELEASE DATE: MARCH 4, 2016

Canada’s nominal merchandise trade deficit was $0.66 billion in January 2016 rela-tive to December 2015’s deficit of $0.63 billion. Exports rose by 1.0% in January while imports increased by 1.1%. On a volumes basis (using 2007 chained dollars), the trade surplus jumped to $4.7 billion in January from $3.8 billion in December, as the volume of exports rose by 2.5% that was only partially offset by import volumes increasing by 0.3%.

C ’ 1.4% F ; 1.9%

LATEST AVAILABLE: FEBRUARYRELEASE DATE: MARCH 18, 2016

Consumer prices rose by 0.2% in February 2016, but with an even larger energy-driven increase last February, the year-over-year rate of inflation fell to 1.4% from 2.0% in January. Market expectations had been for a stronger 0.4% monthly increase and 1.5% annual rate in February. Core CPI rose by 0.5% in February due to a number of seasonal increases. The year-over-year rate of core inflation, nonetheless, edged downward to 1.9% from 2.0% in January. Core inflation remained close to the 2% midpoint of the Bank’s target range, and price pressure was evenly balanced with 50% of core components at or above 2% year over year.

Housing StartsThousands

300

280

260

240

220

200

180

160

140

120

10008 09 10 11 12 13 14 15 16

Source: Canadian Mortgage and Housing Corpora�on

Merchandise TradeC$billions, annualized


600

550

500

450

400

350

3002010 2011 2012 2013 2014 2015 2016

ExportsImports

Consumer Price Index% change, year-over-year

5

4

3

2

1

0

-1

-208 09 10 11 12 13 14 15 16



The bout of financial market volatility early in 2016 was a contributing factor to our decision to lower our forecasts for central banks’ policy rates in 2016. Consistent with this view, we expect the ECB to maintain the deposit rate at -0.4% for the remainder of the year, the Bank of Canada and Bank of England to hold their policy rate at 0.5% in 2016 rather than hike, and for the Fed to raise the fed funds target rate by 75 basis points this year, which is less than the 100 basis points in our previous forecast. These adjustments reflect our view that central banks want to lean against any unwanted tightening in financial conditions, mitigate any damage to sentiment resulting from the financial market volatility, and finally, to ensure that the current low level of inflation reaches their targets in the medium term.

O Oil prices fell aggressively in late 2015 and early 2016, confounding expectations for the price recovery to begin. The 24% drop in oil prices between early December and mid-January resulted in a marking to market of our forecast with a $12 cut to the expected average price of WTI to $40.00/barrel in 2016 with 2017’s average forecast reduced to $57.00/barrel from $62.00/barrel. The basic tenets of our view that prices will recover still hold, with global oil demand expected to increase by about 1% per year while global producers eventually cutback supply, given deterioration in profits and access to capital investment.

G 2015 was a disappointing year for the global economy, with real GDP rising by 3.1%, which was the slowest pace in six years due to a sharper than expected slowing in output in the emerging market economies. Similarly in 2016, these economies are likely to provide only a limited lift to world growth. The advanced economies con-versely are forecasted to post a solid 2.1% gain. The combination of easing in finan-cial market volatility, low interest rates, and accommodative fiscal policy underpins our optimism on the outlook for the advanced economies in 2016.

US The choppy pattern of US growth in 2015 produced a 2.4% rise in real GDP, thereby matching 2014’s pace. Through the ups and downs in the quarterly growth rates, two patterns emerged, with domestic demand remaining solid while external demand was sluggish. In 2016, we expect these trends to persist, with domestic demand posting another year of solid growth while net exports act as a drag on real GDP, albeit to a lesser extent than in 2015. Our forecast is that the US economy will expand by 2.2% this year.

