A look ahead at the Canadian and American economies
February 10, 2014
Arctic Chill Won’t Freeze Economy
United States
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The new year got off to a chilly start. Emerging markets are
submerging, U.S. equities are down moderately, and recent data
(notably, sharply lower home sales and factory orders plus weak auto
sales and employment) have disappointed, even if Polar Vortex’s paw
prints are all over them. Political uncertainty is still undercutting
business confidence, as Congress gears up for another debt-ceiling
debate. Still, the economic fundamentals are improving, as
household and fiscal deleveraging fade.
Led by the fastest gains in consumer spending and exports in three
years, real GDP jumped 3.2% in Q4 after Q3’s 4.1% sprint. Growth
would have topped 4% if not for sequestration and the government
shutdown. A decline in residential construction after five consecutive
quarters of double-digit gains also weighed, as higher mortgage rates
undercut home sales.
Following the best back-to-back performance in nearly two years,
economic growth will likely slow to 2% in Q1. Excess inventories
will curb production, notably among automakers. Companies likely
pulled forward equipment spending prior to the expiration of the
bonus depreciation allowance, while the Polar Vortex only growled
louder in January.
The economy’s underlying strength should reassert itself by the
second quarter. Improved household finances, pent-up demand for
housing and automobiles, and less fiscal drag and political
uncertainty are expected to drive U.S. growth to 2.9% in 2014 from
1.9% in 2013. After carving almost 1½% from GDP last year, federal
fiscal restraint will ease to less than ½% this year. Moreover, state
and local governments plan to address projected budget surpluses by
boosting spending and cutting taxes. Lower office vacancies are
supporting commercial construction, while a record amount of cash
will allow firms to replenish old equipment.
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Growth solidly above potential will reduce the unemployment rate to
6.1% by year-end, even as discouraged workers return to the
workforce. In fact, we could see a five-handle on the jobless rate this
year if an aging population continues to drive down the part rate.
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Acknowledging that the economy has “picked up”, the Fed
announced another modest reduction in asset purchases in late
January. At the same time, it reaffirmed that the fed funds rate will
likely stay put “well past” the time the jobless rate falls below 6½%.
ECONOMIC RESEARCH
1-800-613-0205 • www.bmocm.com/economics
Sal Guatieri, Senior Economist
416-359-5295
sal.guatieri@bmo.com
HIGHLIGHTS
ƒ Despite a “cold” start to the year,
the U.S. economy should enjoy the
fastest annual growth since 2005.
ƒ Rising energy production and firm
consumer spending have supported
Canada’s economy, but stronger
exports to the U.S. are needed to
sustain the pickup in 2014.
ƒ The Fed is gradually winding down
its asset purchase program, while
reinforcing the view that it is in no
hurry to raise interest rates.
ƒ A weaker currency and firmer
economy should ease the Bank of
Canada’s concerns about too-low
inflation and discourage it from
cutting interest rates.
ƒ Fed tapering and BoC handwringing
over disinflation point to further
near-term weakness in the loonie.
A Publication of BMO Capital Markets Economic Research • Douglas Porter, CFA, Chief Economist
Page 2 of 7
The extended forward guidance reinforces our view that the funds
rate will remain near zero until early 2016, even as the
unemployment rate slips below the 6½% threshold this year.
ƒ
Despite Fed tapering, long-term rates have fallen about 40 basis
points this year in response to softer economic data and turbulence
in emerging markets. However, we still expect the 10-year yield,
currently around 2.6%, to test 3.5% by year-end, as the economy
strengthens and QE3 winds down.
Canada
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The economy picked up in the second half of 2013 on resilient
consumer spending and an upturn in energy production. Auto
dealers enjoyed a record year (juiced by extended loan terms), while
realtors cheered as home sales returned to normal levels after
plunging on tougher mortgage rules in 2012. On the downside,
employment slowed as companies eyed productivity gains, and the
jobless rate ended the year a tad higher than a year ago. Since 2002,
Canadian factories have increased productivity at less than half the
rate of American plants, implying plenty of catching up to do.
