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

APRIL 4, 2019 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 . PRESENTED TO THE 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 www.bcbc.com | @bizcouncilbc

2 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 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

3 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 Growth in Total Output 4.5% Average 4.0% Growth, 3.5% 2000-2015 3.7% 3.6% 3.3% 3.0% 3.2% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2017 2018 2019 2020 Source: BMO Economics for forecasts; IMF for other years.

4 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 . Real GDP growth, % 3.5 3.0 U.S. Canada 2.9 3.0 2.5 2.3 2.2 2.0 1.8 1.7 1.7 1.5 1.5 1.0 0.5 0.0 10 11 12 13 14 15 16 17 18e 19f 20f 10 11 12 13 14 15 16 17 18e 19f 20f e=estimate f=forecast Source: IMF World Economic database for history, BMO Economics (March 29, 2019) for forecasts.

5 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 Growth projected at ~2.3% this year, down from almost 3% in 2018 • current expansion is the 2 nd longest on record o Employment continues to climb… as the labour market tightens further • unemployment rate near a 40 year low – heading for 3.5% in 2019 o 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

6 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 U.S. housing starts, 000s 2500 two or more units single units 2000 1500 1000 500 0 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 f=forecast Source: U.S. Census Bureau, Department of Housing and Urban Development, average of forecasts from BMO, CIBC, TD, RBC & Scotiabank for projections.

7 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 ! Annual Population Growth, 2016-2018 1.35% 0.70% U.S. Canada

8 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 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 9 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 Source: CIBC Economic Insights, February 19, 2019.

10 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 Canadian household debt to disposable income, % 180 170 160 150 140 130 120 110 100 90 80 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 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 11 L O O K M A N A G E A B L E Canadian interest paid, billions $ Debt service ratio 50 10 45 9 mortgage 40 non-mortgage 8 35 7 30 6 25 5 20 4 mortgage non-mortgage 15 3 10 2 91 93 95 97 99 01 03 05 07 09 11 13 15 17 91 93 95 97 99 01 03 05 07 09 11 13 15 17 Latest Q3 2018. Source: Statistics Canada, Table: 11-10-0065-01.

12 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 Canada housing starts, 000s 250 200 150 100 50 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19f 20f single family = 30% of all single family = 50%+ of starts f=forecast all starts Source: Statistics Canada, average of forecasts from BMO, CIBC, TD, RBC & Scotiabank for projections.

13 C A N A D A : I M M I G R A N T A R R I VA L S * 331,000 (target) 311,000 297,500 286,000 271,000 260,000 252,000 2013 2014 2015 2016 2017 2018 2019 * Permanent immigrants only Source: Statistics Canada; TD Economics.

14 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 ’ Selected Canadian interest 5.0 4.5 Overnight rate 10 year bond yields 4.0 3 month T bill 3.5 10 yr bond 3.0 yield: 2.10% 2.5 (2020 Q4) Overnight 2.0 rate: 1.75% 1.5 (2020 Q4) 1.0 3 month T bill: 1.75% 0.5 (2020 Q4) 0.0 Source: Bank of Canada; TD Economics for forecasts.

15 O U T L O O K F O R T H E L O O N I E U.S.$ per Cdn$, monthly averages with quarterly forecasts 1.10 history 1.05 TD 1.00 BMO 0.95 0.90 40-yr average 0.85 0.80 OECD PPP estimate 0.75 0.70 0.65 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Latest: March 2019 Source: Bank of Canada, noon rate. TD Economics and BMO Economics for forecasts

C A N A D A E X P O R T S U N D E RW H E L M 16 ( 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 ) 8% 7.2% 7% 6.0% 5.9% 6% 5% 4.1% 4% 3% 2.5% 2% 1.0- 1% 1.5% 0% Total World S. Korean German exports U.S. exports Canada exports Canada non- Exports exports energy exports * Merchandise exports Source: Canadian Manufacturers and Exporters.

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

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 18 “ 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 19 ( 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 ) Inefficient government bureaucracy 19.3 15.8 Tax rates Insufficient capacity to innovate 14.4 Inadequate supply of infrastructure 9.7 Tax regulations 9.1 Policy instability 7.9 Restrictive labour regulations 5.8 Access to financing 5.8 Inadequately educated workforce 4.5 Poor work ethic in national labour force 2.9 Government instability/coups 1.7 Inflation 1.2 Foreign currency regulations 1.2 Corruption 0.7 0.0 Poor public health 0.0 Crime and theft 0 5 10 15 20 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. Source: World Economic Forum, Executive Opinion Survey 2017.

20 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 ) Of the following factors, which is most likely to affect your company’s Canadian investment plans? Regulatory burden 47.8% Availability of talent 20.0% Taxes/tax rates 18.9% Quality/capacity of infrastructure 7.8% Trade barriers/NAFTA/U.S. protectionism 5.6% Source: Business Council of Canada.

21 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 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 22 L A B O U R C O S T S TO T H E 2 0 0 0 L E V E L Source: CIBC Economic Insights, February 19, 2019.

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 23 R E L AT I V E TO M O S T C O M PA R ATO R S Labour productivity gap with U.S. in percentage points, GDP per hour worked (total economy) Gap in % points 5 -2 -5 -4 -12 -15 -25 -26 "ICT revolution" -35 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Canada Germany France G7 average Source: OECD, BCBC.

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 24 H I G H E R T H A N I N T H E U . S . Labour force participation rates for persons aged 25-54 years Source: Ketcheson et al. 2017.