THE OUTL K FOR THE NORTH AMERICAN ECONOMY February 11th, 2020 - PowerPoint PPT Presentation

NORTH AMERICAN POWER CREDIT ORGANIZATION, CREDIT CONFERENCE PALM SPRINGS, CA THE OUTL K FOR THE NORTH AMERICAN ECONOMY February 11th, 2020 Dan North Chief Economist, Euler Hermes North America

Looking Ahead in 2020 EULER HERMES: GLOBAL LEADER IN TRADE CREDIT INSURANCE  Founded in 1893  AA S&P Rating and A+ AM Best Rating  Global leader in credit insurance with 34% market share  Offices in 52 countries providing coverage in over 200 foreign markets  Backed by blue-chip ownership of the Allianz Group  6,000 employees and 52,000 clients worldwide  Insure over $150 Billion in US sales and over $1 Trillion globally.  Pay 85,000 claims per year  International Risk Database monitors over 85 million companies worldwide Credit Insurance: Protection against bankruptcy and slow payment losses  Safer sales growth in the US or overseas  Knowledge to better manage risk  Improved borrowing options  Credit function support  Reduce bad debt reserves  Get paid for what you sell 2 agn

Looking Ahead in 2020 AGENDA 01 THE GLOBAL OUTLOOK 02 THE CANADIAN OUTLOOK 03 THE US OUTLOOK 04 TRADE AND TARIFFS 05 CONCLUSIONS 3

Looking Ahead in 2020 THE GLOBAL OUTLOOK 01

Looking Ahead in 2020 GLOBAL GROWTH FORECAST GDP, Gross Domestic Product is our broadest measure of economic health. It’s a $ value of everything produced by the economy, historically grows ~ 3.3% annually. 2016 2017 2018 2019 2020 World GDP growth 2.7 3.3 3.1 2.5 2.4 1.8 United States 1.6 2.4 2.9 2.3 1.6 Global growth to weaken again during the Latin America -1.1 1.0 1.0 0.0 1.1 coming quarters. Some quarters of zero or Brazil -3.3 1.3 1.3 1.1 2.0 negative growth possible, in the US, the UK, United Kingdom 1.9 1.8 1.4 1.2 1.0 Japan, South Korea, Russia and Asian Eurozone members 1.7 2.7 1.9 1.2 1.0 export hubs. Germany 2.1 2.8 1.5 0.6 0.6 France 1.0 2.4 1.7 1.2 1.2 Italy 1.4 1.8 0.7 0.1 0.4 Spain 3.0 2.9 2.4 2.0 1.6 Recession (two quarters of contraction) or Russia 0.3 1.6 2.3 1.1 1.3 borderline ones (one quarter of contraction) Turkey 3.2 7.5 2.8 0.1 2.3 in France, Italy, Germany, the UK, South Asia 5.0 5.3 4.9 4.4 4.4 China 6.7 6.9 6.6 6.2 5.9 Korea, Singapore, Hong Kong, Turkey, Brazil, Japan 0.6 1.9 0.8 0.8 0.9 Mexico, Argentina and South Africa. India 8.1 7.1 6.8 5.2 6.0 Middle East 4.9 1.2 1.1 0.5 2.1 Saudi Arabia 1.7 -0.7 2.4 0.4 1.2 Africa 1.2 3.2 2.7 1.9 1.8 South Africa 0.6 1.4 0.8 0.3 0.0 5 can Sources: IHS, Euler Hermes, Allianz Research

Looking Ahead in 2020 THE CANADIAN OUTLOOK 02 sum

Looking Ahead in 2020 THE CANADA SUMMARY The Negatives The Positives • Weak consumption • Hot job market • Lack of investment • Low inflation and interest rates • Manufacturing contraction • Leading Indicators rebounding • BoC too tight, inverted yield curve • BoC on hold • Slowing US and global economies • Housing stabilized • Rising insolvencies • Fiscal stimulus • GDP forecast only 1.7% for both 2019 and 2020. • Downside risks, but things can improve. 7 Sources: IHS, StatCan, Allianz Research gdp

Looking Ahead in 2020 THE ECONOMY AND CONSUMERS ARE SLOWING GDP and Consumption, y/y 5% 4% 3% GDP 2% 1.7% Cons 1% 1.4% 0% -1% 2014 2015 2016 2017 2018 2019 8 Sources: IHS, StatCan, Allianz Research lbr

Looking Ahead in 2020 LABOR MARKET STRONG, NEAR RECORD LOW UNEMPLOYMENT BUT JOB GAINS SLOWING Canadian Labor Market, Jobs Created (000s) and the Unemployment Rate 120 9% jobs created (L): 100 H1 247.5k 80 H2 72.8k 8% 60 40 20 7% 0 -20 -40 6% -60 -80 unemployment rate ( R) near record low 5.4% -100 5% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 9 Sources: IHS, StatCan, Allianz Research hsn

Looking Ahead in 2020 HOUSING: GOV’T MEASURES (TAXES, MORTGAGE RULES)TO COOL MARKET WORKED, NOW REBOUNDING Unit sales, annualized Housing starts, 3 mo ave, Home prices, Y/Y rates, 000’s annualized rates, 000’s 29% 240 30% 550 bubbles problem? 26% 525 220 20% 500 14% 200 475 10% 4% 450 1% 180 0% 425 -5% Canada Toronto 160 400 Vancouver -10% 10 Sources: IHS, StatCan, CREA, Allianz Research mfr

