@PeterGHallXIII

CIM-MES ECONOMIC OUTLOOK SESSION

The Price Paradox (Demand Ain’t Dead) February 24, 2016

BLG LLP – Scotia Plaza, Toronto

Peter Hall

Vice-President and Chief Economist

@PeterGHallXIII 2

COMMODITY PRICE PLUNGE

Sources: EIA, Financial Times, WSJ, Haver Analytics

Percentage loss since mid-2014

-80

-70

-60

-50

-40

-30

-20

-10

0

WTI Crude Brent Crude Iron ore Soya Copper Gold

@PeterGHallXIII 3

CURRENCY PLUNGE

Sources: EIA, Financial Times, WSJ, Haver Analytics

Percentage depreciation vs. USD since mid-2014

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

Colombia Brazil Mexico Australia Canada Euro Indonesia India Singapore China

@PeterGHallXIII 4

IMPACT OF OIL PRICES ON THE GLOBAL ECONOMY

Top Global Oil Importers and Exporters

(based on 2013 data; mmbd, USD billions)

Actual, 2015

Net importers Amount Savings ($B)

1 EU 10.4 $168

2 United States 8.9 $143

3 China 6.6 $106

4 Japan 4.6 $73

5 India 2.8 $45

6 South Korea 2.5 $40

7 Germany 2.4 $38

Net exporters Amount Cost ($B)

1 Saudi Arabia 8.5 $136

2 Russia 7.5 $120

3 Iraq 3.1 $50

4 UAE 2.9 $46

5 Kuwait 2.6 $42

6 Nigeria 2.3 $37

7 Venezuela 1.8 $30

11 Canada 1.6 $25

17 Mexico 0.9 $14

19 Colombia 0.7 $11

22 Ecuador 0.3 $4

Top Global Oil Importers and Exporters

(based on 2013 data; mmbd, USD billions)

Scenario: $30 average for 2016

Net importers Amount Savings ($B)

1 EU 10.4 $72

2 United States 8.9 $62

3 China 6.6 $46

4 Japan 4.6 $32

5 India 2.8 $20

6 South Korea 2.5 $17

7 Germany 2.4 $17

Net exporters Amount Cost ($B)

1 Saudi Arabia 8.5 $59

2 Russia 7.5 $52

3 Iraq 3.1 $22

4 UAE 2.9 $20

5 Kuwait 2.6 $18

6 Nigeria 2.3 $16

7 Venezuela 1.8 $13

11 Canada 1.6 $11

17 Mexico 0.9 $6

19 Colombia 0.7 $5

22 Ecuador 0.3 $2

@PeterGHallXIII 5

THE $100 BILLION BONUS

Retail sales, gasoline stations, $M

Sources: Census Bureau, Haver Analytics

30000

32000

34000

36000

38000

40000

42000

44000

46000

48000

50000

2010 2011 2012 2013 2014 2015

@PeterGHallXIII 6

OIL PRICE CHANGES: THE NORMAL RESPONSE

-5

-4

-3

-2

-1

0

1

2

3

4

5

6-75

-50

-25

0

25

50

75

100

125

150

Q1-9

8

Q3-9

8

Q1-9

9

Q3-9

9

Q1-0

0

Q3-0

0

Q1-0

1

Q3-0

1

Q1-0

2

Q3-0

2

Q1-0

3

Q3-0

3

Q1-0

4

Q3-0

4

Q1-0

5

Q3-0

5

Q1-0

6

Q3-0

6

Q1-0

7

Q3-0

7

Q1-0

8

Q3-0

8

Q1-0

9

Q3-0

9

Q1-1

0

Q3-1

0

Q1-1

1

Q3-1

1

Q1-1

2

Q3-1

2

Q1-1

3

Q3-1

3

Q1-1

4

Q3-1

4

Q1-1

5

Q3-1

5

Q1-1

6

Q3-1

6

WTI Price Growth (Real $2015, 6-qtr % chg) [-4 quarters] US Real GDP, Y/Y%

@PeterGHallXIII 7

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

0

500

1000

1500

2000

2500

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Surplus/Deficit [R]

Starts [L]

Permits (L)

Housing starts, permits, balance since 2012, SAAR, ‘000 units

PENT-UP DEMAND: US HOUSING

Sources: US Census Bureau, NAR, Haver Analytics

@PeterGHallXIII 8

0

2

4

6

8

10

12

-1000

-800

-600

-400

-200

0

200

400

600

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Employment

Unemployment rate

Monthly employment change, ‘000, unemployment rate (%)

US EMPLOYMENT: GOING CRITICAL?

