economic outlook: trade war and peace · bmo financial group (nyse, tsx: bmo) is an integrated...

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Economic outlook: Trade War... and Peace October 25, 2018

Douglas Porter, CFA Chief Economist, BMO Financial Group [email protected] • 416-359-4887 A presentation of BMO Economics http://economics.bmocapitalmarkets.com • 1-800-613-0205

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© COPYRIGHT 2018 BMO CAPITAL MARKETS CORP. http://economics.bmocapitalmarkets.comSource: BMO Economics

1

Dairy… US gains access to 3.6% of Canada’s protected market

De minimis limits raised… pressures Canadian retailers

Autos… Canada benefits from Mexico’s concessions

Dispute settlement mechanism… stays

Sunset clause… 16-year lifespan (6-year review)

Steel & aluminum tariffs… still in place

Any future trade deal with China… vetted by US and Mexico

Bottom line: Lifts the dark cloud of uncertainty

We have a deal! NAFTA USMCA

Concessions

‘Wins’

Concerns


2

Oct Jan May Sep Jan May Sep

10-year government bond yields

(%)

Canada

US

7½-yr high

0.9

1.5

2.1

2.7

3.3

Oct Jan May Sep Jan May Sep

Stocks

TSX¹

Record

USElectionDay

S&P 500²

Record

2000

2250

2500

2750

3000

14000

15750

17500

19250

21000

¹ (lhs); ² (rhs)

Rising rates, trade and Emerging Market fears fuel volatility

2016–18

Market volatility returns

(as of October 24, 2018)


3

1.0

1.2

1.3

1.8

1.9

2.2

2.6

2.8

2.9

3.4

6.5

8.2

0 1 2 3 4 5 6 7 8 9

BrazilUK

JapanRussia

CanadaEurozone

MexicoSouth Korea

USAustralia

China¹India

Real GDPCurrent

...but past the peak

(y/y % chng)

Global growth: Still solid...

CurrentYear ago

(avg) 16 17 18 19World 3.3 3.7 3.6 3.5

2018:Q2

Sorted by current; ¹ 2018:Q3


4

USCanada

forecast-5.0

-2.5

0.0

2.5

5.0

04 06 08 10 12 14 16 18

Real GDP

US fiscal stimulus

(y/y % chng)

North American growth: Role reversal, again

16 17 18 19Canada 1.4 3.0 2.1 2.1US 1.6 2.2 2.8 2.5


5

3.7%

forecast

Canada5.9%

8.7%US

10.0%

3

5

7

9

11

06 08 10 12 14 16 18

Lack of workers

Unemployment rate (percent)

Jobless rates: US still falling… Canada improving

Greece 19.0 Spain 15.2 Italy 9.7 France 9.3 Portugal 6.8 Canada 5.9 Ireland 5.4 Australia 5.0 UK 4.0 US 3.7 Germany 3.4 Japan 2.4

5.9 Ontario


6

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

1

2

3

4

5

04 07 10 13 16

Canada

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

Wages rising gradually


7

forecast

West Texas Intermediate

Western Canadian SelectWTI long-term average¹

0

40

80

120

160

07 08 09 10 11 12 13 14 15 16 17 18 19

Crude oil price

¹ Today’s dollars, since 1975, $58

Oil prices: Canadian prices still weak

(US$/bbl : as of October 24, 2018)


8

1.2

2.1

2.2

2.3

2.4

2.5

3.8

4.5

Total CPI(latest month)

0 1 2 3 4 5

Japan

Euro Area

Canada

US

UK

China

India

Brazil

forecast

Total

Core

2.2%

2.3%

United States

-3.0

-1.5

0.0

1.5

3.0

4.5

09 11 13 15 17 19

2.0%

Core¹

Total

2.2%

Canada

-3.0

-1.5

0.0

1.5

3.0

4.5

09 11 13 15 17 19

¹ Average of three new core inflation measures

Consumer price index (y/y % chng)

Inflation moving up

Ontario: 2.2%


9

Deflationary Natural gas -5.2%

Bread -4.1%

Prescription drugs -2.9%

Home entertainment equipment -2.7%

Computer equipment -1.6%

Telephone services -1.4%

Poultry -0.7%

Butter -0.6%

Coffee and tea -0.6%

Household appliances -0.3%

Consumer price index – Canada

Inflation and deflation

Inflationary Gasoline 12.0%

Cigarettes 8.7%

Air fares 7.4%

Mortgage interest 6.4%

Restaurant meals 4.3%

Child care 4.2%

Electricity 3.4%

Beer 3.2%

Tuition fees 3.1%

Property taxes 2.8%

(y/y % chng : as of September 2018)

