MARCH 20, 2019 2 0 1 9 F E D E R A L B U D G E T PRESENTED TO THE K P M G F E D E R AL B U D G E T B R E AK FAS T VAN C O U V E R , B . C . Jock Finlayson, Executive Vice President and Chief Policy Officer jock.finlayson@bcbc.com www.bcbc.com | @bizcouncilbc
2 G LO BAL E CO NO M Y I S CO O LI NG Growth in Total Output 4.5% Average 4.0% Growth, 2000-2015 3.5% 3.7% 3.6% 3.3% 3.0% 3.2% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2017 2018 2019 2020 Source: BMO Economics for forecasts; IMF for other years.
3 G RO WTH M O DE RATI NG I N CAN A D A AND U. S . Real GDP growth, % 3.5 3.0 U.S. Canada 2.9 3.0 2.5 2.3 2.2 2.0 1.8 1.7 1.7 1.5 1.3 1.0 0.5 0.0 10 11 12 13 14 15 16 17 18e 19f 20f 10 11 12 13 14 15 16 17 18e 19f 20f e=estimate f=forecast Source: IMF World Economic database for history, BMO Economics for forecasts.
4 U. S . E CO NO M Y HE ALTH Y, BUT S E T TO S LO W I N 2 0 1 9 - 2 0 2 0 • Growth projected at ~2.3% this year, down from almost 3% in 2018 current expansion is the 2 nd longest on record o US economy has benefitted from ‘sugar high’ provided by tax cuts and increased gov’t spending o • Employment continues to climb… as the labour market tightens further unemployment rate near a 40 year low – heading for 3.5% in 2019 o • Housing starts have been choppy, amid higher prices, escalating building costs, and relatively slow household growth Business investment is increasing – aided by recent tax cuts/reforms • • The Federal Reserve has modified its stance, suggesting at most only 1-2 additional interest rate hikes over the course of 2019-20
5 U. S . S TAR TS WE LL BE LO W 1 9 9 7 - 2 0 0 6 LE V E LS U.S. housing starts, 000s 2500 two or more units single units 2000 1500 1000 500 0 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19f 20f f=forecast Source: U.S. Census Bureau, Department of Housing and Urban Development, average of forecasts from BMO, CIBC, TD, RBC & Scotiabank for projections.
6 U. S . P O P UL ATI O N G RO WTH THE S LO WE S T S I NCE 1 9 3 7 ! Since mid- 2016, America’s population has been growing at an average rate of • 0.7% per year – the slowest pace in 8 decades In contrast, Canada’s population is rising by 1.3 -1.4% per year • This demographic difference should contribute to faster growth in Canada’s • working- age population compared to the U.S., even though America’s population remains younger (average and median age)
7 CAN A DI AN E CO NO M Y: BUM P S AHE A D • Growth essentially stalled in Q4 2018 , creating a very weak hand-off into 2019 • Solid job creation , despite signs of a weakening economy • Household consumption and continued high levels of housing starts (214,000 nationally last year) have been the key factors sustaining aggregate demand – but both are expected to lose steam in 2019-20 Don’t overlook the impact of population growth : Canada leads the G7 and is near • the top in the OECD, fueled by international immigration into urban areas Risks on the downside – softening global economy, Canadian household debt • burden, ongoing adjustments in housing markets, oil prices, increased intergovernmental conflict and tension
8 CAN A D A: I M M I G RANT ARRI VALS * 331,000 (target) 311,000 297,500 286,000 271,000 260,000 252,000 2013 2014 2015 2016 2017 2018 2019 * Permanent immigrants only Source: Statistics Canada; TD Economics.
9 RE CO RD HO US E HO LD DE BT ACC UM UL ATI O N Canadian household debt to disposable income, % 180 170 160 150 140 130 120 110 100 90 80 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Latest Q4 2018. Source: Statistics Canada, CANSIM table 378-0123.
BUT… E V E N WI TH RE CO RD DE BT, DE BT- S E RV I CE RATI O S 10 LO O K M AN AG E A BLE Canadian interest paid, billions $ Debt service ratio 50 10 45 9 mortgage 40 non-mortgage 8 35 7 6 30 25 5 20 4 mortgage non-mortgage 15 3 10 2 91 93 95 97 99 01 03 05 07 09 11 13 15 17 91 93 95 97 99 01 03 05 07 09 11 13 15 17 Latest Q3 2018. Source: Statistics Canada, Table: 11-10-0065-01.
11 CAN A DI AN I NTE RE S T RATE S … V E RY LI TTLE ‘ UP S I DE ’ Selected Canadian interest rates, % 5.0 4.5 Overnight rate 10 year bond yields 4.0 3 month T bill 3.5 10 yr bond yield: 3.0 2.05% Q4 2.5 Overnight 2.0 rate: 1.83% Q4 1.5 1.0 3 month T Bill: 0.5 1.85% Q4 0.0 Source: Bank of Canada; BMO Economics for forecasts.
12 O UTLO O K FO R THE LO O NI E U.S.$ per Cdn$, monthly averages with quarterly forecasts 1.10 history 1.05 Scotiabank 1.00 RBC 0.95 CIBC 0.90 40-yr average 0.85 0.80 OECD PPP estimate 0.75 0.70 0.65 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Latest: January 2019 Source: Bank of Canada, noon rate.
