Oecd interim economic ocde outlook march 2017 embargo (3)
Economic outlook
1. Winter 2015
1
Highlights
While stagnation in the Eurozone and rebalancing policies in China will
again restrain the global economy in 2015, growth should nonetheless be
well supported thanks to a triple boost in the form of improving U.S.
demand, a stronger U.S. dollar, and lower oil prices, all of which bode
well for emerging economies. Moreover, low inflation will allow central
banks in most major economies to assist growth by keeping monetary
policy highly accommodative. We expect global GDP growth to accelerate
to 3.5% in 2015.
The U.S. is on a clear uptrend, buoyed by an invigorated private sector.
The labour market has taken off and the resulting increased household
income, coupled with cheap gasoline and re-leveraging, should boost
consumption further. Exports could soften a bit due to the stronger dollar,
although neither this nor a slight tightening of monetary policy by the Fed
will prevent U.S. GDP growth from accelerating to 3% in 2015, the best
performance in a decade. That, of course, assumes business confidence
isn’t sapped by a dysfunctional Congress.
The oil price slump prompted a three-tick downward revision to our 2015
GDP growth forecast for Canada to just 2.2%. The curtailment of
investment in the oil patch and spending restraint particularly by
provinces due to the revenue shortfall will offset the benefits of cheaper
energy for consumers and non-energy producers. The housing market
could also moderate a bit. So, domestic demand will remain soft for yet
another year, leaving trade to once again lead the way, buoyed by a
cheaper currency and strengthening U.S. demand. Another year of above
potential growth will close the output gap and keep the annual core
inflation rate above the Bank of Canada’s target. But given its concerns
about the global economy and domestic risks, the central bank will likely
delay rate hikes to 2016.
Regionally, the impacts of weaker oil prices will vary. For the first time
since 2000, Ontario will lead the nation in 2015 with growth of 2.7%
buoyed by domestic demand, which should be supported by an overdue
rebound in investment spending in light of elevated capacity usage, but
also by exports which will get a boost from improving U.S. demand and a
more competitive Canadian dollar. Quebec will also accelerate relative to
2014 thanks to better exports, although a less favourable housing market
and tighter fiscal policy will cap growth at 1.9% in 2015. British Columbia
too, should be able to grow a touch higher than the pace set in the prior
year. Alberta, on the other hand, will see a marked deceleration in GDP
growth as investment dries up and revenue shortfall from oil royalties
prompt spending cuts by a government intent in controlling the deficit.
Contents
World
Oil stimulus 2
United States
Beacon of hope 5
Canada
Deceleration in 2015 7
Provincial Economies
Ontario 9
Quebec 11
British-Columbia 13
The Prairies 14
Atlantic Provinces 16
Annex 20
2. ECONOMIC OUTLOOK
WORLD
2
Oil stimulus
The global economy just got a triple boost, courtesy of the
U.S. resurgence. The world’s largest economy is set to
register in 2015 its best performance this cycle (see U.S.
section), and the resulting demand should translate into
better exports and hence stronger growth for emerging
markets in particular. A strengthening U.S. economy also
means tighter Fed policy and hence a further appreciation
of the U.S. dollar, which is another positive for emerging
markets because it makes those export-driven economies
more competitive relative to the U.S.. And last but not
least, a stronger U.S. dollar suggests softness for oil prices
which are often negatively correlated to the greenback.
While declining oil prices aren’t good for Saudi Arabia and
other oil exporting nations with fixed exchange rates, they
are nonetheless a boon to the global economy as a whole.
Cheaper oil helps in rebalancing the global economy by
improving the current account balance of oil importing
countries, which are often in deficit territory, at the
expense of big oil exporters which usually enjoy large
surpluses. More importantly, lower oil prices are equivalent
to a stimulus for the global economy. Even assuming Brent
oil prices near $70/barrel on average in 2015, that will be
about 30% lower than in 2014. Large importers like India,
where oil accounts for more than a third of total imports,
will benefit the most. India, which according to the EIA
consumes about 3.5 million barrels per day, stands to save
US$38 bn/year, or more than 2% of GDP. For the global
economy as whole, a 30% drop in oil prices is equivalent
to a stimulus of over 1.5% of GDP assuming everything
else remains constant.
Further stimulus will come from more familiar sources,
namely monetary policy. Slumping oil prices will make an
already mild inflation environment even milder, allowing
central banks to keep rates low for longer or, even cut
them as the People’s Bank of China just did. Despite being
constrained by the zero lower bound, the Bank of Japan
and European Central Bank already announced that they
will still be able to deliver stimulus by increasing the size of
their respective balance sheets via asset purchases, and
hence injecting more liquidity in the financial system.
That said, there are still risks to the global economy. For
instance, the greenback’s ascent is good as long as it
doesn’t cause investors to flee emerging market debt
instruments, as was the case in the summer of 2013 when
then-Chair Ben Bernanke started talking about QE
tapering by the Fed. At the time, bond yields in emerging
markets soared as foreign investors, wary of holding
assets in depreciated currencies, were engaged in a
massive sell-off. That even prompted some central banks
in emerging economies to raise interest rates to stem
outflows of capital. Fortunately, with the exception of
Russia, there hasn’t been a similar reaction this time, but
92
94
96
98
100
102
104
106
108
110
112
114
116
2009 2010 2011 2012 2013 2014
Trade-weighted U.S. dollar
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Europe Japan Emerging
World: Global economy buoyed by U.S. demand, strong USD, …
NBF Economics and Strategy (data via Datastream, CPB)
Correlation of export volumes with
U.S. real domestic demand
Exports of several economies
should get a boost from
better U.S. demand ... ... and an appreciating
U.S. dollar
70
75
80
85
90
95
100
105
110
115
120
2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4
0.0
0.5
1.0
1.5
2.0
2.5
3.0
India China World
... and cheaper oil
* Assuming consumption unchanged
NBF Economics and Strategy (data via EIA, IMF)
% of GDP
Brent oil price Savings brought by 30% drop in oil price/barrel*
2014 average fcst
US$/barrel
If oil prices average $70/barrel in 2015, the
30% drop will be equivalent ...
30%
... to a stimulus of over
1.5% of global GDP
4
5
6
7
8
9
10
11
12
13
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
0.0
0.4
0.8
1.2
1.6
2.0
2.4
2.8
3.2
3.6
4.0
4.4
4.8
2007 2008 2009 2010 2011 2012 2013 2014
World: Monetary policy to stay highly stimulative
Fed
BoE
BoJ
ECB
Trillion US$ Trillion US$
Central bank balance sheet Big Four central bank balance sheet
*Assuming BoJ increases balance sheet by 80 trillion yen annually, ECB increases balance sheet to 3.5 trillion euros by end-2016, USDJPY reaches 135 and EURUSD reaches 1.10 by end-2016
NBF Economics and Strategy (data via Datastream)
est.* est.*est.
3. ECONOMIC OUTLOOK
WORLD
3
the evolution of debt capital markets in emerging
economies is worth watching closely.
The Eurozone, a major player in global trade, presents
another risk for the world economy in 2015. The failure by
the zone’s members to implement growth-friendly reforms
and policies should continue to cap employment and
growth, thereby restraining wages and prices. Markets
seem to agree with that outlook based on inflation
expectations which are now at record lows.
Once it gets its grip on the economy, deflation can show
persistence and bring all sorts of problems. Besides the
devastation it causes on consumption via deflationary
expectations, deflation can worsen the already shaky
government finances in the Eurozone by raising the real
value of debt, and restraining nominal GDP and hence tax
revenues. To address the threat of deflation, the European
Central Bank may follow its purchases of covered bonds
and asset backed securities with that of sovereign debt.
