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THE ECONOMICS OF CHANGE WARREN JESTIN l CHIEF ECONOMIST
2015 Economic & Market Outlook
December 2014
2 Warren Jestin | Chief Economist
The U.S. Gears Up
Source: Statistics Canada, BEA, Bloomberg, Scotiabank Economics.
-6
-4
-2
0
2
4
6
2007 08 09 10 11 12 13 14e 15f 16f
annual % change
Real GDP Growth
U.S.
Japan
Euro zone
Canada
Forecasts at December 2, 2014
U.S boosted by consumer
revival, lower energy costs &
less fiscal drag.
Oil price decline & softer
housing market temper
Canadian growth outlook.
Euro zone in fragile recovery,
as Russian shock erodes
benefits of lower energy costs.
Japan struggles to exit
recession, despite huge policy
stimulus & yen depreciation.
3 Warren Jestin | Chief Economist
China Gears Down
Source: Bloomberg, Scotiabank Economics.
-2
0
2
4
6
8
10
12
14
16
2007 08 09 10 11 12 13 14e 15f 16f
annual % change
Real GDP Growth
Brazil
China
India
Forecasts at December 2, 2014
Uneven emerging market
activity as oil producers &
consumers hit by lower prices.
China’s growth hovers near 7%
as domestic and external
demand moderate.
Better news in India leads to
gradual convergence of
China-India growth rates.
Slow recovery in Brazil should
be visible by late 2015.
4 Warren Jestin | Chief Economist
Unemployment Rate
Source: Statistics Canada, BLS, Scotiabank Economics.
U.S. Labour Market Moves from Laggard to Leader
0
2
4
6
8
10
12
2007 08 09 10 11 12 13 14 15f 16f
U.S.
Canada
%
Forecasts at December 2, 2014
U.S. job growth leads Canada,
with unemployment rate below
6% for first time since 2008.
Weak oil prices undercut job
gains in Canada’s energy-rich
provinces…
… while the lower loonie and
U.S. recovery benefit many
industries, including
manufacturing…
… leading to a more balanced
growth performance across
Canada.
5 Warren Jestin | Chief Economist
60
70
80
90
100
110
120
2007 08 09 10 11 12 13 14e 15f 16f
Motor Vehicle Sales
Source: Statistics Canada, BEA, Scotiabank Economics.
Pent-Up Demand Puts U.S. Shoppers In A Buying Mood
U.S.
Canada
index, 2007 = 100
Forecasts at December 2, 2014
Low borrowing costs & record
employment push Canadian
vehicle sales to record levels…
… but moderating job gains &
high household debt temper
the Canadian outlook.
Buoyant job gains, pent-up
demand & low interest rates
drive U.S. consumers…
… pushing U.S. vehicle sales
to pre-recession levels, with
further gains likely into 2016.
6 Warren Jestin | Chief Economist
Housing Starts
Source: CMHC, U.S. Commerce Department, Scotiabank Economics.
40
50
60
70
80
90
100
110
2007 08 09 10 11 12 13 14e 15f 16f
U.S.
Canada
index 2007 = 100
Housing Activity Underpins U.S. Outperformance
Forecasts at December 2, 2014
Increase in U.S. housing
activity as job gains boost
confidence & unleash pent-up
demand.
The revival in U.S. residential
construction is good news for
Canadian lumber exporters.
Canada’s housing market
softens alongside record home
ownership rates & high debt
levels …
… but a sudden reversal is
unlikely with employment at
record highs & borrowing
costs near generational lows.
7 Warren Jestin | Chief Economist
-12
-10
-8
-6
-4
-2
0
2
2007 08 09 10 11 12 13 14e 15f 16f
Federal Fiscal Balance
Source: Finance Canada, U.S. Treasury, Scotiabank Economics.
Gradual Improvement in the Federal Fiscal Balance
Canada
% of GDP
Forecasts at December 2, 2014
U.S. ex.
Social
Security
Stronger growth & previous
fiscal cutbacks have led to a
sharp improvement in
Washington’s deficit...
… allowing the government to
turn down fiscal drag & offer
more support to U.S. growth.
Sharply lower oil prices reduce
but won’t forestall Ottawa’s
return to fiscal balance…
… but new energy market
realities pose big challenges
for producing provinces.
8 Warren Jestin | Chief Economist
40
50
60
70
80
90
100
110
120
130
07 08 09 10 11 12 13 14
Autos & Parts
Canadian Exports
Energy
Products
Source: Statistics Canada, Scotiabank Economics.
Energy Has Become Canada’s Export Leader
$ bns, annualized,
4-quarter moving average
Forecasts at December 2, 2014
U.S. sales account for roughly
three-quarters of Canadian
exports.
While a weaker loonie & U.S.
revival will boost our non-
commodity exports…
... sharply lower oil prices will
frustrate an improvement in
Canada’s trade balance…
… because energy accounts
for one-quarter of Canada’s
overall exports.
9 Warren Jestin | Chief Economist
The Loonie Swoons on Weak Commodity Prices
Source: Bloomberg, Scotiabank Economics.
50
60
70
80
90
100
110
0.50
0.60
0.70
0.80
0.90
1.00
1.10
2007 08 09 10 11 12 13 14 15f 16f
CADUSD
Loonie Moves Below Parity
WTI Oil
(RHS)
Canadian Dollar
(LHS)
USD/barrel
4QMMA
Forecasts at December 2, 2014
The Canadian dollar is
expected to gravitate towards
85 cents(US) into 2016.
Lower commodity prices,
particularly oil, have undercut
commodity currencies…
… the U.S. revival & investor
risk aversion have bolstered
the greenback …
… & soft growth suggests the
Bank of Canada will lag the
Fed in raising interest rates.
10 Warren Jestin | Chief Economist
-1
0
1
2
3
4
2007 08 09 10 11 12 13 14e 15f 16f
Inflation
Source: Statistics Canada, BLS, Scotiabank Economics.
Inflation Interrupted … Once Again
U.S.
Canada
average annual % change
Forecasts at December 2, 2014
Lacklustre global growth &
sharply lower oil prices have
dragged down global inflation.
Even with some rebound in
energy prices & a revival in
global demand, inflation will
remain subdued into 2016.
For central banks, reviving &
sustaining growth will be the
top priority beyond mid-
decade.
11 Warren Jestin | Chief Economist
0
1
2
3
4
5
6
2007 08 09 10 11 12 13 14 15f 16f
Source: Bank of Canada, U.S. Federal Reserve, Scotiabank Economics.
Central Bank Rates
U.S.
%
Canada
Monetary Policy On Hold For Now
Forecasts at December 2, 2014
While the U.S. Fed may raise
rates by mid-2015, sustaining
growth is the top priority…
… signs of reduced economic
momentum will push the Fed
to the sidelines …
Weak commodity prices & soft
domestic growth will keep the
Bank of Canada from raising
rates into 2016.
Low inflation & uneven global
growth will limit the back-up in
U.S. & Canadian bond yields.
12 Warren Jestin | Chief Economist
Disclaimer
TM Trademark of The Bank of Nova Scotia. Used under license, where applicable. This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.