T U R B U L E N T T I M E S : E C O N O M I C O U T L O O K F O R - - PowerPoint PPT Presentation

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

APRIL 4, 2019

2 0 1 9 C O F I C O N V E N T I O N

Jock Finlayson, Executive Vice President and Chief Policy Officer jock.finlayson@bcbc.com PRESENTED TO THE

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

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• Overall global growth is softening
• Slower growth in store for U.S./Canada, with some risk of recession by 2020
• Further interest rate increases in U.S./Canada are likely to be very muted
• Weaker housing markets, eroding competitiveness, persistent energy sector woes, and high

levels of household debt…economic headwinds for Canada

• Demographic growth, low interest rates, low dollar, expanding tech economy, and strength in

tourism and other tradable services…positives for Canada

• We expect B.C. to be near the top of the Canadian growth charts in the next 2-3 years, provided

the $40 billion LNG Canada project proceeds

T H E G L O B A L E C O N O M Y I S C O O L I N G

3 Source: BMO Economics for forecasts; IMF for other years.

3.7% 3.6% 3.3% 3.2%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

2017 2018 2019 2020 Growth in Total Output

Average Growth, 2000-2015

G R O W T H M O D E R AT I N G I N C A N A D A A N D U . S .

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3.0 1.8 1.5 1.7 2.2 2.9 2.3 1.7 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 10 11 12 13 14 15 16 17 18e 19f 20f 10 11 12 13 14 15 16 17 18e 19f 20f

Real GDP growth, % Canada U.S.

e=estimate f=forecast Source: IMF World Economic database for history, BMO Economics (March 29, 2019) for forecasts.

U . S . E C O N O M Y H E A LT H Y, B U T S E T TO S L O W I N 2 0 1 9 - 2 0 2 0

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• Growth projected at ~2.3% this year, down from almost 3% in 2018
• current expansion is the 2nd longest on record
• Employment continues to climb… as the labour market tightens further
• unemployment rate near a 40 year low – heading for 3.5% in 2019
• Housing starts have been choppy…amid higher prices, escalating building costs,

and relatively sluggish household growth

• Business investment is increasing – aided by recent tax cuts/reforms
• The Federal Reserve has (suddenly) grown more dovish, suggesting at most

1-2 additional interest rate hikes over 2019-20

U . S . H O U S I N G S TA R T S W E L L B E L O W 1 9 9 7 - 2 0 0 6 L E V E L S

6 f=forecast Source: U.S. Census Bureau, Department of Housing and Urban Development, average of forecasts from BMO, CIBC, TD, RBC & Scotiabank for projections.

500 1000 1500 2000 2500 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19f 20f

U.S. housing starts, 000s

two or more units single units

U . S . P O P U L AT I O N G R O W T H T H E S L O W E S T S I N C E 1 9 3 7 !

7

0.70% 1.35%

U.S. Canada Annual Population Growth, 2016-2018

C A N A D I A N E C O N O M Y: B U M P S A H E A D

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• Growth essentially stalled in Q4 2018, although conditions improved in January 2019
• Solid job creation and low unemployment
• Household consumption and high levels of housing starts (214,000 last year) have

been the key factors sustaining aggregate demand – but both are expected to lose steam in 2019-20

• Don’t overlook population growth! Canada leads the G7 and is near

the top in the OECD, fueled by international immigration

• Lots of downside risks – softening global economy, household debt, loss of industrial

competitiveness, oil prices, uncertainty about USMCA – will the US Congress ratify…and what will Trump do if it doesn’t?