However, it’s unclear if that extra liquidity will immediately
rekindle credit which has been contracting for the last
couple of years for both households and non-financial
corporations. If the U.S. experience is any guide, it can
take several years to fully repair the transmission channels
of monetary policy and bring an end to the deleveraging
cycle. In light of the challenges ahead and our general lack
of faith in European policymaking, we continue to expect
the zone’s GDP growth to be no better than 1% in 2015.
Japan, another economy that will be battling deflation in
2015, is also set for another difficult year despite loose
monetary policy by its central bank. But after the
December elections gave him a new majority government,
Prime Minister Shinzo Abe may press ahead with
necessary structural reforms. The cheap currency policy
will continue as the Bank of Japan ramps up the printing
press, allowing the yen to depreciate against the USD to
levels not seen since 2002. The weaker yen will be
welcome news for exporters and allow the current account
balance, which has been sinking in recent years, to
stabilize. Having seen the devastating impacts of the sales
tax hike of April 2014, the government is likely to delay the
second hike that was scheduled for October 2015 and
that, together with lower projections for the yen (i.e. a
sharper depreciation than in our previous forecasts),
prompts us to raise our 2015 GDP growth forecast for
Japan to 1%.
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
5.0
5.1
5.2
5.3
5.4
5.5
5.6
12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4
World: Bonds in emerging economies holding firm for now
Emerging market effective bond yield
NBF Economics and Strategy (data via Bloomberg)
%
avg.
Fed taper talk
USD takes off
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Eurozone: Next stop, deflation?
Inflation expectations measured by 5-yr inflation swaps
NBF Economics and Strategy (data via Bloomberg)
%
-6
-5
-4
-3
-2
-1
0
1
2
3
4
2009 2010 2011 2012 2013 2014
Households Businesses
Eurozone: Deleveraging continues
Loans by financial institutions to households and non-financial corporations
NBF Economics and Strategy (data via Datastream)
y/y % chg.
est.
4. ECONOMIC OUTLOOK
WORLD
4
In China, growth should soften further, although that
shouldn’t be surprising as the economy’s rebalancing
(towards consumption spending) continues. A moderation
in private fixed investment is likely, more so in light of the
government’s crackdown on the shadow banking sector.
Indeed, loans made outside of banks grew at the slowest
pace in three years, and odds are that there will be a
further deceleration in 2015. A highly levered real estate
sector looks vulnerable to a correction and related defaults
could have a significant impact on financial markets.
However, should things turn sour on that front, the central
government will likely step in to prevent negative spillovers
to the rest of the economy. Infrastructure spending
associated with the government’s urbanization plan,
coupled with the stimulus provided by the oil price slump
and the central bank, should allow China to grow a healthy
6.5%. That, together with contributions from other
emerging economies, Japan and the U.S., should help
global GDP growth accelerate to 3.5% in 2015.
-4
0
4
8
12
16
20
24
28
70
80
90
100
110
120
130
140
150
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Japan: Cheap yen should help support external balance in 2015
12-month cumulative Current account balance and Yen/US$
NBF Economics and Strategy (data via Bloomberg)
Trillion yen
Yen/US$ (R)
Current account (L)
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
2011 2012 2013 2014
China: Cracking down on shadow banking
Bank and non-bank new loans, 12- month cumulative
NBF Economics and Strategy (data via Datastream)
Trillion yuan
Non-bank loans
Bank loans
5. ECONOMIC OUTLOOK
UNITED STATES
5
Beacon of hope
After a difficult start to the year, largely due to inclement
weather, the U.S. economy rebounded sharply with a
string of impressive results, allowing it to grow an
estimated 2.4% in 2014 and even topping the prior year’s
performance. The reduced fiscal drag helped, but so did
an invigorated private sector. The labour market has,
accordingly, taken off as evidenced by more than 2.5
million private sector jobs created in 2014, the largest
annual gain since 1999. Private sector’s share of total U.S.
employment is now almost 84.4%, the highest since 1959.
The resulting household income gains are boosting not
just consumer confidence but also actual spending.
Discretionary spending has soared in recent months, and
we expect consumer momentum to extend to 2015. That
forecast is based not only on the labour market which we
expect to remain on an uptrend, but also on the massive
drop in gasoline prices which leaves more cash to spend
on other items. Assuming pump prices do not change from
now through 2015, they will be down roughly 20% on a
year on year basis. That’s a significant stimulus for
American consumers. A low debt burden, as evidenced by
a financial obligations ratio near multi-decade lows, should
also help rekindle borrowing, providing another layer of
support for consumption.
There is evidence that households are already starting to
respond to the record low interest rates and low debt
burden. Household debt has indeed risen in the last few
quarters, even excluding student loans, and the uptrend is
likely to continue into 2015. The persistence of low interest
rates, the decline in delinquency rates, and the
improvement in credit quality, will enhance the ability to
borrow and spend. Auto loans, for example, already at an
all-time high, should continue to rise as the economy and
job prospects improve further and also to finance pent-up
demand. There is indeed a need to replace an ageing fleet
which is now the oldest on records. For the first time in
years many households now have the ability to do so.
But not everything is rosy. Despite sharp employment and
productivity gains, wages have stagnated in this recovery.
True, there are promising signs that things could improve
on that front with an increase in the labour market quits
rate to the highest since 2008, which should in principle
encourage employers to offer better compensation to
retain talent. But in many cases, particularly in the goods
80.8
81.2
81.6
82.0
82.4
82.8
83.2
83.6
84.0
84.4
84.8
60 65 70 75 80 85 90 95 00 05 10
-6
-5
-4
-3
-2
-1
0
1
2
3
4
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
U.S.: Best labour market in years
Annual change, millions
Private
Total
* Even assuming non farm payrolls flat in December 2014
NBF Economics and Strategy (data via Datastream)
Non farm payrolls Private sector share of total non farm payrolls
%
2014*
*
-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
30
1995 2000 2005 2010 2015
15.2
15.4
15.6
15.8
16.0
16.2
16.4
16.6
16.8
17.0
17.2
17.4
17.6
17.8
18.0
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
U.S.: Fundamentals good for consumption spending in 2015
y/y % chg.
Sales
* Assuming consumption and price in December 2014 remain flat through 2015
NBF Economics and Strategy (data via EIA)
Gasoline consumption and price Financial obligations as a % of disposable income,
4-quarter moving average
%
Gasoline price decline will
provide a boost to consumers ...
... and so will the relatively
low debt burden
Price
Price drop equivalent to
a stimulus for consumers
*
6.8
7.2
7.6
8.0
8.4
8.8
9.2
9.6
10.0
10.4
10.8
11.2
11.6
12.0
12.4
12.8
2004 2006 2008 2010 2012 2014
68
69
70
71
72
73
74
3
4
5
6
7
8
9
10
2004 2006 2008 2010 2012 2014
U.S.: Households now borrowing again
US$ trillion
NBF Economics and Strategy (data via New York Fed)
%
Household debt
Auto loans (R)
Mortgages (L)
Mortgages, Student debt and Auto loans,
share of total loans
Fourth increase in
the last five quarters for household
debt in 2014Q3 suggests
re-leveraging is in full swing ...
%
Excluding
student debt
Total
Student debt (R)
... buoyed in part
by auto loans
6. ECONOMIC OUTLOOK
UNITED STATES
6
sector, there is a limit to how much employers can
sweeten the deal for workers before contemplating
automation. That is not a new phenomenon. Real
compensation and productivity have diverged since the
mid-1970’s, in part due to the impacts of globalization and
the decline of the labour unions which, taken together,
have restrained wages and encouraged automation by
U.S. firms to stay competitive relative to low cost centres.