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Led by Vancouver, Calgary and Toronto, home sales have rebounded
to past-decade norms, despite slowing recently. Markets are
generally balanced, though sellers hold the upper hand in Calgary.
House prices picked up to a 4.3% pace in December, in line with
income growth. Prices are generally rising west of the
Ontario/Quebec border, but sagging in the eastern provinces due to
soft demand and elevated listings. In 2014, moderately higher longterm rates should apply a gentle brake to housing activity and price
gains, even as new immigrants and echo boomers provide ongoing
support. Steadier sales and starts are expected in most regions this
year, while the western provinces and Ontario should see more
subdued price gains.
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Extreme cold weather and a temporary pullback in U.S. production
will likely slow the economy in Q1. However, growth should
strengthen moderately to 2.3% in 2014 on the back of a weaker
dollar and rising U.S. demand. Export-driven growth should jumpstart business confidence and investment. By contrast, elevated
household debt will restrain consumers, who are now borrowing at
the slowest pace in three decades. Fiscal policy will also remain
moderately restrictive, with the federal government eying a return to
balanced budgets in two years, and with many provinces still cutting
back. The unemployment rate should dip to 6.8% by year-end.
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Energy-rich Alberta is expected to top 3% growth this year, assisted
by improved pipeline and rail capacity to transport oil to the Gulf
Coast refineries. TransCanada recently opened the southern leg of its
February 10, 2014
Page 3 of 7
Keystone pipeline from Oklahoma to Texas. While Alberta will lead
the nation, rising exports should give manufacturing-based Central
Canada a lift. Ontario should top 2% growth for the first time in three
years, while Quebec could grow 1.8%, a pace not seen since 2011.
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Though retaining a neutral policy stance, the Bank of Canada’s
intense focus on low inflation implies some risk of a rate cut if
inflation falls further or the economy weakens. However, both
growth and inflation are expected to rise moderately this year,
suggesting the next policy move will be higher rates, albeit not until
2015Q3. A weaker currency has already lifted import costs, and could
raise the CPI rate to 1.6% by year-end.
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The Canadian dollar has fallen 10% to four-year lows in the past
year, as dovish talk from the Bank of Canada contrasted with
diminished stimulus from the Fed. The currency is expected to
weaken to US$0.87 this summer, before appreciating on an upturn in
inflation and ebbing risks of a Bank rate cut. We see the dollar ending
the year above 90 cents, and strengthening moderately further when
the Bank tightens policy next year. However, parity with the
greenback is unlikely given Canada’s sizeable current account gap of
3% of GDP.
Risks
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Emerging markets, notably Argentina, Turkey, Brazil, India and
Indonesia, have come under pressure recently amid political
uncertainty and the prospect of higher U.S. interest rates. The
turbulence has weighed on investor sentiment in North America.
Further turmoil could hit equities harder, undercutting consumer
confidence and spending.
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According to the Treasury Secretary, Congress has only two to three
weeks to raise the debt ceiling before the government risks defaulting
on its bills. In the event, all the goodwill achieved from the budget
deal will go down the drain, taking business confidence with it.
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In Canada, accelerating home prices in Toronto (7.1% y/y in January)
risk straining affordability further, causing a correction when interest
rates normalize and the market is trying to absorb a record number of
newly built condos.
