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26 SEPTEMBER 2019 G L O B A L A N D C A N A D I A N E C O N O M I C O U T L O O K PRESENTED TO K P M G M I N I N G E X E C U T I V E AN D D I R E C TO R F O R U M Dr David Williams Vice President, Policy www.bcbc.com | @bizcouncilbc

  1. 26 SEPTEMBER 2019 G L O B A L A N D C A N A D I A N E C O N O M I C O U T L O O K PRESENTED TO K P M G M I N I N G E X E C U T I V E AN D D I R E C TO R F O R U M Dr David Williams Vice President, Policy www.bcbc.com | @bizcouncilbc

  2. OUTLINE 2 ▪ Highlights ▪ Global economy ▪ Canadian economy ▪ Risks ▪ Conclusion

  3. HIGHLIGHTS 3 ▪ Tepid global GDP growth outlook ▪ Low productivity growth ▪ Trade disputes & uncertainty ▪ Canadian fundamentals look weak ▪ 30- year high population growth lifts GDP, but… ▪ Falling capital intensity ▪ Low productivity growth ▪ Low growth in GDP per capita (0.3% p.a. over past 2 years) ▪ Record national debt (302% of GDP, 8 th highest globally) ▪ Risks skewed to the downside

  4. 4 GLOBAL ECONOMIC OUTLOOK

  5. TEPID GLOBAL GROWTH OUTLOOK 5 % Real GDP growth, annual 7 18% 6 5 33% 4 15% of world GDP 3 18% 12% 2 4% 1 0 US Euro area Japan China Oil-importing Rest of world World EMEs ** 2018 2019* 2020* 2021* * Projections Source: Bank of Canada ** Includes India, Brazil, South Africa, South Korea

  6. COMMODITY PRICES HAVE IMPROVED SINCE JANUARY 6 Index Commodity price indices, USD prices, weekly, 3 Jan 2019 = 100 160 150 140 130 120 110 100 90 80 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Total (BCPI) Energy Metals and minerals Forestry Agriculture Source: Bank of Canada

  7. LONG-TERM DECLINE IN PRODUCTIVITY & GDP GROWTH 7 Source: OECD

  8. TRADE GROWTH HAS STALLED 8 Source: OECD

  9. TRADE GROWTH HAS STALLED 9 % Trade growth, y/y % change quarterly data China provided most of the growth in global trade Source: Bank of Canada

  10. UNCERTAINTY DAMPENS MANUFACTURING & INVESTMENT 10 Source: OECD

  11. INVERTED YIELD CURVES 11 Yields on Treasury bills/bonds 2.4% 2.2% U.S. Canada 2.0% 1.8% 1.6% 1.4% 1.2% 3mth 6mth 1 year 2 years 5 years 10 years 30 years (US) / Long term (Can) Source: Bloomberg 10/9/2019, Bank of Canada 9/9/2019

  12. US INFLATION EXPECTATIONS HAVE DECLINED 12 Monthly data Fed target: 2% for PCE Source: Bank of Canada

  13. 13 CANADIAN ECONOMIC OUTLOOK

  14. CANADIAN ECONOMY IS RUNNING CLOSE TO ITS (MEAGRE) 14 FULL SPEED Real GDP growth, annual % 3.0 2.5 1.9 2.0 1.9 2.0 1.5 1.3 1.0 Potential GDP growth depends on growth in: 1. Productivity 0.5 2. Labour input 0.0 2018 2019* 2020* 2021* * Projected Potential GDP growth Actual GDP growth Source: Bank of Canada

  15. 30-YR HIGH POPULATION GROWTH IS LIFTING GDP, 15 BUT NOT PRODUCTIVITY & GDP PER CAPITA 3-year CAGR, quarterly data 5% 1.5% 4% 3% 1.1% 2% 1% 0.7% 0% 0.6% -1% 0.3% 1986 1991 1996 2001 2006 2011 2016 GDP per capita GDP Labour productivity (business sector) Population (RHS) Source: Statistics Canada

  16. CAPITAL INTENSITY IS BELOW PRE -RECESSION LEVELS 16 Real business investment per worker (before depreciation), Canada, 2008Q1 to 2019Q2* Software Research & development Mineral exploration & evaluation INTELLECTUAL PROPERTY PRODUCTS -532 Computers & computer peripheral equipment Trucks, buses & other motor vehicles Communications & audio-video equipment Aircraft & other transport equipment Passenger cars Furniture, fixtures & prefabricated structures Other machinery & equipment Other electrical, electronic machinery & equipment Industrial machinery & equipment MACHINERY AND EQUIPMENT -689 Engineering structures Non-residential buildings NON-RESIDENTIAL STRUCTURES -73 -1446 TOTAL -1500 -1300 -1100 -900 -700 -500 -300 -100 100 300 500 * 4 quarter average, 2012 chained dollars $/worker Source: Statistics Canada