Sources: US Census Bureau, NAR, Haver Analytics

@PeterGHallXIII 9

US CONSUMER CONFIDENCE: COMFORTABLE

National aggregate, 1985=100

Sources: The Conference Board, Haver Analytics

0

20

40

60

80

100

120

140

160

1998 2000 2002 2004 2006 2008 2010 2012 2014

@PeterGHallXIII 10

AMERICANS ARE SPENDING!

Retail sales, motor vehicles and parts, $M

Sources: Census Bureau, Haver Analytics

50000

55000

60000

65000

70000

75000

80000

85000

90000

95000

100000

1998 2000 2002 2004 2006 2008 2010 2012 2014

@PeterGHallXIII 11

THE US MANUFACTURING CAPACITY CRUNCH

@PeterGHallXIII 12

US CONSTRUCTION SPENDING

Sources: Census Bureau, Haver Analytics

Value of construction put in place, private sector index, 2011=100

50

100

150

200

250

300

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Manufacturing

Transportation

Warehousing

@PeterGHallXIII 13

EU: RETURNING TO BALANCE?

Sources: Eurostat, Haver Analytics

EA building permits, all buildings, ‘000 m2

-1000

0

1000

2000

3000

4000

5000

0

50

100

150

200

250

300

350

400

450

500

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

@PeterGHallXIII 14

EXCESS LIQUIDITY: DISTORTIONS?

Source: EDC Economics

Cash already in

the system

Cash hoarding

Cash injection

Corporate Bonds

@PeterGHallXIII

Excess liquidity: distortions?

Cash already in

the system

Source: EDC Economics

Cash hoarding

Cash injection

@PeterGHallXIII 16

ADD A LITTLE GROWTH, AND…

Source: EDC Economics

Financial transmission mechanism Corporate Bonds

DEPENDS ON …

• Orderliness

• Speed

• Path taken

• Geographic dispersion

@PeterGHallXIII 17

THE GREAT UNWIND: WHO IS VULNERABLE?

1-yr Probability of Default

Country Vulnerability Index

Source: EDC Economics

Real credit growth

C/A Balance, % of GDP

Portfolio Investment Liabilities

@PeterGHallXIII 18

90

95

100

105

110

115

120

125

130

9 10 11 12 13 14 15

Trade-weighted broad effective exchange rate, 2010 = 100

CHINA: WHAT’S UP WITH THE RMB?

Sources: JP Morgan, Haver Analytics

@PeterGHallXIII 19

CHINA’S PAIN IS MEXICO’S GAIN

Sources: EIU, Haver Analytics

Labour costs in Mexico relative to China

0

2

4

6

8

10

12

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Mexico:

Manufacturing

hourly labour

costs ($US)

China:

Manufacturing

hourly labour

costs ($US)

2000 4.70 0.44

2001 5.41 0.49

2002 5.60 0.57

2003 5.31 0.62

2004 5.26 0.66

2005 5.61 0.73

2006 5.88 0.81

2007 6.17 1.06

2008 6.48 1.36

2009 5.69 1.55

2010 6.13 1.77

2011 6.49 2.12

2012 6.36 2.43

2013 6.84 2.73

2014 6.84 3.01

2015 6.24 3.28

2016 5.47 3.60

@PeterGHallXIII 20

Trade as a share of GDP, per cent

CHINA’S TRADE COMEBACK

Sources: EIU Country Data, Haver Analytics

0

10

20

30

40

50

60

70

80

90 91 92 93 94 95 96 97 98 99 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

@PeterGHallXIII 21

25

30

35

40

45

20

25

30

35

40

45

50

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

C/GDP*

C/GDP

SR

SR*

THE POWER OF SAVING LESS

Sources: China National Bureau of Statistics, Haver Analytics

@PeterGHallXIII 22

25

30

35

40

45

20

25

30

35

40

45

50

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

C/GDP*

C/GDP

SR

SR*

THE POWER OF SAVING EVEN LESS

Sources: China National Bureau of Statistics, Haver Analytics

@PeterGHallXIII 23

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2004-08 2015

Ch

ina G

DP,

billio

n Y

uan

CHINA HAS GROWN!