E C O N O M I C S A N D F I N A N C I A L M A R K E T S O U T L O O K

F

CRAIG WRIGHT, DAWN DESJARDINS,PAUL FERLEY, NATHAN JANZEN

PMI Composite: Developed & Emerging MarketsSA, 50+ = expansion

Source: Markit, RBC Economics Research

58

56

54

52

50

48

Developed

2011 2012 2013 2014 2015 2016

Emerging

West Texas Intermediate (WTI)Average US$/bbl

Source: Haver Analy�cs, RBC Economics Research

120

100

80

60

40

202011 2012 2013 2014 2015 2016

Forecast

WTI $49.00 $40.00 $57.00 2015 2016f 2017f

China: Imports and ExportsYear-over-year, % change, US$

Source: China customs, RBC Economics Research

50

40

30

20

10

0

-10

-2005 06 07 08 09 10 11 12 13 14 15

Import value Export value


US – US consumers are in a strong position. The labour market is operating close to full employment, and wage growth is starting to accelerate. We expect that job creation in 2016 will be slower than in previous years, however, will still be sufficient to exert downward pressure on the unemployment rate. The firm labour market com-bined with healthy balance sheets saw financial institutions continue to ease lending standards in early 2016. Home sales activity increased in 2015, and although prices moved upward, US real estate remains historically affordable. We expect these fac-tors will result in another year of rising sales and prices.

B – US business investment was weak in 2015, because energy companies cut capital spending against a backdrop of a very sharp correction in oil prices. The current low level of oil prices makes it likely that energy companies will slash their capital expen-diture budgets again in 2016. Outside energy, however, US businesses are expected to respond to heightened domestic demand not only by increasing their payrolls but also raising investment in equipment and real estate. This is likely to result in another contribution by business investment to economic growth in 2016.

F ’ The Fed’s decision in January to maintain the policy rate in the range between 0.25% to 0.50% following December’s hike reflected concerns about the effect of global financial market turmoil on the US economy. So far, the data suggest that there has been a negligible effect, with real GDP in the first quarter of 2016 on track to post a 2.2% annualized gain. Conditions are in place for the Fed to resume raising the fed funds target in the second quarter of 2016 to fulfill its mandate of achieving full employment and price stability, in the medium term. The labour market is very close to full employment, with the unemployment rate at 4.9% and wage growth accelerat-ing. To date, the Fed has not reached its inflation goal; however, this largely reflects the weight from persistent declines in energy prices and lower prices for imported goods. The timing of the next hike will be contingent not only on the Fed’s assessment of current conditions but also will take into account the effect that international eco-nomic and financial market developments are having on the outlook. As evidence that the economic and inflation outlook is not being significantly affected accumulates, we expect the Fed will resume its tightening cycle with gradual rate hikes resuming in the second quarter. Our forecast is for the fed funds rate to end 2016 at 1.25%.

US Real GDPQuarter-over-quarter % change, annualized rate

Source: Bureau of Economics Analysis, RBC Economics Research

6

4

2

0

-2

-4

-609 10 11 12 13 14 15 16 17

Real GDP 2.4 2.4 2.2 2.4 14 15 16f 17f

Forecast

US Real GDP Growth & Final Domes�c DemandQuarter-over-quarter annualized % change

Source: Bureau of Economic Analysis, RBC Economics Research

10

8

6

4

2

0

-2

-4

-6

-8

-10

Forecast

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Real GDP Real final domes�c demand

Fed Funds Rate%

Source: Federal Reserve Board, RBC Economics Research

7

6

5

4

3

2

1

004 05 06 07 08 09 10 11 12 13 14 15 16 17

Forecast


C 2015 marked a difficult year for Canada’s economy that started poorly and ended on a soft note. An unrelenting drop in business investment took a percentage point off the annual growth rate while a shearing of inventories lopped off another three-tenths of a percent. Offsetting these declines were increases in consumption, housing, gov-ernment spending, and a lift from net exports. On balance, real GDP increased at a subpar 1.2% pace. Another year of retrenchment by energy companies will dampen 2016’s rise; however, the degree should be somewhat less, thereby allowing the economy to expand by 1.7%, which would be close to its potential rate.