We expect wages to continue growing at a moderate pace
in 2015 despite stronger economic growth.
The housing market is another area of concern.
Residential construction remains well below demographic
needs and skewed towards cheaper multiple dwellings
which contribute less per unit to GDP than single family
homes. The homeownership rate is at a 20-year low and is
unlikely to improve significantly unless some of the barriers
to entry for first time home buyers (e.g. student debt) are
lessened. For instance, government could allow for
renegotiation of student loans either through debt
forgiveness or lower interest charges, or even by trying
innovative methods, e.g. pairing an individual’s student
loan with a mortgage at a lower average rate of interest.
That could also help address some of the mounting risks in
credit markets, such as disproportionately high
delinquencies on student debt. Another issue worth
following closely in 2015 is the rising delinquencies on
auto loans related to “sub-prime” type of deals. That’s
unlikely to trigger a financial crisis the way the sub-prime
housing loans did a few years ago because the majority of
the sub-prime auto loans originated from auto finance
companies not banks. Still, such delinquencies could hurt
credit scores somewhat and take some shine off an
otherwise solid consumption picture.
The oil and gas industry will also be under pressure in light
of the recent collapse in prices and there will likely be
cutbacks in investment in that sector. But considering the
earlier-discussed windfall for consumers, we estimate the
energy price slump to be a net positive for the U.S.
economy. Regardless, the oil price decline will not interrupt
the U.S. drive towards energy independence. In our view,
the solid fundamentals for consumption and non-energy
investment outweigh the challenges elsewhere in the
economy. Exports could soften a bit due to the stronger
dollar, although neither this nor a slight tightening of
monetary policy by the Fed will prevent U.S. GDP growth
from accelerating to 3% in 2015, the best performance in a
decade. That, of course, assumes business confidence
isn’t sapped by a dysfunctional Congress.
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
10
12
14
16
18
20
22
24
26
28
30
32
34
1950 1960 1970 1980 1990 2000 2010
80
100
120
140
160
180
200
220
240
260
280
300
320
340
360
380
400
1950 1960 1970 1980 1990 2000 2010
U.S.: Compensation hasn’t kept up with productivity
Index=100 in 1950Q1
Productivity
Real compensation
NBF Economics and Strategy (data via Datastream)
Real compensation per hour and
Non farm business productivity
Real compensation relative to productivity
versus Union membership as % of employed
Unionization rate (R)
Real compensation
relative to
productivity (L)
%
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
2004 2006 2008 2010 2012 2014
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
2004 2006 2008 2010 2012 2014
U.S.: Disproportionately elevated delinquencies for student
and auto loans
%
Share of new
delinquencies
Share of
total loans
NBF Economics and Strategy (data via New York Fed)
Share of new
delinquencies
Share of
total loans
Student loans Auto loans
%
Q3 Q3
2.5
2.6
2.7
2.8
2.9
3.0
3.1
3.2
3.3
3.4
3.5
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
U.S.: Heading towards energy independence
NBF Economics and Strategy (data via Census Bureau, EIA)
Consumption
Production
Gasoline production and consumption
(Billion barrels, annualized)
Real imports of petroleum
15,000
16,000
17,000
18,000
19,000
20,000
21,000
22,000
23,000
24,000
25,000
26,000
27,000
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
index
7. ECONOMIC OUTLOOK
CANADA
7
Deceleration in 2015
The magnitude and speed of the oil price slump has taken
most analysts, including us, by surprise. That’s because
the collapse isn’t commensurate with demand/supply
fundamentals in the market. While there is some excess
supply, speculative activity likely also played a role in the
oil rout. If markets return to focusing on fundamentals, oil
prices could pare back some of the recent losses,
particularly since global demand is expected to strengthen.
That explains our forecast for WTI oil to average $US70
per barrel in 2015. Still, this represents a roughly 25% drop
from the 2014 average. The Canadian energy sector,
which accounts for about 10% of the economy, will take it
on the chin. Nowhere will this be more apparent than in
energy-related investment spending, the latter accounting
for roughly a quarter of total non-residential investment in
Canada. Government revenues are also being negatively
impacted by the oil slide because nominal GDP growth will
soften as a result. While the federal government will wait
until after the elections to announce some bad news to the
electorate, fossil energy producing provinces may not be
as patient. In Alberta, the projected revenue shortfall is
likely to translate into spending cuts as the government
attempts to control the budget deficit.
That said, cheaper oil will also provide some benefits.
Exporters will enjoy not only the accompanying cheaper
Canadian dollar, but also the boost given by cheaper oil
to our biggest trade partner (see U.S. section). Increased
investment outlays by non-energy firms may also
offset part of the expected decline in the energy
patch. Moreover, energy-intensive producers such as
manufacturers, as well as consumers will benefit from
cheaper fuel prices. On net, we estimate the unexpected
25% WTI oil price drop to chop roughly 0.3% from growth
and we have accordingly lowered our 2015 GDP growth
forecast to just 2.2%, representing a deceleration from
the pace expected to be set in 2014.
That, however, does not necessarily translate into a further
deceleration in employment creation. While the energy
patch may see some cutbacks, that by itself shouldn’t
derail the labour market ― the resources sector being very
capital intensive, accounts for just 2% of total employment
in Canada. Moreover, employment growth which was
disappointing in 2014 considering the acceleration of
output in that year, may bounce back particularly in the
45
50
55
60
65
70
75
80
85
90
95
100
14Q1 14Q2 14Q3 14Q4 15Q1
4
6
8
10
12
14
16
18
20
22
24
26
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
Energy investment and public finances hurt by oil slump …
NBF Economics and Strategy (data via Statistics Canada)
Energy as share of non-residential investment
%
Western Canada Select oil price
C$/barrel
C$75 average so far in fiscal year
C$77 average assumed in Alberta budget
C$81 average
needed to match
assumption
Significant portion of
non-residential investment will be
curtailed in light of oil price slump
Alberta government revenues
will be much lower than planned
for fiscal 2014-15
72
73
74
75
76
77
78
79
80
81
82
83
04 05 06 07 08 09 10 11 12 13 14
330
340
350
360
370
380
390
400
410
420
430
04 05 06 07 08 09 10 11 12 13 14
… but there will also be some offset
NBF Economics and Strategy (data via Statistics Canada, CAPP)
Energy fuel use by manufacturing industries
Millions of barrels of oil equivalent
Cheaper energy will result in massive
savings for manufacturers …
Motor gasoline, diesel, fuel oil consumption
Billion litres
… and for consumers
Canada: Estimated impacts of oil price slump* on 2015 growth
* Assuming WTI oil averages US$70/barrel (25% lower than we had expected) and C$ averages 1.17 versus USD in 2015
NBF Economics and Strategy (source NBF estimates)
-0.8 -0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8
Consumption
Investment
Government
Net exports/U.S. boost
Net impact -0.3%
% of GDP
8. ECONOMIC OUTLOOK
CANADA
8
goods sector as manufacturing exports take off. A catch-
up in employment creation is also possible in an otherwise
resilient services sector after an atypically soft 2014. The
related income gains from employment, coupled with the
massive energy stimulus should help support consumption
spending. The cheaper Canadian dollar may also curb
cross-border shopping somewhat and keep retail dollars at
home. Another positive for consumption is that household
debt, while elevated, remains manageable ― the interest
paid as a % of disposable income may be higher than in
the U.S., but it is nonetheless the lowest on record on this
side of the border. So, the much-awaited deleveraging is
likely to be delayed for yet another year.
