Weathering the Headwinds to Canadas Economic Growth Greater Moncton - - PowerPoint PPT Presentation

Weathering the Headwinds to Canada’s Economic Growth

Greater Moncton Chamber of Commerce Moncton, NB 21 November 2012

Tim Lane Deputy Governor Bank of Canada

Outline

• Global economy
• Canada’s economic outlook
• New Brunswick: outlook and challenges
• Bank of Canada mandate and responsibilities

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Global Economy

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Global growth remains modest and unbalanced

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2007 2008 2009 2010 2011 2012 85 95 105 115 125 135 145 Index Canada United States Euro area Japan Emerging-market economies

Real GDP, 2007Q1 = 100, quarterly data

Last observation: 2012Q2 and 2012Q3 Note: Emerging-market economies GDP is a linear approximation of the quarterly trend based on annual data from the IMF World Economic Outlook. Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, Japan Statistics Bureau and International Monetary Fund

U.S. real GDP growth is projected to remain relatively modest compared with previous U.S. recoveries

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1 2 3 4 5 6 7 90 100 110 120 130 140 Index U.S. current cycle Base-case projection The Big Five modern financial crises Range of past U.S. recessions (1948 onward)

U.S. real GDP across economic cycles; start of recession = 100, quarterly data

Note: The Big Five modern financial crises, as described in Reinhart and Rogoff (2008), are Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). Sources: U.S. Bureau of Economic Analysis, Organisation for Economic Co-operation and Development, and Bank of Canada projections

Start of the recession Years after the start of the recession Years before the start of the recession

U.S. households have made considerable progress toward deleveraging

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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 80 90 100 110 120 130 450 500 550 600 650 700 % Net worth-to-income (left scale) Debt-to-income (right scale)

U.S. household balance sheet gradually improving

%

Last observation: 2012Q2 Source: U.S. Federal Reserve Board and Bureau of Economic Analysis

U.S. residential investment is gradually improving

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2004 2005 2006 2007 2008 2009 2010 2011 2012 400 800 1200 1600 2000 2400 5 20 35 50 65 80 Thousands of units Home-builders housing-market index (left scale) New private housing units authorized by building permits (right scale)

Monthly data

Note: The Housing Market Index (HMI) is based on a monthly survey of members of the National Association of Home Builders and is designed to take the pulse of the single-family housing market. Sources: U.S. Census Bureau and National Association of Home Builders Last observations: September and October 2012

Index

Home-Builders Housing Market Index (left scale) New private housing units authorized by building permits (right scale)

U.S. labour market conditions remain weak

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2008 2009 2010 2011 2012 4 5 6 7 8 9 10 11 126 128 130 132 134 136 138 140 % Non-farm employment (left scale) Unemployment rate (right scale)

Monthly data

Last observation: September 2012 Source: U.S. Bureau of Labor Statistics

Millions

Fiscal consolidation will significantly dampen U.S. growth

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1 2 3 4 5 2011 2012 2013 2014 % GDP growth excluding fiscal policy Estimated contribution from fiscal policy GDP growth

Annual data

Note: The contribution of fiscal policy to growth includes both direct government expenditures and the indirect effects on other components of aggregate demand. Sources: U.S. Bureau of Economic Analysis and Bank of Canada calculations and projections

Europe is stagnating

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1 2 3 4 5 6 90 95 100 105 110 115 120 Index Euro-area current cycle Base-case projection The Big Five modern financial crises Range of past euro-area recessions (1980 onward)

Euro-area real GDP across economic cycles; start of recession = 100, quarterly data

Note: The Big Five modern financial crises, as described in Reinhart and Rogoff (2008), are Spain (1977), Norway (1987), Finland (1991), Sweden (1991) and Japan (1992). Sources: Eurostat, Organisation for Economic Co-operation and Development, and Bank of Canada projections

Start of the recession Years after the start of the recession Years before the start of the recession

Very robust growth in emerging markets

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2007 2008 2009 2010 2011 2012 90 100 110 120 130 140 150 160 170 Index Canada U.S. China Emerging market and developing economies

Real GDP, Index 2007Q1=100, quarterly data

Last observation: 2012Q3 for United States and China, 2012Q2 for Canada, 2011Q4 for emerging-market and developing economies Note: The emerging-market and developing economies (which includes China) figure is calculated using annual growth rates from the IMF 2012 October WEO. Sources: Statistics Canada, Bureau of Economic Analysis, China National Bureau of Statistics, IMF 2012 October WEO, and Bank of Canada calculations