L Rising export volumes in December and January left sales up by 21.2% at an annual-ized rate relative to the fourth-quarter average, driven by strength in demand for non-commodity products. In 2016, we expect firm US demand and a weaker Canadian dollar to support an increase in exports of autos, consumer goods, machinery and equipment, and lumber. Conversely, demand for imported machinery is likely to decline as commodities producers’ reduce investment and the weak currency pumps up prices of imported goods. On net, this sets up for trade to support real GDP growth again this year.

C Companies in Canada’s energy patch significantly reduced investment in 2015 as prices for oil and natural gas tumbled. We estimate that total investment by these companies fell by almost 40%. With the price of oil and natural gas running below our earlier forecasts, we have increased the estimated size of the cut to investment by these companies in 2016 to 30% from 15%. Non-resource companies are likely to be tentative about boosting investment in the near term, given the negative senti-ment about the effect of the rout in commodity markets and the price increases for imported goods associated with the weaker currency. Our forecast assumes another hit to the economy from lower investment in 2016, although it is likely to be about half the size of last year’s substantial 1.0 percentage points drag.

C – The tight relationship between the Canadian dollar and oil prices persisted in early 2016, and the currency slumped to a 13-year low as oil prices remained under down-ward pressure. Our forecast assumes that there will be a supply-driven rebalancing in the oil market yielding a recovery in oil prices and commensurate improvement in the Canadian dollar. Another factor at work on the currency is the divergence in monetary policy between Canada and the US, with the Fed committed to raising

Canada Real GDPQuarter-over-quarter % change, annualized rate

Source: Sta�s�cs Canada, RBC Economics Research forecasts

Forecast8

6

4

2

0

-2

-4

-6

-8

-10Real GDP 2.5 1.2 1.7 2.3

14 15 16f 17f

09 10 11 12 13 14 15 16 17

Canadian Real ExportsMonth-over-month change in C$ billions

Source: Sta�s�cs Canada, RBC Economics Research

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5

-2.02011 2012 2013 2014 2015 2016

Canada: Business Investment by IndustryAnnual % change

Source: Sta�s�cs Canada, RBC Economics Research

60

50

40

30

20

10

0

-10

-20

-30

-40

-50

Projec�on

2009 2010 2011 2012 2013 2014 2015 2016 2017

Oil & gas investmentEx. Oil & gas investmentTotal business capital spending


interest rates while the Bank of Canada is more likely to maintain the policy rate at 50 basis points for the remainder of 2016. This will likely have a marginal effect on the currency unless either central bank moves aggressively. Our forecast is for the Canadian dollar to end 2016 at US$0.75.

C Canada’s consumers have been a key engine of growth for the economy for several years and will likely maintain this role in 2016. The combination of a healthy labour market and low interest rates supported robust housing market activity with resales coming in at the second-highest level on record in 2015. We expect Canada’s housing market will continue to perform reasonably well in 2016, with hot markets recording gains while markets in oil-producing provinces remain under downward pressure.

B C The Bank of Canada’s overnight rate stands at 0.5% and will likely remain at that level for the remainder of 2016. In January and March, the Bank decided to hold policy steady, pointing to several factors including evidence that the non-resource sectors of the economy were improving. Canada’s headline inflation rate is likely to remain below the Bank’s 2% target for much of 2016, weighed down by low energy prices. As energy prices and the currency recovery in 2017, and the amount of slack in the economy dissipates, Canada’s inflation rate should settle around 2%. The Bank’s forecast has many of the same tenets as our view, with the economy fore-casted to grow at a mildly faster clip in 2016. This outlook underpinned the Bank’s view that the “current stance of monetary policy is appropriate” at its January and March meetings, and barring any significant deviation in the economy’s performance from its projection, sets up for the overnight rate to remain at 0.5% this year.