February 10, 2014
Page 4 of 7
February 10, 2014
Forecasts
CANADA
2013
2014
ANNUAL
2013
I
II
III
IV
I
II
III
IV
2012
2.3
1.6
2.7
2.6
2.0
2.3
2.4
2.4
1.7
1.8
2.3
Consumer Spending
1.1
3.6
2.2
2.7
2.2
2.3
2.1
2.1
1.9
2.2
2.4
Business Investment (non-residential)
1.4
-1.3
2.2
5.3
6.2
8.0
7.3
6.6
6.2
2.0
5.6
Consumer Price Index (y/y % chng)
0.9
0.8
1.1
0.9
1.0
1.3
1.4
1.6
1.5
0.9
1.3
Unemployment Rate (%)
7.1
7.1
7.1
7.0
7.0
6.9
6.9
6.8
7.3
7.1
6.9
Housing Starts (000s : a.r.)
170
190
195
195
185
180
175
180
215
187
180
-59.1
-63.7
-61.9
-65.5
-63.4
-61.2
-58.8
-56.6
-62.2
-62.5
-60.0
Overnight Rate
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
3-month Treasury Bill
0.95
1.00
1.00
0.93
0.89
0.90
0.90
0.90
0.94
0.97
0.90
10-year Bond
1.92
1.96
2.58
2.58
2.48
2.65
2.88
3.14
1.87
2.26
2.79
90-day
86
95
96
86
85
85
85
85
85
91
85
10-year
-3
-3
-13
-16
-31
-30
-30
-28
7
-9
-30
1.1
2.5
4.1
3.2
2.0
2.8
2.9
3.0
2.8
1.9
2.9
2.3
1.8
2.0
3.3
2.8
3.2
2.9
3.0
2.2
2.0
2.8
-4.6
4.7
4.8
3.8
2.6
5.1
5.2
5.4
7.3
2.6
4.2
Consumer Price Index (y/y % chng)
1.7
1.4
1.6
1.2
1.4
1.7
1.5
1.8
2.1
1.5
1.6
Unemployment Rate (%)
7.7
7.5
7.3
7.0
6.6
6.4
6.3
6.1
8.1
7.4
6.3
Housing Starts (mlns : a.r.)
0.96
0.87
0.88
1.00
1.02
1.10
1.18
1.24
0.78
0.93
1.14
Current Account Balance ($blns : a.r.)
-420
-386
-379
-334
-349
-351
-350
-350
-440
-380
-350
Fed Funds Target Rate
0.13
0.13
0.13
0.13
0.13
0.13
0.13
0.13
0.13
0.13
0.13
3-month Treasury Bill
0.09
0.05
0.03
0.06
0.05
0.05
0.05
0.05
0.09
0.06
0.05
10-year Note
1.95
2.00
2.71
2.75
2.79
2.95
3.19
3.42
1.80
2.35
3.09
US¢/C$
99.1
97.7
96.3
95.3
90.5
87.8
88.7
90.9
100.1
97.1
89.5
C$/US$
1.009
1.023
1.038
1.050
1.105
1.139
1.128
1.100
0.999
1.030
1.118
92
99
99
100
104
106
108
109
80
98
107
US$/Euro
1.32
1.31
1.33
1.36
1.36
1.35
1.33
1.33
1.29
1.33
1.34
US$/£
1.55
1.54
1.55
1.62
1.64
1.62
1.61
1.60
1.59
1.56
1.62
Real GDP (q/q % chng : a.r.)
Current Account Balance ($blns : a.r.)
2014
Interest Rates
(average for the quarter : %)
Canada/U.S. Interest Rate Spreads
(average for the quarter : bps)
UNITED STATES
Real GDP (q/q % chng : a.r.)