Emerging markets now account for bulk of growth

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2000 2011 20 40 60 80 100 %

Advanced economies Emerging and developing economies Contribution to global growth

Percentage contributions to global real GDP growth, annual data

Last observation: 2011 Sources: International Monetary Fund World Economic Outlook, Bank of Canada calculations

EME’s growth slowing from previously rapid rates

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Emerging market economies China Brazil India* 2 4 6 8 10 12 % 2010 2011 2012Q2

Percentage change, year-over-year, annual and quarterly data

Last observation: 2012Q2 Note: Emerging-market economies include China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, Thailand, Argentina, Brazil, Chile, Colombia, Mexico and Peru, Czech Republic, Hungary, Poland, Romania and Russia. Countries are weighted by 2011 GDP in PPP terms. *The measure used for India is GDP at factor cost, since this is the generally reported figure for that country. For the EME aggregate, of which India is part, GDP measured by expenditure was used, for consistency with the other countries included in the aggregate. Source: J.P. Morgan, International Monetary Fund World Economic Outlook, April 2012; Haver Analytics; and Bank of Canada

Emerging-market economies

EMEs major drivers of commodity prices

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World GDP Crude oil Nickel Aluminum Coal Zinc Copper Iron 10 20 30 40 50 60 70 80 % G-20 emerging-market economies (excluding China) China

Percentage share of world GDP and world commodity imports, 2010

Sources: UN Comtrade; IMF, World Economic Outlook, April 2012; and Bank of Canada calculations

Canada’s Economic Outlook

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Canada: First G-7 country to recover pre-recession GDP

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2007 2008 2009 2010 2011 2012 91 93 95 97 99 101 103 105 107 109 Index Canada United States Euro area Japan

Real GDP; 2007Q1 = 100, quarterly data

Last observations: 2012Q2 and 2012Q3 Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat and Japan Statistics Bureau

The Canadian economy continues to operate with a small amount of excess supply

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1 2 3 10 20 30 40 50 60 70 2007 2008 2009 2010 2011 2012 % % Conventional measure of the output gap*** (right scale) Some and significant difficulty* (left scale) Labour shortages** (left scale)

*Response to Business Outlook Survey question on capacity pressures. Percentage of firms indicating that they would have either some or significant difficulty meeting an unanticipated increase in demand/sales. **Response to Business Outlook Survey question on labour shortages. Percentage of firms reporting labour shortages that restrict their ability to meet demand. ***Difference between actual output and estimated potential output from the Bank of Canada's conventional measure. The estimate for the third quarter of 2012 (indicated by *) is based on a projected increase in output of 1.0 per cent (at annual rates) for the quarter. Source: Bank of Canada

Real GDP; 2007Q1 = 100, quarterly data

Last observation: 2012Q3

Real GDP is expected to grow at a moderate pace

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2 4 6 8 2008 2009 2010 2011 2012 2013 2014 % Year-over-year percentage change in real GDP Base-case projection Quarter-over-quarter percentage change in real GDP, at annual rates Base-case projection

Sources: Statistics Canada and Bank of Canada calculations and projections

Export recovery weakest in post-war period

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1 2 3 4 5 6 80 90 100 110 120 130 140 150 160 170 Index Current cycle Base-case scenario Average of previous cycles (since 1951) Range of previous cycles (since 1951)

Comparison of real exports across economic cycles; quarter before the downturn in real GDP = 100, quarterly data

Sources: Statistics Canada and Bank of Canada calculations and projections

Years before the downturn Years after the downturn Quarterly peak in real GDP before the downturn

Canada’s share of world market down

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10 20 30 40 1 2 3 4 5 6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 % % Canadian world export market share (left scale) Canadian export growth (annual percentage change, in values, U.S. dollars, right scale) World export growth (annual percentage change, in values, U.S. dollars, right scale)

Annual data

Last observation: 2010 Sources: UN Comtrade and Bank of Canada calculations

Canada’s trade directed toward slow growing economies

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2 4 6 8 10 12 %

Average growth rates 2000-2011, annual data

Last observation: 2011 Note: *Country is not one of Canada's top 15 trading partners. Export shares in 2011 are reported. Source: International Monetary Fund World Economic Outlook, Industry Canada, staff calculations

