Global Economic Outlook: Global Economic Outlook: Shifting Tectonic - - PowerPoint PPT Presentation

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Global Economic Outlook: Global Economic Outlook: Shifting Tectonic - - PowerPoint PPT Presentation

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Global Economic Outlook: Global Economic Outlook: Shifting Tectonic Plates Shifting Tectonic Plates October 2008 October 2008 Patricia Croft, Vice President & Chief Economist Phillips, Hager & North Investment Management Limited The

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Patricia Croft, Vice President & Chief Economist Phillips, Hager & North Investment Management Limited

Global Economic Outlook: Global Economic Outlook: Shifting Tectonic Plates Shifting Tectonic Plates

October 2008 October 2008

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The Greatest Credit Bubble of All Time The Greatest Credit Bubble of All Time

1.

Liquidity – too much and too cheap

2.

Trend to deregulation

3.

Boom in securitization

  • Democratized credit provision but disconnected lender and

borrower

4.

Overconfidence in financial models

Result: A fundamental change to world financial system

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Third Banking Crisis Since 1930s Third Banking Crisis Since 1930s

U.S. Bank and Thrift Failures Today 100 200 300 400 500 600 1934 1942 1950 1958 1966 1974 1982 1990 1998 2006

Source: Federal Deposit Insurance Corp., The Mortgage Lender Implode-O-Meter.com

9 banks and 265 major U.S. lenders have "imploded" since late 2006

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(Un)Happy Anniversary (Un)Happy Anniversary

  • Problem confined to

sub prime

  • Problem confined to the US
  • Minimal losses
  • No impact on the real economy
  • Global decoupling
  • Cross product contagion to ABCP,

MBS, SIVs, monoline insurers, auction rate securities, LIBOR financing

  • Problem now global
  • Writedowns to date $500 bn – estimates
  • f $1 trillion ++
  • US in recession – UK, Japan and

Europe heading that way

  • Global recoupling – China, India

slowing

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Unprecedented Actions Unprecedented Actions

December – Fed allows banks to borrow using wider range of collateral January – Fed makes emergency ¾% cut in fed funds March – Fed and Treasury broker sale of Bear Stearns to JP Morgan July – SEC curbs improper short selling of Fannie/Freddie September – Federal government takes control of F&F pledging to provide up to $200 billion WHAT’S NEXT??

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The Credit Crisis Is Not Over The Credit Crisis Is Not Over

Bailout of Fannie/Freddie will reduce the cost of

borrowing but will not end the credit crisis nor rescue the US economy

European/UK banks under pressure Emerging market stock markets plunge – risk

appetite goes into reverse

Deleveraging is a painful prolonged process

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China now world’s fourth largest economy Potential growth in China and India far superior

  • Lower labour costs
  • Growing middle class & market reforms

Long-term potential growth rate in G-7 is falling due to

demographics – 2% or lower

Canada risks falling further behind

The World is Changing The World is Changing

“There is a fundamental shift in global economic tectonic plates” The Conference Board of Canada

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Globalization – An Integrated World Economy

World Trade as Share of World GDP

Source: IMF, Economist Intelligence Unit

10 20 30 40 50 60 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 %

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Chindia: Bigger than U.K. & France on a Nominal GDP Basis

Proportion of world GDP, % (2005, nominal) 5 10 15 20 25 30 U.S. Japan Germany China U.K. France

  • 12. India

Source: World Bank

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Advanced Emerging

Emerging Economies Key to Global Growth Outlook Emerging Economies Key to Global Growth Outlook

63 55 60 43 37 45 40 57 25 30 35 40 45 50 55 60 65 70 75 2000 2008 2000 2008 Share of World GDP Share of World GDP growth %

Source: International Monetary Fund

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Catching Up Catching Up

Year that India overtakes individual economies Year that China overtakes individual economies 2005 2035 2010 2015 2020 2040 2025 2030 Germany Japan U.S.A. Italy Germany Japan

Source: Globe & Mail

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2050: A Different World 2050: A Different World

World’s Ten Largest Countries in Population (millions)