While we anticipate Canadian housing to soften
somewhat, particularly after solid growth in recent years,
and in the aftermath of the increase by CMHC of fees
charged to issuers to guarantee mortgages, an outright
crash is unlikely given the still-solid fundamentals including
low interest rates, generally good credit quality of
mortgage holders, healthy demand helped by immigration
growth, and a sound banking system. The home resale
market should remain balanced nationally, although we
expect some softening in the condo market, and in certain
pockets around the country including in Alberta, after the
oil price collapse, and in slow-growing Quebec and Atlantic
Canada.
With domestic demand restrained by the curtailment
of investment in the oil patch, tight fiscal policy, and
a moderation in the housing market, trade will once again
be the driver of growth in 2015. Strengthening U.S.
demand, coupled with the lagged impacts of a cheaper
Canadian dollar will give a boost to exporters, allowing
GDP to grow 2.2% in 2015. That will be the third
consecutive year of above potential growth, and should be
enough to close the output gap. So, while headline
inflation will be soft due to oil prices, core inflation will
remain well supported as to slightly exceed the Bank of
Canada’s 2% target. That's not to say the central bank will
quickly abandon its dovish stance on monetary policy. Like
us, it will have to chop its growth and headline inflation
forecasts for 2015 in the upcoming Monetary Policy Report
to reflect the oil price slump. And given its concerns about
the global economy and domestic risks, the central bank
will likely continue to err on the side of caution and delay
interest rate hikes to 2016.
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
92 94 96 98 00 02 04 06 08 10 12
Canada: Household debt burden is manageable for now
Interest paid as a % of household disposable income
NBF Economics and Strategy (data via BEA, Statistics Canada)
Canada
U.S.
0.94
0.96
0.98
1.00
1.02
1.04
1.06
1.08
1.10
1.12
1.14
1.16
1.18
2010 2011 2012 2013 2014
-0.3
-0.2
-0.1
0.0
0.1
0.2
0.3
0.4
0.5
T T+1 T+2 T+3 T+4 T+5 T+6 T+7 T+8
Canada: Exporters are yet to see full benefits of loonie slump
NBF Economics and Strategy (data via Statistics Canada)
C$/US$
Correlation of changes in export volumes
with C$/US$ lagged by quarters
Depreciating Canadian dollar ...
… tends to lift exports with a lag
9. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
9
Ontario
The value of Ontario’s international merchandise exports in
the first 10 months of 2014 was up 7.3% from a year earlier.
Almost 40% of the rise was in autos and parts, a proportion
consistent with this industry’s share of Ontario exports. Another
large contribution was from pharmaceutical and medicinal
products, whose exports rose 62%.
At the national level, real GDP of the automotive industry rose
9.7% annualized in the third quarter of 2014. In that quarter the
value of shipments of the Ontario industry rose 19.6%. Then
in October, the value of shipments rose 6.5% annualized over
the third-quarter average. The popularity of cross utility vehicles
and of trucks favoured production located in Canada.
However, the very high rate of capacity utilization in the
Canadian transportation equipment industry raises the
question whether this production growth can continue.
The expansion of the U.S. economy and depreciation of the
Canadian dollar nevertheless suggest that overall, Ontario’s
exports will grow further in 2015.
In 2013, real final domestic demand had been sluggish,
growing 0.4%. This lethargy was mostly attributable to
declines in business investment and residential construction.
In 2014, despite a fourth consecutive year of declining
government investment, the growth of final domestic demand
finally accelerated, to 1.1%. Business investment in
machinery and equipment is expanding again after two years
of contraction, backed by corporate profits that by mid-2014
had grown for four consecutive quarters to a point just short of
the all-time high of Q1 2012.
Real household spending is likely to be stimulated in 2015
by the fall of gasoline prices. Business investment should
be robust in each of its three main segments – machinery
and equipment, non-residential structures and intellectual
property.
Quarterly employment numbers from the LFS flattened in late
2013 and early 2014 and then grew briskly in subsequent
quarters. On this point the trend of payroll employment as
reported by the SEPH was in agreement. However, the LFS
reported that most of the jobs added in the last three quarters
of 2014 were part-time. This could help explain why, although
employment is on track for an increase of 0.8% in 2014, payroll
earnings were up only 2.8% in the first three quarters of 2014,
well below the national average of 3.6%.
35
40
45
50
55
60
65
70
75
80
85
90
95
100
105
110
2007 2008 2009 2010 2011 2012 2013 2014
Ontario: Auto industry gaining traction
U.S. new-vehicle sales; Ontario auto industry real GDP and value of shipments
Number of new cars and light trucks
sold in the U.S. (annualized);
Q4 2014 = October + NovemberIndex 2007 = 100
Real GDP of Ontario
auto and parts industry
NBF Economics and Strategy, data from ISQ, Ontario Finance Department,
Statistics Canada and Autodata Corp. via Thompson Reuthers
Value of
new-vehicle
shipments
(Q4 2014 =
October)
56
60
64
68
72
76
80
84
88
92
96
88 90 92 94 96 98 00 02 04 06 08 10 12 14
Canada: Capacity utilization, transportation equipment
%
NBF Economics and Strategy, data from Statistics Canada
44
48
52
56
60
64
68
72
76
80
84
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Ontario: Corporate profits
Operating profits before income taxes and interest payments, annualized
NBF Economics and Strategy, data from Ontario Finance Department
$ billion
10. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
10
Despite this lag, real consumer spending probably
accelerated somewhat in 2014 from the 2.1% growth of 2013.
Lower gasoline prices are one factor. Another is the relatively
high savings rate of households which gives more room to
manoeuvre. A further acceleration of consumer spending can
be expected in 2015, in tandem with employment growth.
Though there is an overhang of unabsorbed new housing
(including presales and units under construction) in high-rise
projects of the Toronto metropolitan area, Realnet reports that
this stock peaked in February and then began shrinking. By
September it was barely larger than it had been two years
earlier. In other words, promoters remained cautious.
Moreover, CMHC data show 97% of the condo units completed
in 2014 as absorbed on completion (i.e. sold or rented). The
bulk of these units had been started in 2012, a record year for
starts. At the time, the number of units under construction,
historically high even relative to the rate of absorption of new
units, aroused fears that starts were exceeding the market’s
ability to absorb them. But the pileup of units under construction
was due to a lengthening of construction times. Corrected for
length of construction, the number of units under construction
did not exceed historical norms. It fell in 2014 as some of the
units begun in 2012 were completed, without resulting in a
significant rise in new vacant dwellings.
Neither is there any flagrant imbalance in the condo resale
market. The rental alternative has been effective in this regard.
The CMHC survey found a vacancy rate of only 1.3% for rental
condos in October. In November the Teranet–National Bank
House Price Index reported Toronto-area home prices up
7.3% from 12 months earlier, versus a countrywide average
of 5.2%. Condo homes were up 5% and other homes 8.7%, a
finding consistent with the tighter market for non-condo homes.
As elsewhere in the country, the resale market has been
stimulated by historically low mortgage rates. The seasonally
adjusted number of sales rose from 6,800 last January to more
than 8,000 a month since May, reports the Canadian Real
Estate Association.
In Ontario as a whole, housing demand will be stimulated in
2015 by an expected abatement of interprovincial emigration
and higher net immigration from abroad. Starts could reach
62,000 units in 2015, up from 58,000 in 2014.
GDP growth, expected to come in at 2.0% in 2014, could pick
up to 2.7% in 2015, allowing Ontario to lead the nation for the
first time since 2000.