H O U S E H O L D C O N S U M P T I O N H A S F I L L E D T H E G A P F R O M C A N A D A’ S E X P O R T A N D I N V E S T M E N T U N D E R P E R F O R M A N C E

9 Source: CIBC Economic Insights, February 19, 2019.

80 90 100 110 120 130 140 150 160 170 180 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Canadian household debt to disposable income, %

R E C O R D H O U S E H O L D D E B T A C C U M U L AT I O N

10 Latest Q4 2018. Source: Statistics Canada, CANSIM table 378-0123.

B U T … E V E N W I T H R E C O R D D E B T, D E B T- S E R V I C E R AT I O S L O O K M A N A G E A B L E 10 15 20 25 30 35 40 45 50

91 93 95 97 99 01 03 05 07 09 11 13 15 17

Canadian interest paid, billions $ mortgage non-mortgage

11 Latest Q3 2018. Source: Statistics Canada, Table: 11-10-0065-01.

2 3 4 5 6 7 8 9 10

91 93 95 97 99 01 03 05 07 09 11 13 15 17

Debt service ratio mortgage non-mortgage

H O U S I N G S TA R T S I N C A N A D A H AV E P E A K E D

12 f=forecast Source: Statistics Canada, average of forecasts from BMO, CIBC, TD, RBC & Scotiabank for projections.

50 100 150 200 250 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19f 20f

Canada housing starts, 000s

single family = 50%+ of all starts single family = 30% of all starts

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C A N A D A : I M M I G R A N T A R R I VA L S *

* Permanent immigrants only Source: Statistics Canada; TD Economics.

252,000 260,000 271,000 297,500 286,000 311,000 331,000

2013 2014 2015 2016 2017 2018 2019

(target)

C A N A D I A N I N T E R E S T R AT E S … V E RY L I T T L E ‘ U P S I D E ’

14 Source: Bank of Canada; TD Economics for forecasts.

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 Overnight rate 10 year bond yields 3 month T bill

Selected Canadian interest

10 yr bond yield: 2.10% (2020 Q4) Overnight rate: 1.75% (2020 Q4) 3 month T bill: 1.75% (2020 Q4)

O U T L O O K F O R T H E L O O N I E

15 Latest: March 2019 Source: Bank of Canada, noon rate. TD Economics and BMO Economics for forecasts

0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05 1.10 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

U.S.$ per Cdn$, monthly averages with quarterly forecasts history TD BMO

OECD PPP estimate 40-yr average

C A N A D A E X P O R T S U N D E RW H E L M

( A V E R A G E A N N U A L I N C R E A S E I N T H E V A L U E O F E X P O R T S * , 2 0 0 0 T O 2 0 1 7 , M E A S U R E D I N U . S . D O L L A R S U S I N G P P P E X C H A N G E R A T E S )

16 * Merchandise exports Source: Canadian Manufacturers and Exporters.

6.0% 7.2% 5.9% 4.1% 2.5% 0% 1% 2% 3% 4% 5% 6% 7% 8% Total World Exports

• S. Korean

exports German exports U.S. exports Canada exports Canada non- energy exports 1.0- 1.5%

O U R E X P O R T M A L A I S E B E G A N A R O U N D 2 0 0 5

17 Source: CIBC Economic Insights, February 19, 2019.

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C A N A D A’ S P E R F O R M A N C E I N T H E 2 0 1 8 W O R L D E C O N O M I C F O R U M “ G L O B A L C O M P E T I T I V E N E S S R E P O R T ”

Source: World Economic Forum, The Global Competitiveness Report 2018.

“ M O S T P R O B L E M AT I C FA C TO R S ” F O R D O I N G B U S I N E S S I N C A N A D A

( B A S E D O N A 2 0 1 7 S U R V E Y O F C A N A D I A N E X E C U T I V E S )

19 Source: World Economic Forum, Executive Opinion Survey 2017.

19.3 15.8 14.4 9.7 9.1 7.9 5.8 5.8 4.5 2.9 1.7 1.2 1.2 0.7 0.0 0.0 5 10 15 20 Inefficient government bureaucracy Tax rates Insufficient capacity to innovate Inadequate supply of infrastructure Tax regulations Policy instability Restrictive labour regulations Access to financing Inadequately educated workforce Poor work ethic in national labour force Government instability/coups Inflation Foreign currency regulations Corruption Poor public health Crime and theft

Note: From the list of factors, respondents to the World Economic Forum’s Executive Opinion Survey were asked to select the five most problematic factors for doing business in their country and to rank them between 1 (most problematic) and 5. The score corresponds to the response weighted according to their rankings.