Overall CPI: 2.2%

Up 0.3% y/y in Ontario


10

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: No bubble

Toronto /Vancouver adjusting to policy changes

Other markets driven by fundamentals

Source: [magazine cover] Maclean’s… 6 years ago

Canada

The great housing market debate: Bubble/No bubble


11

-2.6

-2.6

-1.9

2 2.0

2.0

2.2

2.3

6.1

6.9

$466,000

$377,000

$326,000

$302,000

$787,000

$1,051,000

$489,000

$381,000

$410,000

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

-3 0 3 6 9

Calgary

Edmonton

Saskatoon

Winnipeg

Toronto

Vancouver

Canada

Montreal

Ottawa

Existing home prices¹

Governments move to cool market: Working well

Canada

Canadian house prices: Location, location, location

(y/y % chng : nsa : as of September 2018)

¹ HPI composite benchmark where available; ² Average price (y-t-d)


12

ForeignBuyers’

Tax

Toronto

Vancouver

Montreal

-10

0

10

20

30

40

11 12 13 14 15 16 17 18

Home prices¹

¹ MLS Home Price Index

Canada (y/y % chng)

Home prices: Changing fortunes


13

Renovations

Newconstruction

-10

-5

0

5

10

15

88 94 00 06 12 18

Growth calmer, but solid(volumes : 5-yr % chng)

0.8

1.2

1.6

2.0

2.4

2.8

70 80 90 00 10

Renovations: Share of economy(% of GDP)

Residential construction – Canada

Reno activity: Sturdy


14

45 55 65 75 85 95 05 15

1957Hungary/Suez Crisis

US recession200

300

400

500

600

700

Population

One new Canadian per second in 2018

Canada (000s : y/y chng)

Canada’s population boomlet in raw numbers


15

US

Canada

-5

0

5

10

15

05 08 11 14 17

Debt growth²(y/y % chng)

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)

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

Debt ratio at record highs, more to come

Households¹

Canadian consumers adjusting to higher rates


16

2009 stimulus

-20

-10

0

10

20

30

05 08 11 14 17

General government real investment(y/y % chng)

forecast¹-60

-40

-20

0

20

80 90 00 10 20

Federal government budget balance(C$ blns)

Sources: BMO Economics; ¹ 2018 Federal Budget

Deficits for the foreseeable future

Canada

Still waiting on infrastructure spending


17

05/06 08/09 11/12 14/15 17/18 20/21-20

-15

-10

-5

0

5forecast

2018 Budget

Fiscal Review

(9/21)

?

Sources: BMO Economics; Provincial budgets, Fiscal Review (9/21/18)

Ontario ($ blns)

Ontario budget balance


18

00 03 06 09 12 15 18

forecastUS recession

WTI oilprice¹

C$ parity

C$²

0.6

0.7

0.8

0.9

1.0

1.1

1.2

0

25

50

75

100

125

150 NAFTA uncertainty lifted

US$ gains on Fed rate-hike resolve, trade wars

Capital inflows fading from record highs

Competitiveness issues linger

[actuals] weekly averages; [forecast] monthly averages; ¹ (US$/bbl : lhs); ² (US$/C$ : rhs)

Canadian dollar: Where next?

(as of October 24, 2018)

C$ year-end 2017 79.5 2018 78.5 2019 80.0


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

BoC: No more “gradual” QE winds down

Interest rates: More rate hikes coming

Canada US Current 1.75 2.00-2.25 End-2018 1.75 2.25-2.50 End-2019 2.50 3.00-3.25

(% : as of October 24, 2018)

Canada US Current 2.46 3.12 End-2018 2.50 3.10 End-2019 2.90 3.35


20

0.2

6.0

7.6

7.8

11.4

19.1

19.4

21.8

25.1

27.1

28.2

28.2

2017

0 10 20 30

RussiaTSXUK

AustraliaGermany

JapanS&P 500

ChinaDJIA

IndiaBrazil

Nasdaq

-20.9

-13.4

-9.4

-7.4

-3.9

-3.0

-2.5

0.7

0.7

1.1

5.1

9.7

2018 year-to-date(as of October 24, 2018)

-30 -15 0 15

ChinaGermany

UKTSX

AustraliaJapan

RussiaIndia

S&P 500DJIA

NasdaqBrazil

Equity markets (% chng)

Global stocks: Stellar 2017, stormy 2018


21

Downside:Trade warInflation heats upEmerging Market strains (Turkey, Argentina)

Upside:US: Tax cut impact larger than assumedCanada: Rebounding NAFTA-tied activity

Wild cards:Brexit, Italy, Saudi Arabia, US midterms

Key risks

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