Alberta To Remain A Growth Leader May, 2018 Derek Holt Vice President & Head Of Capital Markets Economics Scotiabank Economics
Despite Protectionism, World Trade Is Rising World Trade Volume 6 y/y % change, 3MMA 5 4 3 2 1 0 12 14 16 18 Sources: Scotiabank Economics, Netherlands Bureau for Economic Policy Analysis. 2
CDN Growth Is Softer, But More Diversified Canadian GDP Diffusion Index Slower, But Not A Standstill 100 balance of y/y growing industries vs. 6 contracting industries, % share of total q/q % change, SAAR 80 Canadian Real GDP 60 4 40 20 2 0 -20 0 -40 -60 -2 98 00 02 04 06 08 10 12 14 16 18 16 17 18 Sources: Scotiabank Economics, Statistics Sources: Scotiabank Economics, Bloomberg. Canada. 3
Alberta Is A Growth Leader, But It Is Still Recovering Alberta Among Growth Leaders Long-Term Unemployment 3 12 % of workers unemployed y/y % change for 27 – 51 weeks Net Oil-Consuming 2018f Provinces: 2019f PE, NS, NB, QC, 9 2 ON, MB, BC 6 1 Net Oil-Producing Provinces: NL, SK, AB 3 0 06 07 08 09 10 11 12 13 14 15 16 17 NL NB NS PE SK MB ON QC AB BC Sources: Scotiabank Economics, Statistics Sources: Scotiabank Economics. Canada. 4
Alberta Remains A ‘Lightweight’ On Debt Net Debt by Province % of GDP NL* 50 QC PE ON NB 40 MB NS 30 20 BC AB SK 10 0 FY07 09 11 13 15 17 * Includes pension promissory notes. Sources: H istorical debt: Moody’s Investors Service; Statistics Canada; Scotiabank Economics. 5
Canadian Business Investment Is Gradually Mending Unweighted Investment Intentions Real Canadian 40 % balance/ diffusion index Business Investment 10 60 35 y/y % change y/y % change Business Outlook 30 40 Survey 5 Investment 25 Machinery/ Total ex. oil & 20 Equipment gas (2013$), 20 LHS 0 0 15 -20 10 -5 5 Oil & gas -40 (2013$), RHS 0 -10 -60 14 15 16 17 18 -5 Sources: Scotiabank Economics, Statistics 12 13 14 15 16 17 18 Canada. Sources: Scotiabank Economics, Bank of Canada. 6
Consumers Are Hanging In, But Spending Has Slowed Consumers Never Retrenched Before Being Over-Stimulated 5 q/q % change, SAAR 4 Real consumption 3 2 1 0 14-Q1 14-Q4 15-Q3 16-Q2 17-Q1 17-q4 Sources: Scotiabank Economics, Statistics Canada. 7
Canadian Exports Are Elevated, But Erratic Canadian Export Volumes 115 Laspeyres volume index, 2007 = 100 110 Stalled! 105 100 95 90 12 13 14 15 16 17 18 Sources: Scotiabank Economics, Statistics Canada. 8
Canada Has No Spare Industrial Capacity Left CDN Industry Faces Greater Capacity Utilization Rates Capacity Pressures 90 Paper products 2017Q4 % Canadian Wood products capacity 85 utilization rate Plastics & rubber Machinery 80 Food products Chemical products 75 US capacity Computers & electronics Long utilization -term rate Transportation equip. avg. 70 Primary metals Fabricated metals % 65 00 02 04 06 08 10 12 14 16 18 0 25 50 75 100 Sources: Scotiabank Economics, Sources: Scotiabank Economics, Federal Statistics Canada. Reserve Board, Statistics Canada. NAFTA risks aside, they still have businesses to run. Capacity pressures require investing and hiring – and dealing with NAFTA risks if and when they arise. 9
Canadian Inflation Has Been Rising CDN Core Inflation Rising Faster Than in the US y/y % change 2.0 CA average core inflation 1.8 1.6 1.4 US core PCE 1.2 14 15 16 17 18 Sources: Scotiabank Economics, Statistics Canada, BEA. 10
Canadian Wage Growth Is Picking Up Canadian Wage Growth 4 y/y % change 3 2 1 0 14 15 16 17 18 SEPH Hourly Earnings of All Empl.* LFS Hourly Wage Permanent Empl. Sources: Scotiabank Economics, Statistics Canada. *weighted hourly earnings of salaried and hourly employees. 11
Higher Borrowing Costs Bank of Canada Rate Forecasts Canada Yield Curve 3.50 2.00 % % OIS Market-based expectations 3.00 1.75 (as of May. 8) 2.50 1.50 1.25 2.00 Scotiabank Economics 1.00 1.50 Current 17q4 0.75 1.00 18q4 19q4 0.50 0.50 0.25 0.00 3-month 2-year 5-year 10-year 30-year T-Bill Canada Canada Canada Canada Sources: Scotiabank Economics, Bloomberg. Source: Scotiabank Economics. 12
Canada Could Import Negative Bond Market Consequences A US Fiscal Train Wreck 4 % of GDP, Including revise 10 yr April 2018 forecast 0 -4 US fiscal deficits adjusted for tax -8 reforms and funding agreement -12 Sources: Scotiabank Economics, CBO. 13
