economic outlook: soft patch or sharp slowdown?€¦ · economic outlook: soft patch or ... world...

Douglas Porter, CFAChief Economist, BMO Financial [email protected]

A presentation of BMO Economicshttp://economics.bmocapitalmarkets.com • 1-800-613-0205

Please refer to the next page for Important Disclosures

March 26, 2019

Economic outlook:Soft Patch orSharp Slowdown?

General Disclosure“BMO Capital Markets” is a trade name used by the BMO Financial Group for the wholesale banking businesses of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Limited in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Limited and BMO Capital Markets Corp are affiliates. This document is issued and distributed in Hong Kong by Bank of Montreal (“BMO”). BMO is an authorized institution under the Banking Ordinance (Chapter 155 of the Laws of Hong Kong) and a registered institution with the Securities and Futures Commission (CE No. AAK809) under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). BMO does not represent that this document may be lawfully distributed, or that any financial products may be lawfully offered or dealt with, in compliance with any regulatory requirements in other jurisdictions, or pursuant to an exemption available thereunder. This document is directed only at entities or persons in jurisdictions or countries where access to and use of the information is not contrary to local laws or regulations. Their contents have not been reviewed by any regulatory authority. Bank of Montreal or its subsidiaries (“BMO Financial Group”) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMO Capital Markets endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This document is not to be construed as an offer to sell, a solicitation for or an offer to buy, any products or services referenced herein (including, without limitation, any commodities, securities or other financial instruments), nor shall such Information be considered as investment advice or as a recommendation to enter into any transaction. Each investor should consider obtaining independent advice before making any financial decisions. This document is provided for general information only and does not take into account any investor’s particular needs, financial status or investment objectives. BMO Capital Markets or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets or its affiliates, officers, directors or employees have a long or short position in many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that BMO Capital Markets or its affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein.

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Important disclosures

© COPYRIGHT 2019 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.comSource: BMO Economics

1

Sep Jan ’17 Jul Jan ’18 Jul Jan ’19

Stocks

TSX¹

Record

2016US Election

S&P 500²

Record

2000

2250

2500

2750

3000

13500

14850

16200

17550

18900

20250

Sep Jan ’17 Jul Jan ’18 Jul Jan ’19

(%)

Canada

US

7½-yr high

10-year government bond yields

0.9

1.5

2.1

2.7

3.3

¹ (lhs); ² (rhs)

Trade tensions and cooling growth fuel volatility

Market rebound… only for equities

(as of March 22, 2019)


2

0.3

1.1

1.1

1.3

1.5

1.6

1.7

2.3

3.1

3.2

3.3

6.4

6.6

0 3 6 9

JapanBrazil

EurozoneUK

Russia¹CanadaMexico

AustraliaUS

South KoreaWorldChinaIndia

Real GDPCurrent

(y/y % chng)

Global growth: Fading

CurrentYear ago

(avg) 17 18 19 20World 3.7 3.6 3.3 3.2

2018:Q4

Sorted by current; World GDP based on 60 of 75 countries that regularly report GDP growth, weighted by GDP shares (converted via IMF’s PPP estimates); ¹ 2018:Q3


3

USCanada

forecast-5.0

-2.5

0.0

2.5

5.0

04 06 08 10 12 14 16 18 20

Real GDP

US fiscal stimulus dwindling

(y/y % chng)

North American growth: Cooler 2019

17 18 19 20Canada 3.0 1.8 1.3 1.7US 2.2 2.9 2.3 1.7


4

forecast

Canada

US

5.8%

8.7%

3.8%

10.0%

3

5

7

9

11

06 08 10 12 14 16 18 20

Lack of workers

Unemployment rate (percent)

Jobless rates: At 40+ year lows

Greece 18.0 Spain 14.1 Italy 10.5 France 8.8 Portugal 6.7 Canada 5.8 Ireland 5.6 Australia 4.9 UK 3.9 US 3.8 Germany 3.2 Japan 2.5


5

recession

Wages & salaries²

Employment/population ratio¹

58

60

62

64

66

1

2

3

4

5

90 95 00 05 10 15

United States

Wage-common³

2.3%Employment/

population ratio¹

60.5

61.5

62.5

63.5

64.5

0

1

2

3

4

5

6

04 07 10 13 16 19

Canada

¹ (% : rhs); ² Employment Cost Index (y/y % chng : lhs); ³ (y/y % chng : lhs); BMO Economics estimate