Looking Ahead in 2020 MANUFACTURING IN CONTRACTION Manufacturing Inventory/Sales Ratio Manufacturing, y/y 20% 1.6 highest since the recession 15% 10% 5% 1.5 0% -5% Sales -0.1% -10% 1.4 New orders -1% -15% -20% -25% 1.3 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019 Sources: IHS, StatCan, Allianz Research lead

Looking Ahead in 2020 LEADING INDICATORS, BUSINESS CONFIDENCE POSITIVE, SLIDING CFIB Business Barometer, and Ivey PMI BoC Business Outlook Survey 60 8 75 future sales 6 40 outlook (l) 70 4 20 65 2 60 0 0 55 -2 -20 -4 50 overall (R) -40 -6 45 CFIB >50 stronger in next year -60 -8 PMI >50 expansion 40 2011 2013 2015 2017 2019 12 Sources: IHS, StatCan, Boc, CFIB, Ivey, Allianz Research boc

Looking Ahead in 2020 BUT HOW LONG CAN THE BOC HOLD OUT IN A WORLD OF COMPETITIVE EASING? Central Bank Rates 3% 2% Can 1.75% US 1.63% 1% Aus 0.75% 0% Jpn -0.1% Eur -0.5% (Note: negative rates don't work) -1% Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 13 Sources: Central banks, Haver, Allianz Research us

Looking Ahead in 2020 THE U.S. OUTLOOK 03 sum

Looking Ahead in 2020 US SUMMARY; SOME STRONG INDICATORS NOW, BUT FUTURE WORRIES The near-term outlook is pretty good... ... but the long-term outlook suggests slowdown • Low interest rates and inflation • Consumer worried about future • Small business confidence • Income slowing • Services strong • Fiscal and monetary policy • Easy financial conditions • Labor market slowing • Housing market recovering • Consumer delinquencies on rise • Consumer confidence high • Manufacturing, transportation in contraction • Income, consumption positive • Corporate profits weak • Strong labor market • Several indicators flashing warnings • Fed cutting rates • Bankruptcies rising • GDP forecast positive at 1.6% for 2020 • Trade war, divided govt, global weakness • GDP forecast only 1.6% for 2020 15 low

Looking Ahead in 2020 GOOD BUSINESS CONDITIONS WITH LOW INTEREST RATES AND INFLATION Inflation Interest Rates 20% 15% Consumer Price Index 12% CPI core 15% 9% 6% 10% 30 yr prime mortgage 3% 5% 0% 10-yr -3% Fed Funds 0% 1969 1979 1989 1999 2009 2019 1969 1979 1989 1999 2009 2019 16 Sources: IHS Global Insight, BLS, Allianz Research nfb

Looking Ahead in 2020 SMALL BUSINESS STILL OPTIMISTIC National Federation of Independent Business, 110 40 Small Business Optimism Survey election 30 overall optimism (L) remains historically high 100 20 10 90 % saying now is a good time to expand (R) 0 historically high 80 -10 1999 2004 2009 2014 2019 17 Sources: IHS Global Insight, National Federation of Independent Business, Allianz Research gdp

Looking Ahead in 2020 GDP, LEAD BY SERVICES, HAS BEEN POSITIVE (BUT SLIDING). ISM Services (85% of the economy) GDP Growth <50 means contraction 4% 70 2.9% 3% 2.3% 65 new 2% orders 1.6% 60 1% 0% 55 -1% services 50 -2% 45 -3% 2015 2016 2017 2018 2019 2020 2005 2008 2011 2014 2017 2020 18 fin

Looking Ahead in 2020 FINANCIAL CONDITIONS ARE EASY Kansas City Fed Financial Stress Index Net % of Banks Increasing Spreads on Large C&I Loans 100% 20% 80% 18% 16% 60% 14% 40% 12% 20% 10% St. Louis Fed Financial Stress Index 0% 8% -20% 6% -40% 4% -60% 2% -80% 0% 1990 1994 1998 2002 2006 2010 2014 2018 19 Sources: IHS Global Insight. FRED, Fed, NBER, Allianz Research hsn

Looking Ahead in 2020 HOUSING MARKET RECOVERING Housing Starts and Permits New & Existing Home Sales National Association of 3mo ave Seasonally Adjusted Annualized Rates 3mo ave Seasonally Adjusted Annualized Rates Homebuilders Index 750 5,600 1,500 90 Total Present Sales New sales Expected Sales 725 Permits; 85 (L) 21% y/y Traffic 11% y/y 80 700 1,400 75 5,400 675 70 650 1,300 65 Existing 60 625 sales (R) 5,200 6% y/y 55 Starts; 600 1,200 22% yy 50 575 45 550 40 5,000 1,100 2017 2018 2019 2017 2018 2019 2017 2018 2019 20 Sources: IHS Global Insight. BEA, NAR, NAHB, Allianz Research mba

Looking Ahead in 2020 HOUSING MARKET RECOVERING 21 Sources: MBA, Allianz Research conf

Looking Ahead in 2020 CONSUMERS 70% OF THE ECONOMY, BUT NERVOUS ABOUT THE FUTURE Consumer Confidence survey: Conference Board Consumer Confidence 180 future expectations - present situation (down 4/5 months) 100 20% 175 present 160 18% 75 situation 140 16% 50 132 14% 120 25 12% 100 0 103 10% future 80 -25 8% expectations 6% 60 -50 4% -75 40 shaded areas 2% -72 are recessions -100 20 0% 1970 1980 1990 2000 2010 2020 2010 2012 2014 2016 2018 2020 22 Sources: IHS Global Insight. Conference Board, Allianz Research pce