7.3%
5.2%
4.6%
3.9%
3.6%
2.9% 2.8%
2.0% 2.0%
1.0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
AB NL SK BC MB NS ON PE QC NB
Growth of payroll earnings
Employee compensation, first nine months of 2014 vs. same period of 2013
National average
3.6%
NBF Economics and Strategy, data from Statistics Canada
Growth in value of new-vehicle sales
First 10 months of 2014 over same period of 2013
12.7
9.7
7.6
4.1 4.0
2.9
2.3 2.1
0.7
0.1
0
2
4
6
8
10
12
14
ON AB BC MB NB NS PE QC SK NL
%
NBF Economics and Strategy, data from Statistics Canada
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Toronto: Teranet–National Bank House Price IndexTM
% y/y
Other
housing
Condos
NBF Economics and Strategy, Teranet–National Bank House Price Index
11. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
11
Quebec
In the first 10 months of 2014, Quebec’s volume international
merchandise exports were up 9.2% from 2013, versus 4.3%
for the rest of Canada. Almost a third of the 2014 growth
came from metal ores, which account for only 5% of volume
international merchandise exports. Aerospace products, which
are Quebec’s largest category of exports at 13% of the total,
contributed almost 22% of the growth.
Mining output, after major capital spending in recent years, jumped
27% in real terms between Q2 2013 and Q2 2014.
The strong showing of exports has yet to boost employment,
which since January 2013 has been flat at best. On this point the
indicators agree – the Labour Force Survey (LFS), the Survey of
Employment, Payrolls and Hours (SEPH) and earnings from
employment, which in the first nine months of 2014 were up only
2.0% from a year earlier.
Given the rate of household saving, which has been very low
since late 2013, it is unlikely that consumer spending will pick up
significantly in 2015 even if labour market conditions improve.
Households could save more in the face of a higher tax burden.
In the housing market, oversupply persists for condos, where
resale listings are far in excess of the buyer’s-market threshold of
10 months of sales at the current rate. The Teranet–National
Bank House Price Index shows home prices up only 0.6% from a
year earlier in the Montreal market and down 0.3% in the Quebec
City market. The deflation in Quebec City was concentrated in
the condo segment, where prices were down 1.9%.
24
25
26
27
28
29
30
31
32
33
34
4.8
5.0
5.2
5.4
5.6
5.8
6.0
6.2
6.4
6.6
6.8
2007 2008 2009 2010 2011 2012 2013 2014
International merchandise exports, customs basis
Constant dollars, monthly average by quarter
NBF Economics and Strategy, Statistics Canada and ISQ data
$ billion$ billion
Rest of
Canada (L)
Quebec (R)
Q4 2014: October
3340
3360
3380
3400
3420
3440
3460
3480
3500
3520
3540
3820
3840
3860
3880
3900
3920
3940
3960
3980
4000
4020
4040
4060
2008 2009 2010 2011 2012 2013 2014
Quebec: Employment indicators converge
Thousands Thousands
NBF Economics and Strategy, data from Statistics Canada
Total employment
LFS (R)
Payroll employment
SEPH (L)
National average
3.6%
Number of jobs according to LFS and SEPH Payroll growth
7.3%
5.2%
4.6%
3.9%
3.6%
2.9% 2.8%
2.0% 2.0%
1.0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
AB NL SK BC MB NS ON PE QC NB
0
1
2
3
4
5
6
7
8
9
2008 2009 2010 2011 2012 2013 2014
Household savings rate
Net saving as % of household disposable income
Quebec
Ontario
Rest of
Canada
%
NBF Economics and Strategy, data from ISQ, Ontario Finance Department
and Statistics Canada
2
4
6
8
10
12
14
16
18
20
22
24
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
4
5
6
7
8
9
10
11
12
13
14
15
16
04 05 06 07 08 09 10 11 12 13 14
Montreal
Number of months to clear
inventory at current sales rate
Quebec City
Buyer’s market
Condo housing: Ratio of active listings to sales
Condo resale market, Montreal and Quebec City Metropolitan Census Areas
NBF Economics and Strategy, data from Centris seasonally adjusted by NBF
Buyer’s market
Number of months to clear
inventory at current sales rate
12. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
12
In addition to a buyer’s market in resale housing, promoters and
homebuilders face some overhang of unabsorbed new units.
They are thus unlikely to launch new projects without a
convincing rate of presale. For this reason we expect starts to
decline from 39,000 units in 2014 to 37,000 in 2015, trailing the
estimated household formation rate of 40,000 a year. Even taking
into account the rise in home-renovation spending, which since
last year has exceeded spending on new construction, investment
in residential construction as a whole is likely to decline in real
terms for a third consecutive year in 2015.
In its Fall 2014 Economic and Financial Update, the Quebec
government reiterated its objective of a balanced budget for the
following financial year. To this end it has targeted average
annual growth of 1.7% for consolidated spending in the current
fiscal year and the next two, with a target of 0.8% for the next
fiscal year. A total of $1.2 billion in gap-closing measures remain
to be identified. In addition, under the government’s 10-year
infrastructure plan, government investment (excluding investment
by government-owned corporations like Hydro-Québec) will peak
at $11.5 billion this year, falling to $9.6 billion in 2015-16 and
$8.5 billion in 2016-17. In short, don’t expect much of a
contribution to economic growth from government spending.
It is clear that the outlook for the components of final domestic
demand reviewed so far is not one of marked acceleration. Final
domestic demand edged up only 0.4% in 2013, held back by a
decline of business nonresidential investment in that year. Since
this investment on the whole seems unlikely to have increased in
2014, we expect growth of final domestic demand to come in at
only 1,1% in that year.
On the other hand, the robust showing of the U.S. economy and
the depreciation of the Canadian dollar will support the expansion
of Quebec’s international exporters in 2015 and improve their
profitability, with further help from a lower energy bill. Incidentally,
profits of Quebec businesses have grown in each of the five
quarters ending in the third quarter of 2014, a good omen for
hiring and capital spending. So despite headwinds from
residential construction and government spending, we expect
final domestic demand to increase 1.2% in 2015.
The contribution from external trade can be expected to bring
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
92 94 96 98 00 02 04 06 08 10 12 14
-6
-4
-2
0
2
4
6
8
10
12
14
16
92 94 96 98 00 02 04 06 08 10 12 14
Montreal Quebec City
Teranet–National Bank House Price IndexTM
Montreal and Quebec City Census Metropolitan Areas, by type of housing
% change y/y
Teranet–National Bank House Price Index
Condo
Other
Condo
Other
% change y/y
2
3
4
5
6
7
8
9
10
11
12
2007 2008 2009 2010 2011 2012 2013 2014
$ billion, chained 2007 dollars
Quebec: Residential construction expenditure
By component, constant dollars
Renovation
New construction
Transfer of ownership
NBF Economics and Strategy, ISQ data
102
104
106
108
110
112
114
116
118
120
122
124
126
128
130
2008 2009 2010 2011 2012 2013 2014
Government investment
Constant dollars
2007 = 100
Quebec
Canada
NBF Economics and Strategy, data from ISQ, Ontario Finance Department,
Statistics Canada
6
7
8
9
10
11
12
13
14
15
2007 2008 2009 2010 2011 2012 2013 2014
Quebec: Nonresidential business investment
By component, constant dollars
Machinery and
equipment
Construction
Intellectual property
NBF Economics and Strategy, ISQ data
$ billion, chained 2007 dollars
13. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
13
2015 GDP growth to 1.9%, up from an estimated 1.6% in 2014
and 1.0% in 2013.