Wages rising only gradually… still


6

0.2

1.5

1.5

1.5

1.5

1.9

2.6

3.9

Total CPI(latest month)

0 1 2 3 4

Japan

Euro Area

China

Canada

US

UK

India

BrazilTotal

Core

forecast

1.5%

2.1%

United States

-3.0

-1.5

0.0

1.5

3.0

4.5

09 12 15 18

Total

Core

1.5%

1.8%

Canada

-3.0

-1.5

0.0

1.5

3.0

4.5

09 12 15 18

¹ Average of three new core inflation measures

Consumer price index (y/y % chng)

Inflation moves lower again


7

Deflationary Gasoline -11.9%

Internet access services -9.2%

Computer equipment -4.7%

Hotel/motel rates -4.7%

Prescription drugs -3.0%

Natural gas -2.3%

Soap -2.2%

Recreational vehicles -1.1%

Tools -1.0%

Household furniture -0.2%

Inflationary Vegetables 12.4%

Cigarettes 8.5%

Mortgage interest 8.1%

Auto insurance 6.3%

Home insurance 6.2%

Air fares 3.8%

Tuition fees 3.1%

Electricity 2.9%

Restaurant meals 2.7%

Beer 2.2%

Consumer price index – Canada

Inflation and deflation

(y/y % chng : as of February 2019)

Overall CPI: 1.5%

Down 3.0% in mid-March


8

The long-running story (2010-2015): No bubble

Home prices rising with strong supply-demand fundamentals

Recent history (2016-Early 2017): Regional bubble

Prices detach from fundamentals in Vancouver then Toronto

Current situation: Policy-induced correction

Toronto/Vancouver adjusting to policy changes

Other markets driven by fundamentals

Sources: BMO Economics; [magazine cover] Maclean’s… 7 years ago

Canada

The great housing market debate: Bubble/No bubble


9

-6.1

-5.1

-4.5

-4.4

-0.1

2 1.6

2.3

5.0

6.3

7.4

$965,000

$297,000

$347,000

$439,000

$462,000

$292,000

$766,000

$555,000

$387,000

$412,000

Average priceAverage price(y-t-d avg)(y-t-d avg)

-8 -4 0 4 8 12

Vancouver

Regina

Edmonton

Calgary

Canada

Winnipeg

Toronto

Hamilton-Burlington

Montreal

Ottawa

Existing home prices¹

Governments move to cool market: Working well

Canada

Canadian house prices: East hot, West not

(y/y % chng : nsa : as of February 2019)

¹ HPI composite benchmark where available; ² Average price (3-mnth ma)


10

45 55 65 75 85 95 05 15

1957Hungary/Suez Crisis

US recession200

300

400

500

600

700

Population

One new Canadian per minute in 2018

Canada (000s : y/y chng)

Canada’s population boomlet in raw numbers


11

US

Canada

crossover

0.6

0.8

1.0

1.2

1.4

1.6

1.8

90 95 00 05 10 15

Debt ratio(ratio to personal disposable income)

US

Canada

-5

0

5

10

15

05 08 11 14 17

Debt growth²(y/y % chng)

¹ Households, nonprofits and unincorporated businesses; ² Consumer credit and residential mortgages only

Debt ratio stabilizing

Households¹

Household debt: Bank of Canada’s “#1 domestic financial vulnerability”


12

Housing slows

Commercial vacancy rates down – except Calgary

Job growth stays firm

Spending growth slows

Infrastructure uncertainty

…But permits still rising

Canadian construction industry: Mixed picture


13

2.0

0.9

1.0

0.8

2.0

-1.0

1.8

2.0

1.9

2.1

0.5

0.6

0.7

0.9

1.2

1.5

1.6

1.6

1.6

1.7

-1 0 1 2 3

AB¹

NB

NS

SK¹

PE

NL¹

BC

QC

MB

ON

Real GDP (y/y % chng)

Sorted by 2019; ¹ Oil producers: Alberta, Saskatchewan, Newfoundland and Labrador; ² forecast

Canada

Regional outlook: Tight race

2018² 2019²


14

US²

Canada¹³

0.8

1.2

1.6

2.0

2.4

8

12

16

20

24

03 06 09 12 15 18

Sales(3-mnth ma : saar)

