0
Economic and
Financial Market Prospects
Earl Sweet
Economic Research
BMO Capital Markets
CASF Conference 2015
November 18, 2015
Economics Department
1
Presentation outline
Global economic performance and risks
 Canada’s macroeconomic prospects
 Motor Vehicles, Construction, and Oil & Gas
 Fabricated Metals & Steel Services
 Surface Finishing
2
Sub-par global growth since 2011; modest improvement
anticipated for 2016, though risks skewed to downside
Global Economic Growth (%)
8
6
Emerging
Markets
Global
Economy
4
2
0
-2
Advanced
Economies
-4
2009
Source: IMF; BMO Economics
2010
2011
2012
2013
2014
2015
2016
3
Global risks – good time to play defence
 China hard-landing & financial crisis
 Emerging-market crisis as U.S. raises rates
 Disinflation morphs to outright deflation
 Re-ignition of European stresses
 Geopolitical stresses intensify (no shortage):
 Middle East & North Africa
 Russia/Ukraine
 China vs. neighbours and U.S. in the South China Sea
4
Weak global growth has caused BMO’s Oil & Gas
and Base Metals indexes to retreat sharply from 2011 peaks
BMO Commodity Price Indexes
Index, 2003=100
400
350
Oil & Gas
Base Metals
300
250
200
150
100
50
0
05:1
Source: BMO Economics
06:1
07:1
08:1
09:1
10:1
11:1
12:1
13:1
14:1
15:1
5
Demand and supply responses will re-balance the
global oil market, though progress will be slow
Crude Oil Prices
$/Barrel
120
100
80
60
40
20
0
09:1
10:1
11:1
12:1
WTI in US$
Source: Bloomberg; Wall Street Journal; BMO Economics
13:1
14:1
15:1
WCS in US$
16:1
6
U.S. production of crude oil has topped out and begun
to decline, while consumption is edging upward
U.S. Oil Market
Million Barrels per Day
10
22
9
20
8
18
7
16
6
14
5
12
4
10
3
91:1 93:1 95:1 97:1 99:1 01:1 03:1 05:1 07:1 09:1 11:1 13:1 15:1
8
Crude Oil Production (LHS)
Source: U.S. Department of Energy
Oil Product Consumption (RHS)
7
While U.S. total crude oil imports are falling sharply,
there is rising refinery demand for Canadian heavy oil
U.S. Imports of Crude Oil
Million Barrels per Day
9
8
7
6
5
4
3
2
1
0
85
87
89
91
93
95
97
From Canada
Source: U.S. Department of Energy
99
01
03
05
07
09
11
From Rest of World
13
15
8
Not so for natural gas – U.S. is becoming self sufficient;
long-term health of Canadian industry depends on LNG
Natural Gas Production & Net Exports: Canada
Billions of Cubic Feet Per Day
18
16
14
12
10
8
6
4
2
0
05
06
07
08
09
10
Production (LHS)
Source: National Energy Board; U.S. Department of Energy
11
12
13
Net Exports
14
15
9
While natural resource output is steady at about 10% of GDP,
its contribution to exports and investment is much higher
Natural Resource Share of the Economy (%)
40
Investment
35
30
Exports
25
20
15
Output
10
5
0
06
Source: Statistics Canada
07
08
09
10
11
12
13
14
15
10
Business Investment:
important driver of demand for metals
 Oil & gas industry – down sharply, delayed recovery
 Pipe
 Equipment
 Commercial construction – momentum waning
 Rising office vacancies
 Reality check for U.S. retail entrants
11
Oil & gas industry investment has plunged 40% in 2015;
continued weak prices in 2016 to limit any recovery
Investment: Oil & Gas Extraction
$ Billions
80
70
60
50
40
30
20
10
0
06
Source: Statistics Canada
07
08
09
10
11
12
13
14
15 est.
12
Considerable new office space coming onto market
and weak resource industry are boosting vacancy rates
Vacancy Rates (%): Office Properties (All Classes)
18
16
14
12
10
8
6
4
2
0
01:1 02:1 03:1 04:1 05:1 06:1 07:1 08:1 09:1 10:1 11:1 12:1 13:1 14:1 15:1
Montreal
Source: CBRE
Toronto
Calgary
Vancouver
13
Diverging trends for industry profits:
weak oil & gas; steady manufacturing returns
Canadian Industry Performance: ROE
21
18
15
12
9
6
3
0
-3
-6
05:1
06:1
07:1
08:1
09:1
10:1
Manufacturing
Source: Statistics Canada
11:1
12:1
13:1
14:1
Oil & Gas
15:1
14
Business has slashed capex in response to falling resource
cash flows, rising commercial vacancies, and global risks
Business Investment in Canada
% Change From Year Ago
20
15
10
5
0
-5
-10
-15
-20
-25
06
07
08
09
10
Machinery & Equipment
Source: Statistics Canada; BMO Economics
11
12
13
14
15
16
Non-residential Construction
15
Household demand:
also an important driver of demand for metals
 Motor Vehicle OEM & Parts Production
 Strong North American sales
 Slipping Canadian share of North American market
 Household Durables
 Near peak demand, some slippage as housing market
cools from its current unsustainable pace
16
Canadian household debt ratio is edging upward,
but is not egregiously high
Household + Unincorporated Business Liabililties
% of Personal Disposable Income
325
300
275
250
225
200
175
150
125
100
75
99:1
01:1
Canada
03:1
U.S.