A S S E S S I N G C A N A D A’ S C O M P E T I T I V E N E S S

( D R AW N F R O M A 2 0 1 8 S U R V E Y O F C A N A D I A N C E O s )

20 Source: Business Council of Canada.

47.8% 20.0% 18.9% 7.8% 5.6%

Regulatory burden Availability of talent Taxes/tax rates Quality/capacity of infrastructure Trade barriers/NAFTA/U.S. protectionism Of the following factors, which is most likely to affect your company’s Canadian investment plans?

P R O D U C T I V I T Y, N O T WA G E S , I S C A N A D A’ S P R O B L E M

21 Source: CIBC Economic Insights, February 19, 2019.

T H E “ C H E A P ” C $ S T I L L H A S N ’ T R E S TO R E D R E L AT I V E U N I T L A B O U R C O S T S TO T H E 2 0 0 0 L E V E L

22 Source: CIBC Economic Insights, February 19, 2019.

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C A N A D A’ S L A B O U R P R O D U C T I V I T Y H A S S T E A D I LY D E T E R I O R AT E D R E L AT I V E TO M O S T C O M PA R ATO R S

Source: OECD, BCBC.

Labour productivity gap with U.S. in percentage points, GDP per hour worked (total economy)

• 26
• 2
• 4
• 12
• 35
• 25
• 15
• 5

5 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Canada Germany France G7 average

"ICT revolution"

Gap in % points

24

C A N A D I A N P R I M E - A G E L A B O U R F O R C E PA R T I C I PAT I O N I S H I G H E R T H A N I N T H E U . S .

Source: Ketcheson et al. 2017.

Labour force participation rates for persons aged 25-54 years

C A N A D A H A S L O S T I T S P R E V I O U S B U S I N E S S TA X A D VA N TA G E O V E R T H E U . S . ( C O M B I N E D N AT I O N A L + AV G . S TAT E / P R O V I N C I A L )

25 Source: PWC.

24% 26% 27% 39% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Non-U.S. OECD Average United States Canada United States (pre-reform) Statutory Corporate Income Tax Rate, Combined, 2018

B . C . E C O N O M I C P I C T U R E

• B.C. an economic leader in Canada over the past 5 years
• Growth has been running above long-run potential and is set to downshift
• Rising population, strong consumer outlays, and robust housing-related

activity underpinned the economic expansion in 2014-2017

• Higher interest rates, tighter mortgage lending regulations, and new housing-

related policy measures are weighing on home sales/prices

• LNG Canada project will provide a multi-year boost, offsetting the effects of

weaker housing markets and more muted increases in consumer spending

• Most of B.C.’s ‘traded industry clusters’ – forestry, mining, energy, and most

segments of manufacturing -- face significant competitiveness challenges

• Risk

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D O W N S H I F T E X P E C T E D I N B . C . F O L L O W I N G A P E R I O D O F S T R O N G E C O N O M I C G R O W T H

Sources: Statistics Canada, Table 36-10-0401-01, BCBC for forecasts. 27

3.8 2.3 2.2 2.4

• 3
• 2
• 1

1 2 3 4 5

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18e 19f 20f

B.C. real GDP growth, %

Average growth 1997-2017: 2.7%

B . C . H A S T H E C O U N T RY ’ S L O W E S T U N E M P L O Y M E N T R AT E 3 4 5 6 7 8 9 10

10 11 12 13 14 15 16 17 18 19

Unemployment rates by selected jurisdictions, %

British Columbia Canada Alberta

28 Latest: Feb. 2019. S.A.=seasonally adjusted Source: Statistics Canada LFS.

I N V E S T M E N T I N R E S I D E N T I A L S T R U C T U R E S …

29 Source: Statistics Canada, Table: 36-10-0222-01. Note: 2012 chained $

4 5 6 7 8 9 10 11

91 93 95 97 99 01 03 05 07 09 11 13 15 17

BC Canada

Capital investment in residential structures as a share of GDP, %

M U LT I - U N I T D W E L L I N G S A C C O U N T F O R M O S T O F T H E I N C R E A S E I N B . C . ’ S H O U S I N G S TO C K