Subsequently, as slack in economic resources is taken up, GDP
growth will be limited by the growth of potential GDP, which will
be slowed by demographic trends. According to the baseline
scenario of the Institut de la Statistique du Québec (ISQ), the
province’s population of 15- to 64-year-olds, the main pool of
workers, will begin to shrink in 2016.
British Columbia
British Columbia is on track for economic growth of 2.3% in
2014. Employment has grown almost 1%, though most of the
jobs added have been part-time. The bulk of the new jobs have
been in the private sector. The industries leading the hiring
have been transportation and warehousing and manufacturing,
along with health care and social services. On other hand,
employment in trade is down and there has been a general
consolidation of employment in the other service industries.
Among goods-producing industries, agriculture and construction
have shed jobs.
Perhaps because new jobs were part-time, average weekly
earnings are at this writing up only 2.9% in 2014. B.C. is
second among provinces in growth of retail sales, but in this
province it is sometimes hard to distinguish sales to residents
from sales to foreign visitors.
After declining in 2013, investment in new residential
buildings was up 11.7% in the first 10 months of the year, the
strongest gain of any province. Starts are likely to end the
year up 5% from 2013, but that leaves them at the average of
1991-2013. The resale market is increasingly tight – sales
have increased steadily from the 2012 trough but new listings
have been fairly flat.
Business investment, more or less flat in 2013, will probably
end 2014 with a decline in real terms. This likelihood is hardly
lessened by a sharp drop in real investment in non-residential
buildings in the first nine months of the year. Government
investment is also on track for a decline.
The value of B.C.’s international merchandise exports is on
track to exceed the all-time high of 2000Q4. In the first 10
months of 2014 exports were up 9% from a year earlier despite
a Vancouver port strike in March. A third of the increase came
from forest products and another third from natural gas.
Copper ore was also a major contributor. Except for coal, down
21% because of lower Chinese demand, B.C.’s traditional
exports have had pride of place in 2014. The leading
destination of its exports has been the U.S., which has taken
half the total and 18% more than a year earlier. Exports to
South Korea are up 30%, though accounting for only 6% of the
total. Exports to China, more than 18% of the total, are down
slightly. Exports to Japan, a little more than 10% of the total,
have also declined.
The value of natural gas exports got a boost in the first half of
the year from a spike in the continental price of this commodity,
attributed to abnormally cold weather. Lumber prices were
generally firm in 2014.
Exports can be expected to spearhead B.C.’s economic
growth once again in 2015. We forecast an expansion of 2.5%.
Output of metal ores is likely to grow at a double-digit rate,
offsetting the blow to lumber production from the ravages of the
mountain pine beetle.
5.42
5.44
5.46
5.48
5.50
5.52
5.54
5.56
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Quebec: Population aged 15 to 64
ISQ baseline scenario
Millions
NBF Economics and Strategy, ISQ data
Decreasing
from 2016 on
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
88 90 92 94 96 98 00 02 04 06 08 10 12 14
B.C.: Value of international merchandise exports
Seasonally adjusted
NBF Economics and Strategy, data from BCStats
$ billion
U.S. recessions in gray
2014 Q4: October
2000 Q4
14. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
14
In the first nine months of 2014, natural gas production was up
5.4% from a year earlier. Further vigorous growth is expected
in 2015.
The Prairies
In Alberta, oil and gas extraction accounts for almost a quarter
of provincial real GDP. And that’s not counting oilsands
investment. Business nonresidential investment is 27% of
nominal GDP and 60% of that has been in the energy sector.
Population growth has been a major driver of the province’s
economic growth. Over the 10 quarters ending last September,
Alberta’s 12-month population growth was always in excess
of 2.5%. Besides attracting many international immigrants, the
province is by far the main destination for Canadians of other
provinces looking for more opportunity than they find in their
regions of origin. Strong population growth has required heavy
investment in housing. The 41,000 starts of 2014 exceeded
those in Quebec, a province twice as populous. New
infrastructure, especially in utilities, education and health
care, is needed to accommodate the influx. The upshot is that
Alberta’s economic growth has averaged 4.5% annually since
2009.
From February 2011 through last September, the benchmark
WCS oil price averaged close to C$78 a barrel, its level in mid-
October. By mid-December WCS was going for about $45,
barely more than in the last recession. Assuming an average
of US$70 for WTI in 2015, with WCS selling at a 30% discount
to WTI and the Canadian dollar averaging 85 cents US over the
year, WCS will average less than C$60 in 2015. In that case,
oilfield investment and production are both certain to decline.
Moreover, Alberta’s employment outlook will be less alluring.
In-migration, especially from other provinces, will abate. As we
have seen, other Canadians will generally enjoy improved
labour markets where they are. Homebuilding will decline
significantly as a result.
According to the Teranet–National Bank House Price IndexTM
,
Calgary home prices rose 9.2% over the 12 months ending in
November. For the 11 metropolitan markets surveyed by the
index, the weighted average gain was 5.2%. Unless the price
of oil rebounds, home-price deflation cannot be ruled out in
Alberta in 2015.
In short, the contraction of activity in the energy sector and its
implications for in-migration and provincial finances suggest
that Alberta’s economic growth in 2015 could slow to 2.0%,
half the estimated rate for 2014. On our assumption of WTI at
US$80 in 2016, growth could accelerate to 2.5% in that year.
Lower oil prices will have a profound impact on the provincial
government’s revenues. In its budget of March 2014 the
government assumed a WTI price averaging US$94.86 in
fiscal 2015-16. Our assumption of $73.40 would mean, other
factors equal, a $4.6-million shortfall in oil royalties. That would
seriously compromise the projected surplus of about $1 billion
in 2015-16. Our forecast for Alberta GDP growth in 2015
20
40
60
80
100
120
140
160
180
2007 2008 2009 2010 2011 2012 2013 2014
B.C.: Prices of selected export commodities
In USD, quarterly average
2007 = 100
NBF Economics and Strategy, data from Thompson Reuthwers Datastream
Softwood lumber
LME copper
Henry Hub
natural gas
20
30
40
50
60
70
80
90
100
110
120
130
140
150
2008 2009 2010 2011 2012 2013 2014
Price of oil: WTI in US$, WCS in C$
WTI in USD
WCS in CAD
Per barrel
NBF Economics and Strategy, data from Bloomberg and Thomson Reuters Datastream
15. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
15
assumes that the government would respond to the
imbalance with spending cuts.
Saskatchewan’s economic growth slowed in 2014 mainly for
technical reasons. A bumper harvest in 2013 boosted real
crop output 38%. Since crops account for almost 7% of its
economy, that surge added 2½ percentage points to
Saskatchewan’s GDP growth. Then in 2014, bad weather cut
crop output by a quarter. This swing is a very large part of the
reason why real GDP growth fell from 5.0% in 2013 to an
estimated 0.9% in 2014.
Oil and gas extraction added to economic growth in 2014. In
the first 10 months of the year, volume crude production was
up 5.8% from a year earlier. In the first 11 months, the number
of wells drilled was up 9.9%. Natural Resources Canada
reports that 10 months into 2014, potash tonnage extracted in
Canada as a whole was up 3.2% from the same period of 2013.
Since this industry accounts for less than 3% of the province’s
GDP, its impact on 2014 economic growth will be marginal.
Employment is on track for growth of 1.9% in 2014, a third
consecutive year of robust expansion. The jobs added over
these three years have been essentially full-time, and most
new payroll employment has been in the private sector; the
public-sector headcount contracted in 2014. The great majority
of jobs added in 2014 were in goods-producing industries –
agriculture, mining, construction.