05:1
07:1
Australia
Source: Bank of Canada; Statistics Canada; Federal Reserve;
Dept. of Commerce; Haver
09:1
11:1
Norway
13:1
15:1
Denmark
17
Sharp U.S. household deleveraging
2/3 by default;
Canadian ratio still above pre-GFC level
low rates
Household Debt as a Per Cent of Net Worth
35
30
25
20
15
10
97:1
99:1
01:1
03:1
Canada
05:1
07:1
09:1
11:1
United States
Source: Bank of Canada; Statistics Canada; Federal Reserve; Dept. of Commerce
13:1
15:1
18
Canada’s jobless rate essentially flat near 7% since early
2013; weak resource prices restraining growth …
Unemployment Rate (%)
10
9
8
7
6
5
4
3
03:1
05:1
Canada
07:1
09:1
11:1
Canada on US Basis
Source: Statistics Canada; U.S. Dept. of Labor; BMO Economics
13:1
15:1
United States
19
… and a lower rate of labour force drop-outs contribute to
the higher Canadian jobless rate
Labour Force Participation Rate
% of Adult Population in the Labour Force
68
67
66
65
64
63
62
03:1
05:1
07:1
Canada
Source: Statistics Canada; U.S. Dept. of Labor
09:1
11:1
13:1
United States
15:1
20
A higher percentage of Canada’s adult labour force
is employed
Employment Rate
% of Adult Population Employed
65
64
63
62
61
60
59
58
57
56
55
03:1
05:1
07:1
Canada
Source: Statistics Canada; U.S. Dept. of Labor
09:1
11:1
13:1
United States
15:1
21
House prices are running around 12% above trend;
mostly in Vancouver and GTA single-family detached
Average Price for Resale Homes: Canada
$ Thousands, SA
500
450
12%
Gap
400
350
300
250
200
150
100
50
0
80:1
85:1
Source: CREA MLS; BMO Economics
90:1
95:1
00:1
05:1
10:1
15:1
22
Potential problem? Building boom three years ago has
brought a lot of condos to the GTA market in 2015
Total New & Unabsorbed Housing Units: Toronto
Per Million Persons
600
500
400
L.T. Avg.
300
200
100
0
97:1
99:1
01:1
03:1
Source: CMHC; Statistics Canada; BMO Economics
05:1
07:1
09:1
11:1
13:1
15:1
23
GTA housing pipeline had been correcting toward trend,
but has upshifted since mid-year:
Risk: rising supply meets slowing demand during 2016-2018
Housing Units Under Construction: Toronto
Per Million Persons
16000
14000
12000
10000
Trend
8000
6000
4000
2000
0
04:1 05:1 06:1 07:1 08:1 09:1 10:1 11:1 12:1 13:1 14:1 15:1
Condos
Source: CMHC; Statistics Canada; BMO Economics
Other
Total
24
Housing starts in Canada expected to run near
demographic requirement; U.S. recovery at measured pace
Housing Starts
Millions of Units
0.25
2.5
0.20
2.0
0.15
Demographic Requirement
1.5
0.10
1.0
0.05
0.5
0.00
0.0
05:1 06:1 07:1 08:1 09:1 10:1 11:1 12:1 13:1 14:1 15:1 16:1
Canada -- LHS
Source: CMHC; U.S. Census Bureau; BMO Economics
United States -- RHS
25
Mortgage quality still rock solid in Canada
despite dire warnings from headline writers
Mortgages 90+ days in Arrears
% of Total Mortgages
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
95:1
97:1
99:1
01:1
Canada
03:1
05:1
Alberta
07:1
09:1
11:1
13:1
United States
Source: Canadian Bankers Association; U.S. Mortgage Bankers Association
15:1
26
Equity in Canadian households’ real estate
has held remarkably steady near 70% for 25 years
Household Residential Equity
% of Value of Residential Property
75
70
65
60
55
50
45
40
35
30
90:1 92:1 94:1 96:1 98:1 00:1 02:1 04:1 06:1 08:1 10:1 12:1 14:1
Canada
Source: CMHC; U.S. Census Bureau; BMO Economics
United States
27
North American motor vehicle sales spurred by rising
employment and very low borrowing costs
Motor Vehicle Sales
Million Units
2.0
20
1.8
18
1.6
16
1.4
14
1.2
12
1.0
10
0.8
8
05:1 06:1 07:1 08:1 09:1 10:1 11:1 12:1 13:1 14:1 15:1 16:1