F The federal government provided a peek at the nation’s fiscal situation ahead of the March 22, 2016 budget. The preview showed marked deterioration in the country’s fiscal health, with the deficit forecasted to be $18.4 billion in fiscal 2016–17, which is larger than the $3.9 billion projected in the fall fiscal update. The increase in the deficit reflected a downgraded forecast for economic growth, a larger adjustment for risk, and the incorporation of several policy changes. The government is expected to unveil several more policy initiatives in the March 22 Budget that will yield an even larger deficit. In total, we expect the government’s initiatives will boost Canadian GDP by 0.2 percentage points in 2016, thereby providing a needed lift as the econo-my works through the commodity price shock.

Spot Market Price – WTI vs. Cda/US Exch. Rate

Source: EIA/CME, BoC/Haver, RBC Economics Research

1.70

1.60

1.50

1.40

1.30

1.20

1.10

1.00

0.90

0.8095 97 99 01 03 05 07 09 11 13 15

0

20

40

60

80

100

120

140

CAD/USD (le�)

WTI $/bbl (right)

Canada Home Sales PriceYear-over-year % change, C$

Source: Royal LePage, RBC Economics Research

12

10

8

6

4

2

0

-2

-4

-6

-8

Forecast

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

BC OntarioAlberta Quebec

Bank of Canada Overnight Rate%

Source: Bank of Canada, RBC Economics Research forecasts

Forecast7

6

5

4

3

2

1

004 05 06 07 08 09 10 11 12 13 14 15 16 17


L -

The persistence of historically low oil prices in recent months has increased the likelihood that they will remain ‘lower for longer’, and that the hardship felt in oil-producing regions of the country will continue in the short term, albeit at a decreasing intensity—we do not expect cuts in capital spending in the energy sector to be as dramatic as they were in 2015. RBC recently cut its working assumptions for the WTI benchmark to an average of US$40/barrel in 2016 and US$57/barrel in 2017, with quarterly values remaining particularly weak during the first half of 2016. Accordingly, with little meaningful relief for the energy sector in sight causing further declines in capital spending, we expect provincial recessions in Alberta, and Newfoundland and Labrador to carry into 2016, with weakness increasingly spread-ing to non-energy sectors. In Saskatchewan, an expected recovery in the province’s agricultural sector should help return growth to the plus side.

B -

The other side of the coin of low oil prices—which brings net benefits via more com-petitively priced exports, cheaper energy prices, and a stronger US economy—bright-ens the prospects of oil-consuming provinces. The complex adjustments underway have somewhat delayed the benefits in 2015; however, we expect to see them accrue more significantly in 2016. In particular, we expect Ontario, British Columbia, Manitoba, and Quebec will get a material lift to their exports.

R E A L G D P G R O W T H

Source: Statistics Canada, RBC Economics Research

P R O V I N C I A L O U T L O O K

T 2016

PAUL FERLEY, ROBERT HOGUE,LAURA COOPER, GERARD WALSH

H I G H L I G H T S

▲ Lower oil prices for longer will cause further hardship for oil-producing prov-inces in 2016. In contrast, oil-consuming provinces stand to get a boost from weaker oil prices in the form of more compe vely priced exports, cheaper energy costs, and a stronger US economy.

▲ We now expect provincial recessions to persist in Alberta, and Newfoundland and Labrador in 2016, with real GDP fall-ing by 1.6% and 0.1%, respec vely, and Saskatchewan’s recovery (growth of 1.2%) to be more modest than we had previously an cipated.

▲ S ll, such performance would mark an improvement rela ve to 2015 when we es- mated that all three provincial economies

contracted more signifi cantly.

▲ Our outlook for oil-consuming provinces remains generally construc ve; however, we have downgraded growth slightly to refl ect longer than expected lags in seeing the benefi ts of lower oil prices across industrial sectors.