Nine months into the year, Saskatchewan’s population was
up 1.6% from a year earlier. Two-thirds of the growth was due
to international immigration. Residential construction seems
nevertheless to have overshot the mark a little, judging by the
rise in unabsorbed new non-rental housing units in the Regina
and Saskatoon markets. For that reason, we forecast a slight
decline in housing starts in 2015 and 2016.
Like in Alberta, lower oil prices will impact the activity in the
energy sector. Essentially for this reason, we are revising
down our forecast of Saskatchewan’s 2015 growth to 1.3%.
In its midyear update the government planned for an average
price of US$82.06 a barrel for WTI crude in the second half of
the current fiscal year. At this writing, $65.25 seems more
likely. Other factors equal, that would mean $168 million less
in royalties than was projected at midyear, compromising the
projected 2014-15 surplus of $105 million before transfers to
the Growth and Financial Security Fund (GFSF). Since public
accounts show the financial-security portion of the GFSF with
an endowment of $296 million at the beginning of the year, the
government will be in a position to make up the shortfall.
For fiscal 2015-16, the budget of March 2014 assumed an
average WTI price of US$92. Our forecast is US$73.40. If we
are on the mark, the royalty shortfall will amount to $372 million
and the projected surplus of $108 million before transfer to the
GFSF will become a $264-million deficit. The financial-security
portion of the GFSF will in principle be insufficient to plug the
gap. Since other variables could come in more favourable
than forecast – the March budget assumed a Canadian dollar
worth 90 cents US – the government will not necessarily need
drastic measures to shore up its fiscal position.
Since oil and gas extraction accounts for only about 2.5% of
Manitoba’s economy, the fall of oil prices will have relatively
little effect. Crude production in the first 10 months of 2014
was down 16% from a year earlier.
Employment may end 2014 showing only marginal growth, due
to a reduction in head counts in the private sector. There was a
partial recovery in private employment late in the year.
However, losses were concentrated in part-time jobs. Full-
time employment is on track to grow 0.6%. That could explain
why average weekly earnings in the first 10 months of 2014
were up 4.3% from a year earlier, matching Newfoundland
and Labrador for the strongest gain among provinces.
Saskatchewan: Housing starts due to decelerate in 2015
Current excess supply of new dwellings
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
2001 2003 2005 2007 2009 2011 2013 2015
Housing starts
0
100
200
300
400
500
600
700
90 92 94 96 98 00 02 04 06 08 10 12 14
Dwellings completed and unabsorbed
(intended for homeowners and condos)
NBF Economics and Strategy, historical data from CMHC.
Saskatoon
Regina
NBF
Forecast
16. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
16
Also in the first 10 months of 2014, the value of Manitoba’s
international merchandise exports was up 11.2% from a year
earlier, with gains in 11 of 12 main categories. The strongest
advances were in crop products, livestock, meat products and
hydrocarbons. The rise in grain exports was due to the bumper
crop of 2013. Despite U.S. legislation that since 2009 has
required labelling by country of origin, hog and cattle exports
were up 45%, good news for farm incomes.
Nonresidential building construction in the first nine months of
2014 was up 8.1% in real terms from a year earlier, with
strong gains in commercial, institutional and government
structures. Mining output rose sharply in 2014 as several sites
came on stream.
Manitoba’s population continues to grow briskly. At the end of
September 2014 it was up 1.3% from 12 months earlier, versus
1.1% for Canada as a whole. Nevertheless, unabsorbed new
condo units on the Winnipeg market stood at an all-time high
last November. Promoters are unlikely to continue starting
1,500 condo units a year as they did in 2013 and 2014 – a
pace double that of the previous two years. Meanwhile, the
rental vacancy rate in the Winnipeg market in October, though
not alarming, was the highest since 2000. Housing starts in
2015 are unlikely to exceed those of 2014.
The lethargy of the labour market in 2014 is seen as a blip.
Robust growth of domestic demand, led by investment in
energy-related projects such as the Bipole III high-voltage
direct-current transmission line, by government investment in
infrastructure and by consumer spending, is likely to cause
economic growth to accelerate from an estimated 2.0% in
2014 to 2.5% in 2015.
The provincial government’s midyear update revised its deficit
for the current fiscal year from $357 million to $402 million, or
2.7% of consolidated revenues. In its budget of March 2014
the government projected a return to budget balance in fiscal
2016-17, implying that consolidated spending growth will be
held to less than 2% annually.
Atlantic Provinces
Newfoundland and Labrador’s real GDP is now expected to
have declined in 2014, mainly because of lower-than-expected
volume exports of crude oil and iron ore. The output of these
industries has fallen considerably. Crude extraction during the
first 10 months of the year was down 8% from a year earlier.
Over the same period iron ore producers shipped 23% less
tonnage than a year earlier, reflecting the closing of the
Wabush mine and, to a lesser extent, temporary shutdowns at
other mines. These two industries accounted for almost a
third of the province’s GDP in 2013.
Newfoundland and Labrador employment is on track to decline
2.1% in 2014 after four years of strong growth. The major
losses were not in resource industries but in the public sector,
which may have shed 10% of its headcount. The cuts were
concentrated in education, health care, social assistance and
the government sector. The private sector, meanwhile,
continues to add jobs at a good pace and has apparently been
paying good wages – income from employment in the first nine
months of 2014 was up 5.0% from a year earlier. Average
weekly earnings were up 4.4%, the best showing in Canada.
This income growth fuelled a 3.1% rise in retail sales, though
new-vehicle sales were up only minimally. In addition, the
number of bankruptcies and proposals to creditors is down,
4.3 4.3
4.1
3.2 3.2 3.1
2.9
2.5
2.1 2.1
1.5
2.0
2.5
3.0
3.5
4.0
4.5
MB NL AB NS NB SK BC PE ON QC
Canada: Growth of average weekly earnings
First 10 months of 2014, change from year earlier
% y/y
NBF Economics and Strategy, data from Statistics Canada
0
3
6
9
12
15
18
21
03 04 05 06 07 08 09 10 11 12 13 14
Nov.-Dec.
Jan.-Oct.
Newfoundland and Labrador: Crude oil production
and producers’ shipments of iron ore
NBF Economics and Strategy, data from Natural Resources Canada and
Canada–Newfoundland and Labrador Offshore Petroleum Board
0
20
40
60
80
100
120
140
98 00 02 04 06 08 10 12 14
Jan.-Oct.
Nov.-Dec.
Millions of barrels
Crude oil Iron ore shipments
Millions of tonnes
17. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
17
suggesting that household balance sheets are on the whole
holding up in the face of job losses.
Real non-residential investment of business and government
combined is likely to come close in 2014 in real terms, to the
prior year’s record. The ramp-up of capital spending for the
White Rose and Hebron oilfields and the Muskrat Falls hydro
project will offset the abatement of spending related to the
Vale nickel-processing plant.
Residential investment will be another story. The resale market
has been a buyer’s market for two years now, with listings on
the rise though sales have been more or less flat. In addition,
the province’s population shrank over the five quarters ending
Q3 2014. Net international immigration has not offset natural
decline and, especially, net migration to other provinces. This
last flow could, however, reverse over the coming quarters. In
2014, housing starts fell to 2,300 units from 2,900.
In 2015, employment growth is likely to resume as investment
in energy megaprojects ramps up. This should help to
improve the balance of migration. However, the current state
of the resale housing market means that starts are unlikely to
increase. In 2016, real GDP and employment are likely to
contract again as megaproject investment slackens.