AVERAGE

CONTRIBUTION

AT 18%

GROWTH

CURRENT

CONTRIBUTION

AT 6%

GROWTH

@PeterGHallXIII 24

Market Share (2014) 2013 2014 2015 (f) 2016 (f)

US 16.1 1.5 2.4 2.5 2.9

Canada 1.5 2.0 2.4 1.3 2.3

Mexico 2.0 1.4 2.1 2.4 3.1

Euro Area 12.2 -0.4 0.8 1.4 1.8

Japan 4.4 1.6 -0.1 0.9 1.5

Industrialized 43.1 1.4 1.8 2.0 2.4

Emerging Asia 29.5 7.0 6.8 6.6 6.7

› China 16.3 7.7 7.4 6.9 6.8

› India 6.8 6.9 7.3 7.4 7.5

LatAm/Caribbean 8.7 2.9 1.3 0.3 1.6

› Brazil 3.0 2.7 0.1 -2.0 0.2

Emerging Europe 8.0 4.2 3.4 -1.2 0.7

› Russia 3.3 1.3 0.6 -5.0 -2.0

Africa/Mideast 6.8 2.5 2.7 2.6 3.8

Emerging 56.9 5.0 4.6 3.8 4.4

Total World 100.0 3.4 3.4 3.0 3.6

GLOBAL GROWTH FORECAST

@PeterGHallXIII 25

KEY RISKS

Weak vs.

strong

economies

End of QE

(volatility)

Confidence

Little

policy

room

Geopolitics

Reticence

(paradox of

thrift)

@PeterGHallXIII 26

DRIVERS OF THE CANADIAN DOLLAR

US dollar movements*

The ‘halo’ effect

Canadian dollar

Source: EDC Economics

Oil & gas prices

Non-energy commodity prices

Interest rate spreads

@PeterGHallXIII 27

IMPACT OF OIL PRICES ON THE CANADIAN ECONOMY

Oil Price Impact by Economic Sector, % of GDP

Category Oil Price, WTI Crude, $US

Oil price scenario: $75 $60 $40 $25

O&G direct -1.6% -2.6% -3.8% -4.8%

Indirect investment -0.2% -0.3% -0.4% -0.5%

Manufacturing (cost) 0.6% 1.0% 1.5% 1.8%

Manufacturing (effect of $) 0.7% 1.2% 1.8% 2.2%

Consumer 0.4% 0.6% 0.9% 1.2%

Fiscal -0.1% -0.2% -0.3% -0.4%

Net impact, % of GDP -0.16% -0.26% -0.39% -0.48%

Source: EDC Economics

@PeterGHallXIII 28

IT’S ALL ABOUT MO…

Sources: EIA, Financial Times, WSJ, Haver Analytics

Built-in growth, inflation-adjusted exports, %

-10

-8

-6

-4

-2

0

2

4

6

8

10

BasMin Chem E&E NRG Ag-food Aero Total Forest IndMch MinPrd Cons Auto

@PeterGHallXIII 29

VISIT US ONLINE

› www.edc.ca

› Country analysis and information

› Global Export Forecast

› Weekly Commentary

› Trade Confidence Index

› Research reports on international trade

@PeterGHallXIII 30

THE COMMODITY PRICE SLUMP

0

20

40

60

80

100

120

2014- Jun

2014- Jul

2014- Aug

2014- Sep

2014- Oct

2014- Nov

2014- Dec

2015- Jan

2015- Feb

2015- Mar

2015- Apr

2015- May

2015- Jun

2015- Jul

2015- Aug

2015- Sep

2015- Oct

2015- Nov

2015- Dec

Copper

Gold

Brent

WTI

Soya

Iron Ore

@PeterGHallXIII 31

CURRENCIES ON A WILD RIDE

80

90

100

110

120

130

140

150

160

170

180

2014- Jun

2014- Jul

2014- Aug

2014- Sep

2014- Oct

2014- Nov

2014- Dec

2015- Jan

2015- Feb

2015- Mar

2015- Apr

2015- May

2015- Jun

2015- Jul

2015- Aug

2015- Sep

2015- Oct

2015- Nov

2015- Dec

Euro

CAD

SAR

MEX

BRA