Consumer Spending
Business Investment (non-residential)
Interest Rates
(average for the quarter : %)
EXCHANGE RATES
(average for the quarter)
¥/US$
Note: Shaded areas represent BMO Capital Markets forecasts
Page 5 of 7
February 10, 2014
FINANCIAL STRESS REMAINS LOW
CREDIT RISK IS DECLINING
United States (as of February 6, 2014)
United States (ppts)
VIX 2
Ted Spread 1
500
100
400
80
300
60
200
40
100
20
Corporate Bond Spreads 1
5
4
3
0
2
0
07 08 09 10 11 12 13 14
1
1
07 08 09 10 11 12 13 14
2
3-mnth Eurodollar minus 3-mnth T-bills (bps)
07
1
CBOE market volatility index
08
09
10
11
12
13
14
15-year BoA Merrill Lynch AA Corporate Yield less 10-year Treasury Yield
CANADIAN DOLLAR TO WEAKEN FURTHER
COMMODITY PRICES HAVE MODERATED
(US¢ : as of February 6, 2014)
Commodity price range since start of 2013
Canadian Dollar
Materials & Foodstuffs
Metals & Energy
(as of February 6, 2014)
(as of February 6, 2014)
110
Lumber
Parity
100
90
Soybeans
90.31¢
(US$/bu)
Gold
352.20 [current]
(US$/
1000 sq ft) 277.40
(US$/oz)
399.80
1256.50
1192.00
1693.75
Oil
13.18
12.43
16.10
(US$/bbl)
97.84
86.68
110.53
80
Wheat
(US$/bu)
70
forecast
60
03
04
05
06
07
08
09
10
11
12
13
14
15
Corn
(US$/bu)
Natural Gas
5.43
4.98
7.71
(US$/mmbtu)
5.03
3.11
Copper
4.29
3.98
(US$/lb)
7.52
5.56
3.22
3.01
3.74
But the Extreme Cold Weather Has Warmed Natural Gas
FIRMER GROWTH EXPECTED IN 2014
U.S. CONSUMER SPENDING TO PICK UP
(y/y % change)
(y/y % change)
Real GDP
Real Personal Consumption Expenditures
6
6
Canada
4
Canada
4
2
2
0
0
-2
-4
-6
12
Canada 1.7
US
2.8
00
02
13
1.8
1.9
04
14
2.3
2.9
15
2.5
3.0
06
-2
U.S.
08
10
forecast
12
14
U.S.
-4
00
02
04
06
08
10
forecast
12
14
Page 6 of 7
February 10, 2014
BUSINESS INVESTMENT TO IMPROVE
CANADIAN HOME SALES HAVE REBOUNDED
(y/y % change)
Existing Homes (y/y % change : 3-month m.a.)
Real Non-Residential Business Investment
Prices
Sales
30
80
Canada
20
60
10
25
20
15
10
5
0
-5
-10
-15
-20
Canada
40
0
20
U.S.
-10
0
-20
-20
forecast
-30
00
02
04
06
08
10
12
U.S.
-40
14
00 02 04 06 08 10 12 14
Canada
U.S.
00 02 04 06 08 10 12 14
…U.S. Home Prices Accelerating
JOBLESS RATES FALLING
INFLATION STAYING VERY LOW
(percent)
Consumer Price Index (y/y % change)
United States
Canada
Unemployment Rate
6
14
6
12
Headline
forecast
Canada
Headline
10
33-Year
Low
8
1.3%
3
forecast
Core
Core
0
6
1.7%
3
1.5%
0
1.2%
4
U.S.
forecast
2
70
75
80
85
90
95
00
05
10
-3
-3
07
15
09
11
13
15
07
09
11
13
BANK OF CANADA ON HOLD UNTIL 2015Q3
LONG-TERM RATES TO RISE GRADUALLY
(% : as of February 6, 2014)
(% : as of February 6 2014)
Overnight Rate
15
10-Year Bonds
7
forecast
6
6
forecast
U.S.
4.00%
5
5
(year end
’15)
4
4
3
Canada
3
3.50%
4.00%
Canada
2
2
U.S.
1%
45-Year Low
1
1.0%
0%–0.25%
0
01
03
05
07
09
11
13
Fed Funds Rate Steady Until Early 2016
3.25%
2.70%
Canada 2.43%
Canada-U.S. Spread -27 bps
U.S.
1
0
15
07
08
09
10
11
12
13
14
(year end
’14)
15
Page 7 of 7
February 10, 2014
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