Iran Pull- Out Risks Overshooting Oil Prices… Iranian Sanctions Drove Iranian Sanctions Were A Major Oil To The Moon Oil Shock 160 5 USD/bbl barrels per day, millions UN Security Iranian Crude Resolution 1696 Oil Production 4 120 3 Brent 80 Iranian Crude Oil Exports 2 40 1 UN Security WTI Resolution 1696 - Iranian Sanctions 0 0 04 06 08 10 12 14 16 04 06 08 10 Sources: Scotiabank Economics, Central Bank of Sources: Scotiabank Economics, Bloomberg. the Islamic Republic of Iran. 14
…With Various Knock -On Effects Iranian Sanctions Helped To Inflation Turned Lower Iranian Sanctions Helped To Stop Drive 10 Year Treasury Yield Lower 6 The Fed In Its Tracks 6 6 y/y % change yield, % % UN Security Resolution 1696 5 5 4 PCE Deflator 4 4 2 UN Security 3 3 Resolution 1696 UN Security Core PCE Resolution 1696 2 2 Federal Funds Target US Generic 0 Rate - Upper Bound Govt 10 Year 1 1 0 0 -2 04 06 08 10 04 06 08 10 04 06 08 10 Sources: Scotiabank Economics, Bloomberg. Sources: Scotiabank Economics, Bloomberg. Sources: Scotiabank Economics, Bloomberg. 15
Is Now Different? The World Produces More Oil Now 100 barrels per day, millions Global Crude Oil Production 90 80 UN Security Resolution 1696 70 04 06 08 10 12 14 16 18 Sources: Scotiabank Economics, Bloomberg, Energy Intelligence.. 16
Oil Prices Are Above Mid-Cycle Project Break-Evens Break Even Costs Are Below WTI Break Even Costs Are Below WTI 80.0 US projects- break even cost US$/bbl Canadian projects- break even cost 70.0 WTI Spot Price 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Source: Scotiabank GBM Estimates, The Playbook - Eighth Edition. Source: Scotiabank GBM Estimates, The Playbook - Eighth Edition. 17
Supply Deficit To Be Addressed By Relaxed Cuts Oil Supply Deficits To Persist Canadian Oil Prices Still at a Following Q1 Demand Weakness Discount 4 F'cast 0 3 2 -10 1 -20 0 Western Canada -1 -30 Select Crude Oil Differential -2 -40 Δ Oil Supply -3 Δ Oil Demand (Inverted) USD/bbl Oil Market Balance Mbpd -50 -4 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 10 12 14 16 18 Sources: Scotiabank Economics, Scotiabank Sources: Scotiabank Economics, Bloomberg. GBM, IEA, EIA, JODI, OPEC. 18
Alberta’s Home Prices Are Now Relatively Resilient National Home Sales Alberta's House Prices are 600 Relatively Resilient 000s of units, annualized Vancouver 550 Moncton Ottawa 500 Quebec City Montreal 10-year 450 Winnipeg average Halifax Average home 400 Calgary sale price Edmonton 350 Saskatoon y/y % change Toronto 300 -20 -10 0 10 20 10 11 12 13 14 15 16 17 18 Sources: Scotiabank Economics, CREA, Real Sources: Scotiabank Economics, CREA. Estate Boards. 19
Mortgage Debt Matters, But The Challenge Is Often Overstated Two-Thirds Of CDN Households Real Estate Equity as % of Don't Have a Mortgage Real Estate Assets 40 % 80 % 35 30 70 Canada 25 Title 20 60 15 US 50 10 5 40 0 Owned dwelling Owned dwelling Rented with a mortgage without a 30 mortgage 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Sources: Scotiabank Economics, Statistics Canada. Sources: Scotiabank Economics, Federal Reserve Board, Statistics Canada. Includes households, non-profits and unincorporated business. . 20
Stable Debt Service Ratio Household Debt-Service Costs 16 % of PDI 14 12 10 00 05 10 15 Sources: Scotiabank Economics, Statistics Canada. 21
Demographics Support Housing With Alberta Improving Proposed Immigration for Canada Net Interprovincial Migration 60 400 000s, 4QMA 000s Proposed 50 350 Immigration Alberta 40 300 Annual Average 30 ImmIgration 250 20 200 BC 10 150 0 100 -10 50 -20 Ontario 0 -30 00 02 04 06 08 10 12 14 16 18 Sources: Scotiabank Economics, Statistics Source: Statistics Canada, Ministry of Canada. Immigration, Refugees & Citizenship Canada. Source: Statistics Canada. 22
Canadians Usually Don’t Default When House Prices Correct Mortgage Arrears During House Price Corrections Large House Price Corrections 0.7 Toronto 1989- Vancouver Vancouver Vancouver Toronto 2008- trough to peak in provincial mortgages in arrears, bps peak to trough change in provincial mortgages in arrears, bps 95 1990-91 1995-96 2008 09 0.6 0 0.5 -5 0.4 -10 0.3 -15 0.2 0.1 -20 0.0 -25 Toronto 1989- Vancouver Vancouver Vancouver Toronto 2008- -30 % change 95 1990-91 1995-96 2008 09 Source: CREA MLS, Scotia Economics. Source: Canadian Bankers Association, Scotia Economics. Canada has witnessed some big price corrections since the late 1980s that corresponded with big shifts in the macro environment, notably in Toronto and Vancouver, and yet each time mortgage arrears barely budged. Implication? Originations are at greater risk than charge-offs. 23
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