Canada -- LHS
Source: Statistics Canada; Autodata; BMO Economics
United States -- RHS
28
Imports of vehicles and parts have surpassed pre-recession
peak by 22%; exports rising, but constrained by capacity
Motor Vehicle and Parts Trade
$ Billions, Monthly
30
25
20
15
10
5
0
91:1 93:1 95:1 97:1 99:1 01:1 03:1 05:1 07:1 09:1 11:1 13:1 15:1
Exports
Source: Statistics Canada
Imports
29
Challenging markets for the Oil & Gas, Construction, and
Transportation Equipment industries are restraining demand
for and output of fabricated metals and steel services
Metal Surface Finishing Markets
Real GDP: Billions of 2007 Dollars
18
1.8
16
1.6
14
1.4
12
1.2
10
1.0
8
0.8
6
0.6
4
0.4
97:1
99:1
01:1
03:1
05:1
Fabricated Metals
Source: Statistics Canada
07:1
09:1
11:1
13:1
Steel Service Centres
15:1
30
Metal coating, heating, & engraving have fallen as a per cent
of fabricated metals shipments since 2003 …
Metal Surface Finishing Shipments
% of Fabricated Metal Shipments
14
12
10
Long-run Average = 8.4%
8
6
4
2
0
95:1 97:1 99:1 01:1 03:1 05:1 07:1 09:1 11:1 13:1 15:1
Source: Statistics Canada
31
… in part, reflecting a more challenging pricing environment
for surface finishers
Industry Selling Prices
Indexes, 2003=100
135
130
125
120
115
110
105
100
95
90
03:1 04:1 05:1 06:1 07:1 08:1 09:1 10:1 11:1 12:1 13:1 14:1 15:1
Metal Surfacing
Source: Statistics Canada
Fabricated Metals
32
On the plus side, the lower loonie should act as a tail-wind
for the trade-intensive Canadian economy …
Canadian Dollar
US Cents
105
100
95
90
85
80
75
70
65
60
00:1
02:1
04:1
Source: Bank of Canada; BMO Economics
06:1
08:1
10:1
12:1
14:1
16:1
33
… and non-energy exports have already begun to respond
Non-Energy Exports
$ Billions
120
100
80
60
40
20
0
93:1
Source: Statistics Canada
95:1
97:1
99:1
01:1
03:1
05:1
07:1
09:1 11:1
13:1
15:1
34
Another positive: even small steps taken to close the large
infrastructure gap would boost economic growth
Government Real Capital Stock
Thousands of 2007 Dollars Per Capita
24
22
Infrastructure
Deficit = $180b
1971-1994 Trend Extrapolated
Trend Growth = 1.8%
20
18
16
14
12
10
8
6
61
65
69
73
Source: Statistics Canada; BMO Economics
77
81
85
89
93
97
01
05
09
13
35
Canadian growth to strengthen to 2.1% in 2016,
supported by robust U.S. demand and the low loonie
Real GDP Growth (%)
4
3
2
1
0
-1
-2
-3
05
06
07
08
09
Canada
10
11
12
13
United States
Source: Statistics Canada; Bureau of Economic Analysis; BMO Economics
14
15
16
36
Resource-rich provinces will face challenging conditions;
momentum improving in manf-oriented Central Canada
Economic Growth by Province (%)
5
4
3
2
1
0
-1
B.C
Alb
Sask
2014
Source: Statistics Canada; BMO Economics
Man
2015
Ont
Que
2016
Atl
37
Fed expected to go in December;
global risks expected to keep BoC on hold until early-2017
Monetary Policy Rates (%)
6
5
4
3
2
1
0
04:1 05:1 06:1 07:1 08:1 09:1 10:1 11:1 12:1 13:1 14:1 15:1 16:1
BoC Overnight
Source: Bank of Canada; Federal Reserve Board; BMO Economics
Fed Funds Target
38
Modest policy tightening, overseas QE, and slowing
potential growth to restrain the increase in LT yields
10-Year GoC/Treasury Rates (%)
6
5
4
3
2
1
0
04:1 05:1 06:1 07:1 08:1 09:1 10:1 11:1 12:1 13:1 14:1 15:1 16:1
GoC 10-Year
Source: Bank of Canada; Federal Reserve Board; BMO Economics
10-Year Treasury
39
Upside surprises for the industry?
 A positive LNG Final Investment Decision
 Would boost natural gas E&P and pipeline development
 Accelerated infrastructure investment
 Faster-than-expected recovery in oil prices