▲ We project Bri sh Columbia to remain at the top of our provincial growth rankings for the second consecu ve year in 2016, with a growth rate of 2.9%, followed by Ontario and Manitoba with rates of 2.3% and 2.2%, respec vely. We expect all other provinces to come in below the na onal average of 1.7% with Quebec at 1.4%, Nova Sco a at 1.3%, Prince Edward Island at 1.2%, and New Brunswick at 0.4%.

▲ While we con nue to expect all pro-vincial economies except Newfoundland and Labrador to grow in 2017, we have generally tempered the growth outlook. Bri sh Columbia, Manitoba, and Ontario remain our top provincial growth prospects in 2017. We project Alberta to emerge from recession next year.

B.C.ONT.

MAN.

QUE.N.S.

P.E.I.SASK.

N.B.N.&L.ALTA.

B.C.MAN.ONT.SASK.

ALTA.QUE.N.S.

P.E.I.N.B.

N.&L. 201720160 1 2 3

CANADA

% -2 -1 0 1 2 3-2 -1

CANADA


F – CR B C F O R E C A S T S O F T H E E C O N O M Y A N D F I N A N C I A L M A R K E T S

* Quarterly averages, levelSource: Bank of Canada, Statistics Canada, RBC Economics Research forecastsMarch 2016

= Forecast 2015 | 2016 | 2017 | Annual

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2015 2016 2017

GROWTH IN THE ECONOMY PERIOD OVER PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED

Household consumption 0.6 1.9 2.2 1.0 2.1 2.2 2.3 2.2 2.1 2.0 1.8 1.7 2.6 1.9 1.9 2.1 Durables -5.6 5.1 10.3 1.7 2.0 2.3 1.7 1.8 1.5 1.5 1.5 1.0 4.3 3.3 3.1 1.6 Semi-Durables 0.2 3.0 1.2 2.6 2.0 2.6 2.5 3.4 2.5 2.1 1.8 1.8 3.1 2.4 2.4 2.5 Non-durables 2.7 -2.9 1.7 -1.0 2.0 2.6 3.0 2.5 2.2 2.2 2.0 2.0 2.4 0.7 1.9 2.5 Services 1.2 3.3 0.8 1.5 2.1 2.0 2.2 2.1 2.1 2.0 1.8 1.8 2.3 2.1 2.0 2.0Government expenditures 3.8 2.4 0.1 1.5 1.5 2.0 2.5 2.0 1.8 1.5 1.5 1.5 0.3 1.4 1.6 1.8Residential investment 5.9 1.3 2.7 1.8 -0.1 -4.0 -5.7 -5.2 -2.7 -0.7 -0.5 -1.2 2.5 3.9 -1.1 -2.9Business investment -19.4 -13.0 -10.1 -12.4 -10.3 -1.5 5.5 5.4 5.3 4.8 4.4 5.0 0.0 -8.8 -6.5 4.7 Non-residential structures -27.7 -12.8 -11.7 -14.6 -10.5 -1.8 5.5 5.3 5.3 4.8 4.5 5.0 -0.4 -12.7 -7.3 4.7 Machinery & equipment -2.1 -13.4 -7.5 -9.0 -10.0 -1.0 5.5 5.5 5.3 4.8 4.3 5.0 1.0 -1.3 -5.4 4.7Final domestic demand -1.5 0.1 0.1 -0.6 0.4 1.4 2.4 2.2 2.1 2.0 1.9 1.9 1.6 0.5 0.7 2.1Exports -0.6 -0.1 10.8 -2.2 8.1 3.9 3.5 3.7 4.5 4.9 4.3 4.5 5.3 3.0 4.3 4.2Imports 0.5 -1.7 -2.4 -8.9 4.0 3.0 5.7 4.7 3.6 3.4 3.4 3.6 1.8 0.1 0.4 4.0Inventories (change in $b) 12.7 8.4 1.1 -4.0 -1.4 0.7 2.1 3.4 3.2 3.5 4.3 4.5 9.9 4.5 1.2 3.9Real gross domestic product -0.9 -0.4 2.4 0.8 2.2 2.1 2.0 2.2 2.3 2.5 2.3 2.2 2.5 1.2 1.7 2.3