1 China 1,318 2 India 1,132 3 U.S. 302 4 Indonesia 232 5 Brazil 189 6 Pakistan 169 7 Bangladesh 149 8 Nigeria 144 9 Russia 142 10 Japan 128 Canada 32.9 1 India 1,747 2 China 1,437 3 U.S. 420 4 Indonesia 297 5 Pakistan 295 6 Nigeria 282 7 Brazil 260 8 Bangladesh 231 9 Dem Rep of Congo 187 10 Philippines 150 Canada 41.6

Source: Population Reference Bureau

2007 Rank Country Population 2050 Rank Country Population

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The World is Changing The World is Changing

Largest shopping mall? China World’s tallest building? Dubai World’s largest publicly traded company? China Largest roller coaster? Singapore Largest casino? Macao World’s largest investment fund? Abu Dhabi Biggest movie industry? Bollywood

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World’s Top Ten - 2008 World’s Top Ten - 2008

3. Bill Gates US $58 bn 2. Carlos Slim Helu Mexico $60 bn 1. Warren Buffet US $62 bn 4. Lakshmi Mittal India $45 bn 5. Mukesh Ambani India $43 bn 6. Anil Ambani India $42 bn 8. KP Singh India $30 bn 7. Ingvar Kamprad Sweden $31 bn 9. Oleg Deripaska Russia $28 bn

  • 10. Karl Albrecht

Germany $27 bn

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Show Me the Money! Show Me the Money!

5 10 15 20 25 30 35 40 2005 2006 2007 ($'000 bn)

Africa 14.9% Middle East 17.5% Latin America 20.4% Asia-Pacific 12.5% Europe 5.3% North America 4.4%

High net-worth Individuals, wealth by region

Total 9.4%

% Change

Sources: Capgemini; Merrill Lynch

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World’s largest debtor nation – sizeable current

account and federal budget deficits

A consuming society that is running out of steam Political power waning?

Why is the World So Pessimistic About the US? Why is the World So Pessimistic About the US?

“The US economy is on a road to disaster and the dollar along with it” Jim Rogers

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US is World’s Largest Debtor Nation US is World’s Largest Debtor Nation

U.S. Credit Market Liabilities, % of GDP 50 100 150 200 250 300 350 400 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 %

Source: U.S. BEA

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Personal Savings Rate Near Record Low Personal Savings Rate Near Record Low

Personal Savings Rate % of disposable income Mean Two standard deviations

Source: US Bureau of Economic Analysis, NBF Financial

  • 2

2 4 6 8 10 12 14 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2% 1%

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House Prices to Fall Further House Prices to Fall Further

US Real House Prices: Projections

Source: Office of Federal Housing Enterprise Oversight, Bureau of Labor Statistics, PH&N

Index Return to trend 1989-92 crash: 25% decline 1979-82 crash: 40% decline 85 95 105 115 125 135 145 155 165 175 1975 1980 1985 1990 1995 2000 2005 2010

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US Has Greater Income Inequality Than Other Developed Countries US Has Greater Income Inequality Than Other Developed Countries

60 51 47 46 41 40 39 37 28 25 Bolivia (2002) Zambia (2004) China (2004) Mexico (2004) U.S. (2000) Burkina Faso (2003) Israel (2001) India (2004) Ukraine (2003) Sweden (2000) Gini Index of Income Distribution – Zero = Perfect Equality

Source: 2007 Population Reference Bureau

Greater income inequality Is associated with worse health status 31 Canada (2003)

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Obesity Has Become A Global Problem Obesity Has Become A Global Problem

Percent of adults who are obese (2005) 2 4 13 4 24 7 37 2 10 13 21 34 35 42 Japan South Korea Italy Morocco Mexico South Africa United States

Source: 2007 Population Reference Bureau

Canada 2323 Males aged 15+ Females aged 15+

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Health Care & Defense Will Put Pressure Health Care & Defense Will Put Pressure

  • n the Deficit
  • n the Deficit

Educ, Training & Soc. Svcs. 3% Veterans Benefits 2% Transportation 2% Justice 1% Natural Resources & Environment 1% International Affairs 1% Science, Space & Tech 1% Agriculture 1% Others include:

National Defense 17% Off-budget 14% Income Security 11% Medicare 11% Health 8% Social Security 18% Debt Interest 7% Others 14%

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Drop in US Dollar Reflects Global Drop in US Dollar Reflects Global Pessimism Pessimism

U.S. Current Account Balance & Dollar Index

  • 7
  • 6
  • 5
  • 4
  • 3
  • 2
  • 1

1 2 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 % of GDP 70 80 90 100 110 120 130 140 150 Index CA balance, % of GDP (left) Trade-weighted value of US dollar against major currencies (right)

Source: U.S. BEA, Federal Reserve

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Europe Japan China

  • 3.0
  • 2.5
  • 2.0
  • 1.5
  • 1.0
  • 0.5

0.0 0.5 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

  • 6.0
  • 4.0
  • 2.0

0.0 2.0 4.0 6.0 8.0 10.0 12.0 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 % of GDP Source: IMF, Datastream

  • 2.0
  • 1.0

0.0 1.0 2.0 3.0 4.0 5.0 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 % of GDP Source: IMF

  • 1.5
  • 1.0
  • 0.5

0.0 0.5 1.0 1.5 2.0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 % of GDP Source: IMF

World Happy to Cover US Shortfall for Now World Happy to Cover US Shortfall for Now

Current Account Balances, % of GDP Current Account Balances, % of GDP

United States

% of GDP Source: Bureau of Economic Analysis

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Demographics Suggest Shrinking Labour Supply Demographics Suggest Shrinking Labour Supply

Working-Age Population, % of Total 50 52 54 56 58 60 62 64 66 68 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 % G7 North America Japan

Source: US Census Bureau, PH&N

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Fertility Rates – 2.1 Is The Magic Number Fertility Rates – 2.1 Is The Magic Number

Fertility Rates, 2007

United States 2.1 France 2.0 UK 1.8 Canada 1.5

Aboriginal 2.6

Italy 1.4 Spain 1.4 Japan 1.3 Germany 1.3

Source: 2007 Population Reference Bureau, Statistics Canada Fertility Rate = average number of children born to a woman in her lifetime

Pakistan 4.1 Saudi Arabia 4.1 India 2.9 Brazil 2.3 China 1.6 Russia 1.3

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US In Better Shape Than Japan

Ratio of 65+ To Working Age Population: Dependency Ratio

US In Better Shape Than Japan

Ratio of 65+ To Working Age Population: Dependency Ratio

10 20 30 40 50 60 70 80 1950 1955 1960 1965 1970 1975 1980 1985 1990 1990 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Ratio Canada Japan US Germany

Source: U.S. Census Bureau

Dependency Ratios

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US Growth Could be Sub Par for Some Time US Growth Could be Sub Par for Some Time

  • Housing market will be a multi-year work out process
  • Consumer spending set to slow but…
  • …it has been a mistake to short the US consumer
  • Don’t underestimate the willingness of the rest of the

world to invest in the US

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Instead of Decline of the American Empire… What about the rise of the rest? Every few decades a significant shift occurs in the world economy with far reaching implications

Another Way to Look At This Issue Another Way to Look At This Issue Today it could be the BRICs

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Youthful BRICs Youthful BRICs

Source: Goldman Sachs

Working-age Population, % of Total 55 57 59 61 63 65 67 69 71 73 75 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 % of total G7 Brazil China Russia India Working-age = ages 15-65 G7

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Brazil’s Potential Growth Rate Much Higher Brazil’s Potential Growth Rate Much Higher

0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 1992-2000 2000-2025 2025-2050 % Labour Force Productivity 8.8% 4.9% 4.5% Figures show potential growth rate

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Canada’s Long Term Potential Just 1.25% Canada’s Long Term Potential Just 1.25%

0.0 0.5 1.0 1.5 2.0 2.5 3.0 1990 - 2000 2000 - 2025 2025 - 2050 % Labour Force Productivity 2.4% 2.0% 1.25%