30 Source: Statistics Canada, Census 2006 and 2016.

100 200 300 400 500 600 700 800 900

Single-detached house Apartment - building fewer than five storeys Apartment - duplex Apartment - building five or more storeys Row house Semi-detached house

B.C. housing stock by dwelling type, 000s units

2006 2016

3.1% growth 12% growth 38% growth 51% growth 13% growth 33% growth

49% 44.1% share of total 21% 20.5% share of total 10.2% 12.2% share of total 7.2% 9.4% share of total 6.8% 7.9% share of total 3.1% 3.0%

R I S I N G P E R M I T VA L U E S P O I N T TO M O R E N O N - R E S C O N S T R U C T I O N – E S P E C I A L LY I N M E T R O VA N C O U V E R

31 Source: Statistics Canada, CANSIM table: 34-10-0066-01 * 2018 estimate based on January to November data

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

11 12 13 14 15 16 17 18*

Metro Vancouver non-residential building permits, billions $ 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

11 12 13 14 15 16 17 18*

Rest of B.C. non-residential building permits, billions $

B . C . I N V E S T M E N T I N M & E C O N S I S T E N T LY B E L O W T H E N AT I O N A L B E N C H M A R K

32 Source: Statistics Canada, Table: 36-10-0222-01. Note: 2012 chained $

1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

91 93 95 97 99 01 03 05 07 09 11 13 15 17

B.C. Canada

Capital investment in machinery & equipment as a share of GDP, %

M E R C H A N D I S E E X P O R T S C L I M B TO N E W H I G H S 2000 2500 3000 3500 4000 4500 10 11 12 13 14 15 16 17 18

B.C. international merchandise exports, S.A., millions $

33 Latest: December 2018. S.A.=seasonally adjusted; Source: B.C. Stats.

B . C . M E R C H A N D I S E E X P O R T S ( 2 0 1 7 )

34

• Natural resource products made up

almost ¾ of B.C.’s $43.4 billion of merchandise exports in 2017

• Forestry = 31-35% of B.C.’s goods

exports, depending on the year

• The data reported here does not

include exports of services (e.g., tourism, education, finance, transportation, etc.)

Wood products, 22.5% Pulp and paper, 10.2% Agri-food and fish, 9.4% Metallic minerals, 12.3% Energy, 25.4% Fabricated metals, 2.8% Machinery and equipment, 10.7% Chemical products, 2.3% Plastics, 1.0% Other, 3.4%

B . C . E C O N O M I C O U T L O O K ( B C B C F O R E C A S T )

( A N N U A L % C H A N G E U N L E S S O T H E R W I S E I N D I C A T E D )

e – estimate f – forecast Source: Statistics Canada and BC Stats; Business Council for forecasts.

2017 2018 2019f 2020f Real GDP 3.8 2.3 2.2 2.4 Employment 3.7 1.1 1.2 1.0 Unemployment rate (%) 5.1 4.7 4.4 4.6 Housing starts (000 units) 40.1 41.0 36.0 37.0 Retail sales 9.0 2.4 4.0 3.9 B.C. CPI 1.7 2.7 2.3 2.2

35

B . C . ’ S B U S I N E S S E N V I R O N M E N T I S B E C O M I N G L E S S C O MP E T I T I V E A N D MO R E U N C E RTA I N

36

• True for most industries, including many exporters
• Return of Provincial Sales Tax in 2013…rising corporate tax rates…

highest carbon tax in North America…increased PIT rates on the most productive workers…Employer Health Tax (2019)…municipal property taxes

• New Environmental Assessment Act….next stage of B.C. climate policy…
• verhaul of ‘professional reliance’ regime governing qualified professionals in

natural resource sectors…Water Sustainability Act (2016)…Coast forest ‘revitalization’ plan

• Expected changes in Employment Standards legislation, Labour Code, and

WorkSafe BC regulations, benefit levels, and assessments

• Adoption of UNDRIP into provincial policy and decision-making