OTHER INDICATORS YEAR OVER YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED

Business and labour Productivity 1.7 -0.5 -0.3 -0.6 0.3 1.3 1.2 1.3 1.2 1.2 1.4 1.4 2.1 0.0 1.0 1.3 Pre-tax corporate profits -11.4 -14.1 -16.4 -18.6 -12.5 -7.1 -3.3 7.0 17.4 15.1 12.5 9.4 7.0 -15.2 -4.1 13.4 Unemployment rate (%)* 6.8 6.8 7.0 7.0 7.1 7.0 6.9 6.8 6.8 6.7 6.6 6.5 6.9 6.9 7.0 6.7Inflation Headline CPI 1.1 0.9 1.2 1.3 1.6 1.4 1.6 2.0 2.5 2.5 2.3 2.1 2.0 1.1 1.7 2.3 Core CPI 2.2 2.2 2.2 2.0 2.0 2.1 2.0 2.1 2.1 2.0 2.0 2.0 1.8 2.2 2.1 2.0External trade Current account balance ($b) -75.2 -64.9 -61.2 -61.5 -74.6 -61.7 -55.2 -45.3 -38.0 -30.4 -25.1 -18.3 -44.9 -65.7 -59.2 -27.9 % of GDP -3.8 -3.3 -3.1 -3.1 -3.7 -3.0 -2.7 -2.2 -1.8 -1.4 -1.2 -0.8 -2.3 -3.3 -2.9 -1.3Housing starts (000s)* 175 193 213 194 189 187 182 176 176 175 172 168 189 196 183 173Motor vehicle sales (mill., saar)* 1.83 1.92 2.00 2.00 1.97 1.92 1.89 1.87 1.86 1.86 1.83 1.82 1.89 1.94 1.91 1.84

INTEREST AND EXCHANGE RATES %, END OF PERIOD

Overnight 0.75 0.75 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.75 1.00 0.50 0.50 1.75Three-month 0.55 0.58 0.43 0.51 0.40 0.40 0.50 0.60 0.85 1.10 1.35 1.80 0.91 0.51 0.60 1.80Two-year 0.50 0.48 0.52 0.48 0.40 0.50 0.65 1.00 1.30 1.60 1.95 2.45 1.01 0.48 1.00 2.45Five-year 0.77 0.82 0.80 0.73 0.60 0.80 1.05 1.35 1.70 2.00 2.35 2.70 1.34 0.73 1.35 2.7010-year 1.36 1.69 1.43 1.40 1.20 1.50 1.65 2.00 2.35 2.60 2.80 3.05 1.79 1.40 2.00 3.0530-year 1.98 2.31 2.20 2.15 1.85 2.25 2.40 2.70 2.95 3.05 3.20 3.35 2.34 2.15 2.70 3.35Canadian dollar 1.27 1.25 1.33 1.38 1.45 1.40 1.36 1.33 1.31 1.29 1.27 1.25 1.16 1.38 1.33 1.25


F – U SR B C F O R E C A S T S O F T H E E C O N O M Y A N D F I N A N C I A L M A R K E T S

* Quarterly averages, levelSource: US Bureau of Economic Analysis, RBC Economics Research forecastsMarch 2016

= Forecast 2015 | 2016 | 2017 | Annual

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2015 2016 2017

GROWTH IN THE ECONOMY PERIOD OVER PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED

Consumer spending 1.7 3.6 3.0 2.0 3.2 2.3 2.6 2.4 2.3 2.1 2.0 2.0 2.7 3.1 2.7 2.3 Durables 2.0 8.0 6.6 3.4 6.5 3.5 4.8 4.5 4.0 3.5 3.1 3.1 5.9 5.9 5.1 3.9 Non-durables 0.7 4.3 4.2 1.2 3.4 2.5 2.3 2.1 2.0 1.9 1.7 1.6 2.1 2.7 2.7 2.0 Services 2.1 2.7 2.1 2.1 2.6 2.1 2.3 2.2 2.1 2.0 1.9 1.9 2.4 2.8 2.3 2.1Government spending -0.1 2.6 1.8 -0.1 1.7 1.8 2.0 1.8 1.5 1.2 1.2 1.0 -0.6 0.7 1.5 1.5Residential investment 10.1 9.4 8.2 7.9 9.5 4.6 6.8 7.4 7.4 6.4 6.0 5.6 1.8 8.7 7.6 6.7Business investment 1.6 4.1 2.6 -1.9 2.0 3.8 3.7 3.9 3.9 4.0 3.9 3.8 6.2 2.9 2.1 3.9 Non-residential structures -7.4 6.3 -7.2 -6.6 -1.3 3.0 2.6 2.5 2.6 2.7 2.7 2.7 8.1 -1.6 -1.1 2.6 Non-residential equipment 2.3 0.3 9.9 -1.8 3.0 3.9 3.9 4.3 4.4 4.4 4.3 4.1 5.8 3.1 3.1 4.3 Intellectual property 7.4 8.3 -0.8 1.3 2.9 4.1 4.1 4.2 4.2 4.2 4.1 4.0 5.2 5.7 2.9 4.2Final domestic demand 1.7 3.7 2.9 1.4 3.0 2.5 2.8 2.7 2.5 2.3 2.2 2.2 2.5 2.8 2.6 2.5Exports -6.0 5.1 0.7 -2.7 -4.0 1.3 4.4 4.8 4.8 4.7 4.4 4.2 3.4 1.1 -0.1 4.4Imports 7.1 3.0 2.3 -0.6 0.5 3.8 4.4 4.3 4.3 4.0 3.8 3.6 3.8 4.9 2.0 4.1Inventories (change in $b) 112.8 113.5 85.5 81.7 68.1 79.0 74.0 66.0 61.0 60.0 52.0 49.0 68.0 98.4 71.8 55.5Real gross domestic product 0.6 3.9 2.0 1.0 2.2 2.4 2.6 2.5 2.4 2.3 2.1 2.1 2.4 2.4 2.2 2.4

OTHER INDICATORS YEAR OVER YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED

Business and labour Productivity 0.4 0.6 0.6 0.5 0.9 0.3 0.0 1.0 1.3 1.5 1.4 1.4 0.6 0.5 0.6 1.4 Pre-tax corporate profits 4.6 0.6 -5.1 -4.7 1.8 -1.4 0.9 2.2 2.4 2.5 2.4 2.2 1.7 -1.3 0.9 2.4 Unemployment rate (%)* 5.6 5.4 5.2 5.0 4.9 4.9 4.9 4.8 4.8 4.7 4.7 4.7 6.2 5.3 4.9 4.7Inflation Headline CPI -0.1 0.0 0.1 0.5 1.0 0.9 1.2 1.9 2.6 2.7 2.5 2.3 1.6 0.1 1.3 2.5 Core CPI 1.7 1.8 1.8 2.0 2.2 2.0 2.1 2.1 2.0 2.0 2.0 2.0 1.7 1.8 2.1 2.0External trade Current account balance ($b) -473 -444 -496 -500 -501 -537 -557 -576 -587 -594 -599 -606 -390 -478 -543 -596 % of GDP -2.7 -2.5 -2.8 -2.8 -2.7 -2.9 -3.0 -3.1 -3.1 -3.1 -3.1 -3.1 -2.2 -2.7 -2.9 -3.1Housing starts (000s)* 978 1158 1158 1130 1145 1180 1218 1253 1286 1313 1342 1368 1001 1106 1199 1327Motor vehicle sales (millions, saar)* 16.7 17.1 17.8 17.8 17.8 17.9 18.1 18.2 18.3 18.4 18.5 18.5 16.4 17.4 18.0 18.4