US²

Canada³

Mexico³

1

2

3

4

5.0

7.5

10.0

12.5

03 06 09 12 15 18

Car and truck production(12-mnth ms)

Vehicles (mlns of units)

North American auto sales: A little off the top

¹ February: BMO Economics estimate; ² (lhs); ³ (rhs)


15

-0.7

-0.7

-1.6

0.1

0.1

0.01

1.3

-1.6

-0.6

-0.5

-2.0

0.1

-$14.9 bln

-$15.9 bln

-$0.5 bln

$0.00 bln

$0.03 bln

$0.0 bln

$5.6 bln

-$13.5 bln

-$0.5 bln

-$0.4 bln

-$6.9 bln

$0.4 bln

deficit surplus-2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0

Federal

All provinces

Newfoundland and Labrador

Prince Edward Island

Nova Scotia

New Brunswick

Quebec

Ontario

Manitoba

Saskatchewan

Alberta

British Columbia

Budget balance

Sources: BMO Economics; Federal and provincial budgets

Canada (% of GDP)

Provincial deficits: Some progress, some trouble

– FY18/19


16

2009 stimulus

-20

-10

0

10

20

30

05 08 11 14 17

General government real investment(y/y % chng)

forecast¹

(e)

-60

-40

-20

0

20

80 90 00 10 20

Federal government budget balance(C$ blns)

Sources: BMO Economics; ¹ 2018 federal fiscal update

(e) = estimate

2019 Federal budget: Spending on housing, social programs

Canada

Ottawa’s deficits linger; infrastructure sags


17

Canadian election 2019: October 21

Federal election – Canada

170 needed for majority¹ Weighted average poll, as of March 21, 2019

Sources: BMO Economics; CBC Poll Tracker

Andrew Scheer

Conservative

Justin TrudeauLiberal

Political party

Votes Seats Votes Seats(%) (%)

Liberal 32.3 141 39.5 184

Conservative 35.6 160 31.9 99

New Democratic [NDP] 15.7 25 19.7 44

Bloc Québécois 4.2 10 4.7 10

Green 8.7 2 3.5 1

Other 3.5 0 0.7 0

338 338

Latest polls¹ 2015

Elizabeth MayGreen

JagmeetSinghNDP

Yves-François Blanchet

Bloc Québécois


18

74.5¢

106.0¢

68.6¢

parity

Poloz takes over at BoC(June 1, 2013)

Canadian dollar (US¢ : as of March 22, 2019)

60

70

80

90

100

110

11 12 13 14 15 16 17 18 19Bank of Canada Governor Stephen Poloz

[line] weekly averages; [dots] daily closes; [forecasts] BMO Economics

Competitiveness, housing worries, oil

Canada

Canadian dollar: Where next? Year-end 2018 73.3 2019 75.5 2020 77.0


19

forecast

Canada

US

Overnight rate

0

1

2

3

4

5

6

07 09 11 13 15 17 19

Canada

US

10-year bonds

0

1

2

3

4

5

6

07 09 11 13 15 17 19

On hold Balance sheet adjusts

Interest rates: Fewer rate hikes coming

Canada US Current 1.75 2.25-2.50 End-2019 2.00 2.50-2.75 End-2020 2.00 2.50-2.75

(% : as of March 22, 2019)

Canada US Current 1.60 2.44 End-2019 2.10 2.85 End-2020 1.95 2.65


20

-25.3

-18.3

-12.5

-12.1

-11.6

-7.6

-7.4

-6.2

-5.6

-3.9

6.7

15.0

2018

-40 -20 0 20

ChinaGermany

UKJapan

TSXRussia

AustraliaS&P 500

DJIANasdaq

IndiaBrazil

5.8

6.4

7.1

7.6

8.1

9.3

10.0

11.7

12.3

13.8

15.2

27.4

2019 year-to-date(as of March 22, 2019)

0 10 20 30

IndiaBrazil

UKGermany

JapanDJIA

AustraliaS&P 500

TSXRussia

NasdaqChina

Equity markets (% chng)

Global stocks: Stormy 2018, Snapback 2019

economic outlook: soft patch or sharp slowdown?€¦ · economic outlook: soft patch or ... world...

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