Accounts for 84.5% of exports Accounts for 9.3% of exports

Canadian firms losing competitiveness

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2005 2006 2007 2008 2009 2010 2011 2012

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10 20 30 40 % Canadian dollar vis-à-vis the U.S. dollar Relative wages Relative productivity Percentage change in relative unit labour costs vis-à-vis the United States

Contribution of various factors to the change in Canada's relative unit labour costs vis-à-vis those in the United States, quarterly data

Last observation: 2012Q2 Sources: Statistics Canada, U.S. Bureau of Economic Analysis and Bank of Canada calculations

Canada has relied on domestic demand

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 90 92 94 96 98 100 102 104 106 108 Index

Canada United States Japan United Kingdom Euro area

Index, peak of real GDP = 100, quarterly data

Last observation: 2012Q2 Note: Private domestic demand includes consumption, business and residential investment, except for the euro area and the United Kingdom, which also includes government investment. Sources: Statistics Canada, U.S. Bureau of Economic Analysis, Eurostat, Japan Cabinet Office, the U.K. Office for National Statistics via Haver Analytics and Bank of Canada calculations

Quarters

Evolution of real private domestic demand since pre-recession peak

Contribution of government spending to real GDP growth is expected to be modest

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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0.0 0.5 1.0 1.5 Percentage points Contribution of government expenditures to real GDP growth Base-case projection Annual data

Sources: Statistics Canada and Bank of Canada calculations and projections

New Brunswick: outlook and challenges

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GDP comparison—New Brunswick and Canada

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Employment: New Brunswick and Canada

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Canada (left scale) New Brunswick (right scale)

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New Brunswick: largest exporter to United States

NL PE NS NB QC ON MB SK AB BC 5 10 15 20 25 30 35 % U.S. share of exports

U.S. exports as a share of GDP

Constant 2007 prices

Last observation: 2011 Source: Statistics Canada, Industry Canada

Bank of Canada mandate and responsibilities

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The mandate of the Bank of Canada is to contribute to the economic well-being of Canadians by:

• Aiming to keep inflation low, stable and predictable
• Promoting a stable and efficient financial system
• Supplying secure, quality bank notes
• Providing banking services to the federal government

and key financial system players

Mandate of the Bank

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Our objective: Low, stable, predictable inflation. The target is 2%. Benefits:

• Reduces uncertainty: Businesses and consumers can make

decisions with greater confidence

• Smooths out business cycles: Stimulates very slow growth,

dampens excessive growth

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Monetary policy

Monetary policy: Low and stable inflation

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1980 1985 1990 1995 2000 2005 2010 2 4 6 8 10 12 14 % Total CPI Core CPI Control range Target

CPI annual averages, year-over-year percentage change

Note: Data for 2012 are current to September. Source: Statistics Canada

Recent monetary policy decision

• On 23 October, the Bank of Canada maintained its policy

interest rate at 1 per cent

• Over time, some gradual withdrawal of monetary policy

stimulus will likely be required, consistent with achieving the inflation-control target

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T

• tal CPI inflation in Canada is projected to remain below

2 per cent until the end of 2013

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1 2 3 4 2007 2008 2009 2010 2011 2012 2013 2014 % Total CPI Core CPI* Target Control range

Year-over-year percentage change, quarterly data

*CPI excluding eight of the most volatile components and the effect of changes in indirect taxes on the remaining components Sources: Statistics Canada and Bank of Canada calculations and projections

Financial system

Goal: Promote the stability and efficiency of the Canadian and global financial systems Canada’s financial system includes:

• Financial institutions, e.g. banks, credit unions, insurance

companies

• Financial markets, including securities and foreign exchange

markets

• Clearing and settlement systems

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Funds management

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Objective: Provide effective banking services to the federal government and other key financial system players The Bank of Canada:

• Manages Canada’s foreign exchange reserves, the federal

government’s cash balances and federal debt in collaboration with the Department of Finance

• Administers the Canada Savings Bond program
• Provides the means of final settlement of daily flows of payment

among financial institutions

• Bank notes are one of the central bank’s most tangible

products.

• The Bank of Canada provides Canadians with bank notes

that are readily accepted and secure from counterfeiting.

• Anti-counterfeiting goal: fewer than 50 counterfeits detected

annually per million notes in circulation.

Currency

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New $20 bank note: safer, cheaper, greener

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Questions?

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