INTEREST RATES %, END OF PERIOD

Fed funds 0.25 0.25 0.25 0.50 0.50 0.75 1.00 1.25 1.50 1.75 2.25 2.75 0.25 0.50 1.25 2.75Three-month 0.04 0.03 0.00 0.17 0.20 0.40 0.45 0.70 1.00 1.30 1.90 2.45 0.04 0.17 0.70 2.45Two-year 0.56 0.64 0.64 1.05 0.85 1.10 1.25 1.60 1.90 2.20 2.60 2.95 0.67 1.05 1.60 2.95Five-year 1.37 1.64 1.37 1.76 1.30 1.60 1.75 2.15 2.40 2.65 2.95 3.20 1.65 1.76 2.15 3.2010-year 1.93 2.35 2.04 2.27 1.85 2.10 2.15 2.55 2.80 3.00 3.25 3.40 2.17 2.27 2.55 3.4030-year 2.54 3.12 2.86 3.02 2.65 2.90 2.95 3.30 3.45 3.55 3.75 3.85 2.75 3.02 3.30 3.85Yield curve (10s-2s) 137 171 140 122 100 100 90 95 90 80 65 45 150 122 95 45


CURRENT TRENDS

C U R R E N T E C O N O M I C I N D I C ATO R S

C - US C

F F Y - L F F Y - L P Y T - M P Y T - M M A D M A D

BIndustrial production1 0.0 -2.2 -1.2 Dec. 0.8 -0.7 1.1 Jan.

Mfg. inventory - shipments ratio (level) 1.4 1.4 1.4 Dec. 1.4 1.4 1.4 Jan.

New orders in manufacturing -2.1 -6.5 -4.3 Dec. 1.6 -1.9 -6.3 Jan.

Business loans - Banks -0.1 5.8 10.6 Jan. 1.1 10.8 11.3 Feb.

Index of stock prices2 0.3 -15.6 -5.5 Feb. -0.7 -8.5 4.2 Feb.

HRetail sales -2.2 2.6 2.2 Dec. 0.2 3.4 1.5 Jan.

Auto sales 0.3 9.7 3.1 Jan. -0.5 -0.3 -2.7 Feb.

Total consumer credit3 0.1 2.7 3.0 Dec. 0.3 6.5 6.8 Jan.

Housing starts 28.8 40.5 3.9 Feb. -3.8 1.8 9.8 Jan.

Employment 0.0 0.7 0.8 Feb. 0.4 1.9 1.7 Feb.

PConsumer price index 0.2 2.0 1.2 Jan. 0.0 1.3 0.21 Jan.

Producer price index4 0.5 1.7 -0.5 Jan. -0.8 -2.8 -3.3 Dec.

I Policy rate 0.5 0.8 0.6 Feb. 0.38 0.13 0.38 Feb.

90-day commercial paper rates 0.8 0.9 0.8 Feb. 0.5 0.1 0.5 Feb.

Government bonds (10 years) 1.2 1.4 1.6 Feb. 1.8 2.0 2.2 Feb.

Seasonally adjusted % changes unless otherwise indicated. Interest rates are levels.1 The U.S. series is an index.2 Canada = S&P/TSX; United States = S&P 5003 Excludes credit unions and caisses populaires.4 Canada’s producer price index is not seasonally adjusted.March 2016

ISSN 0712-2012Printed in Canada

March 2016

C GDP Q4/15

F

T 2016

Documents

Econoscope - March 2016 B · Canada’s nominal merchandise trade deficit was $0.66 billion in January 2016 rela-tive to December 2015’s deficit of $0.63 billion. Exports rose by