  17. CANADA HAS LITTLE IDLE CAPACITY 17 Estimates of potential GDP less actual GDP (“output gap”), Canada, quarterly 3 % of GDP 2 1 0 -1 -2 -3 -4 2019Q2: -0.4% to -0.9% of GDP -5 2005Q2 2007Q2 2009Q2 2011Q2 2013Q2 2015Q2 2017Q2 2019Q2 Integrated framework Extended multivariate filter Source: Bank of Canada

  18. CORE INFLATION MEASURES ARE CLOSE TO 2% TARGET 18 Year/year percentage change, monthly data Source: Bank of Canada

  19. 19 RISKS

  20. RISKS TO THE CANADIAN OUTLOOK 20 ▪ Upside ▪ Stronger U.S. growth (e.g. productivity acceleration; fiscal stimulus) ▪ Looser monetary policy by global central banks ▪ Credit boom accelerates again ▪ Downside ▪ Tighter financial conditions ▪ Weaker growth in China and lower commodity prices ▪ Disorderly unwinding of high global indebtedness (esp. China, HK, Canada) ▪ Risks are skewed to the downside

  21. CANADA’S POST -2005 CREDIT BOOM IS YET TO UNWIND 21 Credit to GDP ratios in the non-financial sector, market value % of GDP 350 1 0.9 300 Government debt boom begins (2008) 0.8 250 0.7 0.6 200 Corporate debt boom begins (2006) 0.5 150 0.4 Household debt boom begins (2001) 100 0.3 0.2 50 0.1 0 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Households Non-financial corporations Government Canadian recessions Source: BIS, C.D. Howe Institute

  22. BOC: TRADE RISKS ARE SKEWED TO THE DOWNSIDE 22 Percentage change in real GDP relative to BOC’s base case projection in 2021Q4 Upside: tariff changes over past 2yrs are reversed and all trade-related uncertainty dissipates Downside: U.S. imposes 25% tariffs on all imports and trading partners respond in-kind; trade-related uncertainty increases GDP ↓3% (world) ↓6% (Canada) Global commodity prices ↓30% Terms of trade ↓, CAD ↓25% Source: Bank of Canada July MPR

  23. 23 CONCLUSION

  24. CONCLUSION 24 ▪ Tepid global GDP growth outlook ▪ Low productivity growth ▪ Trade disputes & uncertainty ▪ Canadian fundamentals look weak ▪ 30- year high population growth lifts GDP, but… ▪ Falling capital intensity ▪ Low productivity growth ▪ Low growth in GDP per capita (0.3% p.a. over past 2 years) ▪ Record national debt (302% of GDP, 8 th highest globally) ▪ Risks skewed to the downside

  25. 25 THANK YOU! david.williams@bcbc.com

  26. 26 QUESTIONS

  27. 27 EXTRA CHARTS

  28. NEAR-TERM GLOBAL OUTLOOK WEAKENS 28 Source: OECD

  29. LIVING STANDARDS HAVE STAGNATED SINCE 2007 29 Real GDP per capita, compound annual growth rate, 2007-2018 3% 2% 1% 0% -1% Germany Australia OECD* US G7 Japan CANADA Euro area France UK Italy Labour productivity Labour utilization GDP per capita GDP per capita (2000-07) Source: OECD * 2007-17 CAGR

  30. DISAPPOINTING PRODUCTIVITY GROWTH SINCE 2007 30 Growth in labour productivity (GDP per hour worked), CAGR 2.5% 2.0% 1.5% 1.1% 1.0% 0.8% 0.5% 0.0% US UK OECD* G7 Germany Japan France Australia CANADA Euro area Italy 2000-07 2007-18 Source: OECD * 2007-17 CAGR

  31. REAL WAGE GROWTH IS WEAK 31 Real compensation per employee*, 5-year CAGR, Canada 3% 2% 1% 0.6% 0% -1% Q1 1984 Q1 1989 Q1 1994 Q1 1999 Q1 2004 Q1 2009 Q1 2014 * Nominal total compensation per employee deflated by household consumption deflator Source: Statistics Canada

  32. EMPLOYMENT GROWTH IS RAISING TOTAL HOURS WORKED 32 Year/year percentage change, quarterly data 4% 3% 2% 1% 0% -1% -2% -3% Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Employment Average hours worked Total hours worked Source: Bank of Canada

  33. CAPITAL INTENSITY IS FALLING 33 Real business gross fixed capital formation per worker, Canada, y/y % change 30% 20% 10% 0% -4% -10% -20% -30% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Non-residential structures Machinery and equipment Intellectual property products Total Source: Statistics Canada

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