CAN A D A’ S S HRI NKI NG FO O TP RI NT I N G LO BAL M ARKE TS 13 ( S H AR E O F W O R L D M E R C H AN D I S E E X P O R T S ) 4.3% 2.4% 2000 2017 Source: Canadian Manufacturers and Exporters.
CAN A D A’ S LAG G I NG E X P O RT P E RFO RM AN CE 14 ( A V E R A G E A N N U A L I N C R E A S E I N T H E V A L U E O F E X P O R T S * , 2 0 0 0 T O 2 0 1 7 , M E A S U R E D I N U . S . D O L L A R S U S I N G P P P E X C H A N G E R A T E S ) 8% 7.2% 7% 6.0% 5.9% 6% 5% 4.1% 4% 3% 2.5% 2% 1.0- 1% 1.5% 0% Total World S. Korean German exports U.S. exports Canada exports Canada non- Exports exports energy exports * Merchandise exports Source: Canadian Manufacturers and Exporters.
CAN A D A’ S P E RFO RM ANC E I N THE 2 0 1 8 WO RLD E CO NO M I C FO RUM 15 “ G LO BAL CO M P E TI TI V E NE S S RE P O RT” Source: World Economic Forum, The Global Competitiveness Report 2018 .
“ M O S T P RO BLE M ATI C FACTO RS ” FO R DO I NG BUS I NE S S I N CAN AD A 16 ( B A S E D O N A 2 0 1 7 S U R V E Y O F C A N A D I A N E X E C U T I V E S ) Inefficient government bureaucracy 19.3 Tax rates 15.8 Insufficient capacity to innovate 14.4 Inadequate supply of infrastructure 9.7 Tax regulations 9.1 Policy instability 7.9 Restrictive labour regulations 5.8 Access to financing 5.8 Inadequately educated workforce 4.5 Poor work ethic in national labour force 2.9 Government instability/coups 1.7 Inflation 1.2 Foreign currency regulations 1.2 Corruption 0.7 Poor public health 0.0 0.0 Crime and theft 0 5 10 15 20 Note: From the list of factors, respondents to the World Economic Forum’s Executive Opinion Survey were asked to select the five most problematic factors for doing business in their country and to rank them between 1 (most problematic) and 5. The score corresponds to the response weighted according to their rankings. Source: World Economic Forum, Executive Opinion Survey 2017.
M E AS URI NG CAN A D A’ S CO M P E TI TI V E NE S S 17 ( D R AW N F R O M A 2 0 1 8 S U R V E Y O F C AN A D I A N C E O s ) Of the following factors, which is most likely to affect your company’s Canadian investment plans? 47.8% Regulatory burden Availability of talent 20.0% Taxes/tax rates 18.9% Quality/capacity of infrastructure 7.8% Trade barriers/NAFTA/U.S. protectionism 5.6% Source: Business Council of Canada.
18 BUDG E T 2 0 1 9 : M AI N FO CUS ARE AS Fiscal deficits are here to stay…but with a stable debt/GDP ratio (assuming no • recession in next 5 years) • New initiatives to assist first-time home-buyers and expand the rental housing stock • Programs to enable workers to pursue mid-career training/skills upgrading • Lower interest rates on student loans , plus a significant push forward on work- integrated learning • A rhetorical commitment to review and modernize some areas of government regulation …but not much action Little to address Canada’s eroding competitiveness or the weakness in Canadian • capital formation, beyond the measures announced last fall • Initial steps to advance a national pharma-care program A handful of new ‘green’ initiatives (notably subsidies for electric vehicles) •
19 E CO NO M I C AS S UM P TI O NS FO R CAN AD A 2018 2019 2020 2021 Real GDP Growth (%) 1.9% 1.8% 1.6% 1.7% Nominal GDP Growth (%) 3.8% 3.4% 3.5% 3.7% Level of Nominal GDP ($) $2.22 tril $2.30 tril $2.38 tril $2.46 tril Avg. Unemployment Rate 5.8% 5.7% 5.9% 6.0% 3-month T-bill rate 1.4% 1.9% 2.2% 2.3% 10- yr gov’t bond rate 2.3% 2.4% 2.7% 2.8% Oil prices, WTI (US$) $66 $59 $60 $61 Source: Federal Budget 2019.
20 RE V I S E D FE DE R AL FI S CAL P LAN ( C$ BI LLI O NS ) 2017/18 2018/19 2019/20 2020/21 2021/22 Revenues 311.2 332.2 338.8 351.4 366.7 Expenditures 330.2 347.1 355.6 368.2 378.4 Program Spending 308.3 323.5 329.4 339.7 348.3 Public Debt Charges 21.9 23.6 26.2 28.5 30.2 Adjustment for risk - - -3.0 -3.0 -3.0 Budgetary Balance -19.0 -14.9 -19.8 -19.7 -14.8 Net Federal Debt* 671 685 705 725 740 * Rounded to nearest whole number. Source: Federal Budget 2019.
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