weathering the headwinds to canada’s economic growth · u.s. real gdp growth is projected to...
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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
2
Global Economy
3
Global growth remains modest and unbalanced
4
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
5
-2 -1 0 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
6
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: 2012Q2Source: U.S. Federal Reserve Board and Bureau of Economic Analysis
U.S. residential investment is gradually improving
7
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 BuildersLast 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
8
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 2012Source: U.S. Bureau of Labor Statistics
Millions
Fiscal consolidation will significantly dampen U.S. growth
9
-2
-1
0
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
10
-2 -1 0 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
11
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
12
2000 2011
0
20
40
60
80
100
%
Advanced economies Emerging and developing economies
Contribution to global growthPercentage contributions to global real GDP growth, annual data
Last observation: 2011Sources: International Monetary Fund World Economic Outlook, Bank of Canada calculations
EME’s growth slowing from previously rapid rates
13
Emerging market economies China Brazil India*
0
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
14
World GDP Crude oil Nickel Aluminum Coal Zinc Copper Iron
0
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
15
Canada: First G-7 country to recover pre-recession GDP
16
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 2012Q3Sources: 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
17
-4
-3
-2
-1
0
1
2
3
0
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
18
-10
-8
-6
-4
-2
0
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
19
-1 0 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
20
-40
-30
-20
-10
0
10
20
30
40
0
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: 2010Sources: UN Comtrade and Bank of Canada calculations
Canada’s trade directed toward slow growing economies
21
0
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
22
2005 2006 2007 2008 2009 2010 2011 2012
-10
0
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: 2012Q2Sources: Statistics Canada, U.S. Bureau of Economic Analysis and Bank of Canada calculations
Canada has relied on domestic demand
23
0 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
24
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-0.5
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
25
GDP comparison—New Brunswick and Canada
26
Employment: New Brunswick and Canada
27
Canada (left scale) New Brunswick (right scale)
28
New Brunswick: largest exporter to United States
NL PE NS NB QC ON MB SK AB BC
0
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: 2011Source: Statistics Canada, Industry Canada
Bank of Canada mandate and responsibilities
29
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
30
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
31
Monetary policy
Monetary policy: Low and stable inflation
32
1980 1985 1990 1995 2000 2005 2010
0
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
33
Total CPI inflation in Canada is projected to remain below
2 per cent until the end of 2013
34
-2
-1
0
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, insurancecompanies
Financial markets, including securities and foreign exchange markets
Clearing and settlement systems
35
Funds management
36
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
37
New $20 bank note: safer, cheaper, greener
38
Questions?
39