Economic Outlook: fear over fundamentals

ECONOMICS I RESEARCH

May 2016

Craig Wright (SVP & Chief Economist) (416) 974-7457 craig.wright@rbc.com

ECONOMICS I RESEARCH 2

-100

-50

50

100

150

200

250

300

350

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Year-over-year % change, Market volatility index, (VIX)

Volatility index

Source: Wall Street Journal, RBC Economics Research

ECONOMICS I RESEARCH 3

-1

1

2

3

4

5

6

7

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Canada

U.S.

UK

Eurozone

%, eop

Central bank policy rates

Source: Bank of Canada, Federal Reserve Board, Bank of England, European Central Bank, RBC Economics Research

Forecast

ECONOMICS I RESEARCH 4

9.0

10.010.1

11.3

12.6

14.2

9.79.1

10.7

9.5

7.7 7.77.3

6.9

10.010.210.09.4

8.68.0

7.6 7.57.9 7.8 7.6

7.97.5 7.3 7.4 7.2 7.2 7.1 7.0 6.8 6.8 6.7 6.5 6.2

2

4

6

8

10

12

14

16

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2010

Q4

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

2017

Forecast

% change, year-over-year

Real GDP: China

Source: CNBS, Haver Analytics, IMF, RBC Economics Research Forecasts

ECONOMICS I RESEARCH 5

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Annual Growth Rates

Forecast

% change, year-over-year

Advanced versus emerging economies GDP growth

Source: International Monetary Fund, RBC Economics Research Forecasts

2016f

1.94.1

3.2

Advanced Economies

Emerging and DevelopingWorld

2017f

2.04.6

3.5

2014

1.84.6

3.4

2015

1.94.0

3.1

ECONOMICS I RESEARCH 6

20

40

60

80

100

120

140

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Western Canadian Select (WCS) West Texas Intermediate (WTI)

$US/bbl

Oil prices: WTI and WCS

Source: Bloomberg, Wall Street Journal, RBC Economics Research

Forecast

ECONOMICS I RESEARCH 7

-10

-8

-6

-4

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Forecast:

Source: Bureau of Economic Analysis, RBC Economics Research

U.S. real GDPQuarter-over-quarter annualized % change

Annual Growth Rates

2016f

2.0

2015

2.4

2014

2.4Real GDP

2017f

2.4

ECONOMICS I RESEARCH 8

-1000

-800

-600

-400

-200

0

200

400

600

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Bureau of Labor Statistics, RBC Economics Research

Private sector employment growth: U.S.Change from previous month (Thous.)

ECONOMICS I RESEARCH 9

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Federal Reserve, RBC Economics Research

%

Forecast

Interest rates: U.S.

10 Year Bond Yield

Fed Funds Rate

ECONOMICS I RESEARCH 10

80

85

90

95

100

105

110

115

120

125

130

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Index: 1990=100

Real Broad Trade-Weighted Exchange Value of the US$

Source: Federal Reserve Board, RBC Economics Research

ECONOMICS I RESEARCH 11

0

200

400

600

800

1000

1200

0.50

0.60

0.70

0.80

0.90

1.00

1.10

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Canadian Dollar (LHS) Commodity Prices (RHS)

Source: Bank of Canada, Federal Reserve Board, RBC Economics Research

Canadian dollar and commodity pricesUS$/C$ NSA, Jan-1972=100

ECONOMICS I RESEARCH 12

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Consumer spending Government spending Residential investment Non-res. investment Net external trade Inventories

2015 2016f

Source: Statistics Canada, RBC Economics Research

Percentage points

Canadian real GDP growth composition forecast

ECONOMICS I RESEARCH 13

70

80

90

100

110

120

130

140

2007 2008 2009 2010 2011 2012 2013 2014 2015

Non-energy commodities (29% of total exports)

Non-commodities (51% of total exports)

Energy commodities (20% of total exports)

Foreign activity measure

Index: 2007 Q2 = 100

Canadian exports by sector

Source: Statistics Canada, Bank of Canada, RBC Economics Research

ECONOMICS I RESEARCH 14

5

10

15

20

25

30

35

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Canada

U.S.

UK

Source: Statistics Canada, ONS, FRB, RBC Economics Research

Cash & deposits as a % of GDP

Non-financial corporate liquidity

ECONOMICS I RESEARCH 15

4

5

6

7

8

9

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Employment (LHS) Unemployment Rate (RHS)

SA, millions

Labour market: Canada

Source: Statistics Canada, RBC Economics Research

%SA, millions

Labour market: Canada

Source: Statistics Canada, RBC Economics Research

%

ECONOMICS I RESEARCH 16

5

6

7

8

9

10

11

12

70

80

90

100

110

120

130

140

150

160

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Credit market debt as a % of PDI

Household debt-to-income and debt service ratio: Canada (US Comparable)

Source: Statistics Canada, RBC Economics Research

Interest payments as a % of PDI

Debt-to-income (LHS)

Debt service ratio (RHS)

ECONOMICS I RESEARCH 17

-33.4

-26.2

-18.9

-5.2

1.9

-5.4

-29.4 -29.0

-22.8-17.7

-14.3

-60.0

-50.0

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.01995–9

6

1996–9

7

1997–9

8

1998–9

9

1999–0

0

2000–0

1

2001–0

2

2002–0

3

2003–0

4

2004–0

5

2005–0

6

2006–0

7

2007–0

8

2008–0

9

2009–1

0

2010-1

1

2011-1

2

2012-1

3

2013-1

4

2014-1

5

2015-1

6

2016-1

7

2017-1

8

2018-1

9

2019-2

0

2020-2

1

Federal budget projection

Source: Department of Finance, RBC Economics Research

Federal government budgetary balanceBillions of dollars

ECONOMICS I RESEARCH 18

-10

-8

-6

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Statistics Canada, RBC Economics Research

Canada's real GDP growth Quarter-over-quarter % change, annualized rate

Forecast:

Annual Growth Rates

2016f

1.8

2014

2.5

2017f

2.3Real GDP

2015

1.2

ECONOMICS I RESEARCH 19

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: Bank of Canada, RBC Economics Research Forecasts

%

Interest rates: Canada

10 Year Bond Yield

BoC Overnight Rate

Forecast

ECONOMICS I RESEARCH 20

2.8

2.5

1.8

1.2

1.0

0.9

1.5

-0.8

1.0

-3.5

-1.8

2.9

2.3

2.2

1.8

1.4

1.3

1.2

1.2

0.4

-0.1

-1.6

-4 -3 -2 -1 1 2 3 4 5

B.C.

ONT.

MAN.

CANADA

QUE.

N.S.

P.E.I

SASK.

N.B.

N.& L.

ALTA.

2015 2016

Sources: Statistics Canada, RBC Economics Research

Provincial real GDP growthAnnual % change, ranked by 2016 growth

ECONOMICS I RESEARCH 21

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