RBC ECONOMIC I RESEARCH

Canada’s economy navigating an

uncertain global backdrop

Dawn Desjardins (Deputy Chief Economist) (416) 974-6919 dawn.desjardins@rbc.com

March 2019

RBC ECONOMIC I RESEARCH

Global economy faces high level of uncertainty

2

50

100

150

200

250

300

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Canada Global

Indexed to long-run average = 100

Policy Uncertainty Elevated

Source: Policyuncertainty.com, RBC Economics Research

RBC ECONOMIC I RESEARCH

The pace of global growth is easing

3

-1

1

2

3

4

5

6

08 09 10 11 12 13 14 15 16 17 18 19 20

% change

World GDP growth

Source: International Monetary Fund, RBC Economic Research

Forecast

RBC ECONOMIC I RESEARCH

US economy headed for another year of solid growth

4

-2

-1

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

S

U.S. real GDP growthQuarter-over-quarter annualized % change

Forecast:

Annual Growth Rates

20182.9

2019f2.4

2020f1.9

Source: Bureau of Economic Analysis, RBC Economics Research

RBC ECONOMIC I RESEARCH

Canada’s economy facing challenges: lower oil prices and higher rates

5

-2

0

2

4

6

8

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: Statistics Canada, RBC Economic Research Forecasts

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

Forecast:

Annual Growth Rates

20181.8

2019f1.5

2020f1.8

CCanada's potential growth rate

RBC ECONOMIC I RESEARCH

Drivers of economy shifting – less reliance on consumer

6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Consumer spending Government spending Residential investment Nonresidentialinvestment

Net trade

2008-2018

2019f

2020f

percentage point contribution

Source: Statistics Canada, RBC Economics Research

Contributions to Canadian GDP growth

RBC ECONOMIC I RESEARCH

Federal government stimulus to continue in 2019

7

-56.4

-35.0

-28.0

-21.3

-8.1

-0.6 -2.9

-19.0 -19.0-14.9

-19.8-19.7

-14.8-12.1

-9.8

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

1995–96

1996–97

1997–98

1998–99

1999–00

2000–01

2001–02

2002–03

2003–04

2004–05

2005–06

2006–07

2007–08

2008–09

2009–10

2010-1

1

2011-1

2

2012-1

3

2013-1

4

2014-1

5

2015-1

6

2016

-17

2017

-18

2018

-19

2019

-20

2020

-21

2021

-22

2022

-23

2023

-24

Federal budget projection

Federal government budgetary balance

Source: Department of Finance, RBC Economics Research Forecasts

Billions of dollars

RBC ECONOMIC I RESEARCH

Companies are hitting capacity limits and plan to invest

8

65%

70%

75%

80%

85%

90%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Investment intentions (left axis)

Capacity utilization (right axis)

balance of opinion on investment intentions; industrial capacity utilization

Capacity utilization and investment intentions

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

RBC ECONOMIC I RESEARCH

Although the oil and gas sector will be sidelined by lower prices

9

20

40

60

80

100

120

140

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Western Canadian Select (WCS)

West Texas Intermediate (WTI)

$US/bbl

Oil prices: WTI and WCS

Source: Bloomberg, Wall Street Journal, RBC Equity Research

Forecast

Annual average

WTI

2018$65$38

2020f$64$43

2019f$56$37WCS

RBC ECONOMIC I RESEARCH

Range-bound C$ for now; conditions to improve in 2020

10

0.6

0.7

0.8

0.9

1.0

1.1

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Forecast

Source: Bank of Canada, RBC Economic Research

Parity

Canadian dollarUS$/C$

End of period

2019f

0.75US$/C$

2017

0.80

2018

0.732020f

0.77

RBC ECONOMIC I RESEARCH

Bank of Canada: waiting for economy to emerge from soft patch

11

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 2017 2018 2019 2020

10 Year bond yield BoC overnight rate

Source: Bank of Canada, RBC Economic Research

%

Interest rates: Canada

Forecast

RBC ECONOMIC I RESEARCH 12

Canadian housing sagged due to higher rates and regulatory changes

250

300

350

400

450

500

550

600

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Thousands, SAAR

Existing home sales in Canada

Source: CREA, RBC Economics Research

RBC ECONOMIC I RESEARCH 13

Price gains moderated…

-15

-10

-5

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Year-over-year % change in the composite index

MLS Home Price Index - Canada

Source: CREA, RBC Economics Research

RBC ECONOMIC I RESEARCH 14

…especially in high-priced markets

-20

-10

0

10

20

30

40

2013 2014 2015 2016 2017 2018 2019

Vancouver

Toronto

Year-over-year % change

MLS Home Price Index

Source: CREA, TREB, REBGV, RBC Economic Research

July 25, 2016: BC government announces 15% foreign buyer tax in Metro Vancouver,

effective Aug. 2, 2016.

April 20, 2017: Ontario government announces housingaction plan that

includes a non-resident buyer tax of 15% effective immediately.

February 26, 2018: BC budget

announces rise in foreign buyer tax

to 20% and new non-resident speculator tax.

January 1, 2018: OSFI implements new B-20 guideline for mortgage

lending that calls for stress test for all uninsured mortgages.

RBC ECONOMIC I RESEARCH 15

Affordability pressures will remain intense

54

75

87

20

40

60

80

100

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Vancouver

Toronto

Canada

Ownership costs as % of household income

RBC Housing Affordability Measures - aggregate

Source: RPS, Royal LePage, Statistics Canada, Bank of Canada, RBC Economic Research

RBC ECONOMIC I RESEARCH 16

Housing outlook: we expect a soft landing in Canada, not a collapse…

541 516

460 451472

0

100

200

300

400

500

600

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Source: Canadian Real Estate Association, RBC Economics Research

Thousands of units

Home resales: Canada

Forecast:

10-year average

RBC ECONOMIC I RESEARCH 17

…accompanied by stable prices

-0.3

1.5

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Source: Brookfield, RPS, RBC Economic Research

Annual % change, composite

Home prices in Canada

Forecast:

RBC ECONOMIC I RESEARCH 18

Rising payments will take a bigger bite out of household incomes

920

710

560590 580 660

1,010

730

810

1,260

1,130

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Canada NL PE NS NB QC ON MB SK AB BC

If interest rates were 1 pp higher

2016 payments

* Including debt-free households.Source: Statistics Canada, RBC Economic Research

Average annual debt service payments per household*, in $

Effect of 1 pp rise in interest rates on debt service payments

RBC ECONOMIC I RESEARCH

Strong labour market will allow consumers to absorb higher costs

19

5

6

7

8

9

13

14

15

16

17

18

19

20

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Millions, seasonally adjusted

Unemployment Rate (RHS)

%

Employment Level (LHS)

Source: Statistics Canada, RBC Economics Research

Labour market: Canada

RBC ECONOMIC I RESEARCH 20

2.5

2.3

1.7

1.7

1.6

1.5

1.5

1.3

1.2

0.6

0.5

2.5

0.4

1.6

1.4

1.6

1.7

1.8

2.6

2.2

0.8

0.8

-1 1 2 3 4

B.C.

N.& L.

ONT.

P.E.I

QUE.

MAN.

CANADA

ALTA.

SASK.

N.S.

N.B.

2019f 2020f

Sources: Statistics Canada, RBC Economics Research

Provincial real GDP growthAnnual % change, ranked by 2019 growth

Fastest growth coming from the coasts!

RBC ECONOMIC I RESEARCH 21

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