Source: BCA Research

Figures show potential growth rate

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China’s Demographics Negative China’s Demographics Negative -

  • Consumer

Consumer Potential Enormous Potential Enormous

China's Working-Age Population, % of Total

Source: Goldman Sachs Research "Dreaming with BRICs: The Path to 2050", U.S. Census Bureau, PH&N

55 57 59 61 63 65 67 69 71 73 75 05 10 15 20 25 30 35 40 45 50 % of total

Working-age = ages 15-65 Peaks in 2010- 11 2005 2015 2025 10 20 30 40 50 60 70 80 90 100 Brazil China India Russia

Source: UN

Population with income above U.S. $3,000 as % of total At Some Point China Will Move from Supplier Of Labour to Demander of Consumer Goods

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Bond Market Trend Intact Bond Market Trend Intact – – For Now For Now

10-year Treasury bond yield 10-year average

Source: U.S. Federal Reserve

2 4 6 8 10 12 14 16 1953 1963 1973 1983 1993 2003 2007 %

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China Is A Trading Giant China Is A Trading Giant

3 6 9 12 15 18 21 24 27 30 1981 1985 1989 1993 1997 2001 2005 Index, 1981 = 1 China's Exports China's Imports World Trade

Source: IMF International Financial Statistics

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China Now World’s Second Largest China Now World’s Second Largest Exporter Exporter

Share of World Exports China United States Germany

Source: IMF Direction of Trade Statistics

2 4 6 8 10 12 14 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 %

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A Made In Canada Dichotomy A Made In Canada Dichotomy

It’s Canada’s time to shine…

  • Strong domestic demand
  • Lowest unemployment rate in almost 30 years
  • Near record labour force participation rate
  • Only G-7 country with twin surpluses

But beneath the surface….

  • Productivity growth is weak
  • Face growing competition from Asia and others
  • Soaring C$ weighs on exports
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C$ Driven by Oil and Economic Outlook C$ Driven by Oil and Economic Outlook

Canadian dollar and WTI Monthly since 1995 0.60 0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05 1995 1997 1999 2001 2003 2005 2007 US$ per C$ 20 40 60 80 100 120 140 US$/barrel USD per CAD (left) Crude Oil - WTI Spot (right) Correlation since 1995 = 0.89

Source: Bank of Canada, Datastream

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Average Annual Growth Rate in Labour Productivity (2000-2005) 1 2 3 4 5 6 Czech Republic Hungary Korea Poland Ireland U.S. Japan Finland UK Australia France Canada Austria Switzerland Spain Mexico Italy

Canada Lags In Labour Productivity Growth – Parity Not Justified Canada Lags In Labour Productivity Growth – Parity Not Justified

% change,

Source: The Conference Board of Canada

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The Impact of Globalization?

United States Canada Canada & US Manufacturing Employment

Source: Statistics Canada, US BLS

75 80 85 90 95 100 105 110 115 120 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Index, Jan. 1987 = 100

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Exports to China

Exports to the US 73.4% 76.5% Imports from US 69.2 65.0 Exports to China 1.0 2.0 Imports from China 1.0 9.3

1990 2007

Canadian Trade Still Regional Not Global Canadian Trade Still Regional Not Global

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The Changing Nature of Canadian Trade The Changing Nature of Canadian Trade

C$ millions Surplus on energy Surplus on autos and parts

Source: Statistics Canada

  • 2000
  • 1000

1000 2000 3000 4000 5000 6000 7000 97 98 99 00 01 02 03 04 05 06 07 08

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China Has Surpassed Canada In Terms of China Has Surpassed Canada In Terms of US Market Share US Market Share

Canada & China Share of US Imports % of US imports China's rank:

Source: US Census Bureau

Canada China 5 10 15 20 25 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

<10 9 8 6 5 4 3 2 1

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Canada and China/India

Risks and Opportunities

Canada and China/India

Risks and Opportunities

Risks

Competition and loss of market share Outsourcing

Opportunities

We have what China wants New markets for Canadian products

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  • Est. 1964
  • Est. 1964

Your Questions Your Questions