The government’s budget of March 2014 assumed an
average Brent oil price of US$105 during the 2014-15 fiscal
year. Since then, oil prices have slumped unexpectedly, in a
drop partly offset by the rise of the USD against the CAD, and
less oil has been produced than the budget projected. These
factors prompted a revision of the expected deficit for the year
from $528 million to $918 million, even after savings of $158
million from a recent agreement with public-sector employee
unions on contributions to pension funds and changes to
benefits effective January 1, 2015. The expected contraction
of 3.0% in nominal GDP in 2015 puts a question mark over
the objective of a balanced budget in fiscal 2015-16.
Employment in Prince Edward Island, after four years of
robust growth, is estimated to have grown only 0.2% in 2014
as a result of job losses in the public sector.
On the other hand, private-sector employment is estimated to
have grown more than 3% in 2014, a fourth straight year of
solid expansion, putting P.E.I. in the running for the best
provincial showing of the year. Large job gains in
manufacturing and in transportation and warehousing are
consistent with the 21% rise in the value of international
merchandise exports in the first 10 months of the year, relative
to a year earlier. The largest gains were in processed fish
products, in electrical equipment, apparatus and components
and in basic organic chemicals.
Since P.E.I. is the province where payroll employment is most
dependent on the public sector (a little less than one-third of
the work force), the continued strong performance of the
private sector did not offset the overall sluggishness of the
labour market in 2014 (though full-time employment is up
considerably), and the growth of employment income and
consumer spending has been accordingly moderate. The
labour market is forecast to pick up in 2015 and 2016.
A smaller inflow of immigrants from abroad following the
overhaul of the Provincial Nominee Program has slowed
population growth in recent years. The vacancy rate of rental
units in Charlottetown nevertheless fell from 8.0% in October
2013 to 5.4% a year later. On the other hand, conditions in the
Island’s resale housing market have not improved. The
upshot is that starts are likely to hold at about 500 in 2015,
about the same as in 2014 but far below the pace of the years
from 2009 to 2012.
0.8
1.2
1.6
2.0
2.4
2.8
3.2
3.6
4.0
4.4
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
88 90 92 94 96 98 00 02 04 06 08 10 12 14
Newfoundland and Labrador: Resale housing
New listings and sales, seasonally adjusted
Thousands
Ratio
NBF Economics and Strategy, data from Canadian Real Estate Association
New listings
Sales
Buyer’s
market
Seller’s market
86
88
90
92
94
96
98
100
102
104
106
108
110
112
114
2008 2009 2010 2011 2012 2013 2014
Public-sector employment
Seasonally adjusted
October 2008 = 100
P.E.I.
N.L.
N.B.
NBF Economics and Strategy, data from Statistics Canada
18. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
18
Industrial building construction in the first nine months of 2014
was up very strongly from a year earlier. The resulting boost
to the economy could bring P.E.I. economic growth to 1.0% in
2014, accelerating to 1.5% in 2015. These forecasts take into
account the government’s upward revision of its deficit for the
current fiscal year, to $44.7 million (2.8% of budgetary
revenues) from $39.7 million, and its objective of a balanced
budget in 2015.
In Nova Scotia, real GDP and employment followed divergent
paths in 2014. The startup of production at the Deep Panuke
gas field added to the former but had no effect on the latter.
Though payroll employment was up in the public sector, total
employment is on track to shrink 1.3% in 2014, deepening the
0.3% contraction of 2013 in a decline that goes well beyond
what could be explained by demographics. Employment fell in
2014 in all of the five groups of goods-producing industries
and five of the 11 service industry groups. The largest losses
were in corporate services to facilities and other support
services and in construction, trade, manufacturing and public
services.
Employment in construction seems to have suffered from a
sharp decline in homebuilding and a decline of investment in
commercial buildings. Investment in the upgrading of Halifax
shipbuilding facilities will wind down in 2015, though
government investment will buoy the construction industry in
the years ahead.
Since aging homeowners tend to leave their homes for rental
accommodation, construction of such housing flourished from
2011 through 2013, so much so that the vacancy rate in the
Halifax market rose from 2.4% in October 2011 to 3.7% in
October 2014. Promoters cut back sharply on starts in 2014,
no doubt to stop this rise, and are likely to continue doing so
in 2015.
Manufacturers’ shipments in the first 10 months of 2014 were
down 27% from a year earlier. A brighter future is promised
by contracts under the National Shipbuilding Procurement
Strategy, the expansion of the U.S. economy and depreciation
of the Canadian dollar. Meanwhile, companies are prospecting
for new offshore hydrocarbon fields.
In sum, we expect Nova Scotia real GDP to grow 1.7% in 2014
and accelerate to 2.1% in 2015, though natural gas extraction will
of course contribute less to growth than in 2014.
In its midyear update the provincial government revised down
its deficit for the current fiscal year to $221 million from
$279 million. It is targeting a balanced budget in 2017-18.
In New Brunswick, 2014 will go down as the year that ended
a four-year run of job losses. However, the gains are spotty:
employment was down in nine of 16 broad sectors, including
the five goods-producing sectors. The provincial government
continues to reduce headcount. The main new hiring in 2014
was in professional, scientific and technical services and in
business, building and other support services. Private-sector
payrolls surged in late 2013 and early 2014 but lost the gains
in the second half of that year as construction and trade shed
jobs.
The labour market is likely to firm up more convincingly in 2015
and 2016. Volume exports will be the main driver. The Irving
Oil refinery shutdown for maintenance in early 2014 is unlikely
to recur in 2015. Forest industries will be buoyed by demand
for lumber for the U.S. housing expansion, by the provincial
government’s 20% hike in the volume of softwood that can be
taken from Crown land and by substantial investment in mills.
Potash output will continue to grow as the new Piccadilly mine
comes on stream. The start of operations at the Caribou mine
will boost the production of metal ores, severely reduced by
the closing of the Brunswick zinc mine more than a year ago.
However, the oil price slide will reduce the value of exports
(and corporate profits). Refined petroleum products account
for about two-thirds of New Brunswick’s international exports
by volume.
0
200
400
600
800
1000
1200
1400
1600
90 92 94 96 98 00 02 04 06 08 10 12 14p
Halifax: Rental housing starts
Number of units
NBF Economics and Strategy, historical data from CMHC
19. ECONOMIC OUTLOOK
PROVINCIAL ECONOMIES
19
Housing, in contrast to other components of private-sector
domestic demand, is unlikely to contribute to economic growth
in 2015 or 2016. The resale market has been oversupplied
since 2012 and the overhang was exacerbated in 2014 by a
large rise in new listings. Meanwhile, the rental vacancy rate in
October was 8.4% in Moncton and 8.7% in Saint John. Starts,
which will end 2014 at an 18-year low, are for these reasons
likely to remain modest over the forecast period.
New Brunswick’s economic growth is on track to finish 2014
at 0.9%. We see it rebounding to 1.5% in 2015 and 1.9% in
2016. The outlook for 2016 would be improved by a green
light for the Energy East pipeline and for installation of export
capability at the Canaport liquefied natural gas terminal.
Provincial government finances suffered from the economic
downturn in 2012 and 2013. A midyear budget update projects
a deficit of $377 million, or 4.6% of budgeted revenues, for
2014-15. In the budget of February 2014, the return to a
balanced budget was deferred to fiscal 2017-18. About $300
million in gap-closing measures remain to be identified.
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
3.0
CA NL PE NS NB QC ON MB SK AB BC
Buyer’s
market
Balanced
market
Canada: Resale housing market
Ratio of new listings to monthly sales, November 2014, by province
NBF Economics and Strategy, data from Canadian Real Estate Association
24. ECONOMIC OUTLOOK
ECONOMICS AND STRATEGY GROUP
514-879-2529
Stéfane Marion
Chief Economist & Strategist
stefane.marion@bnc.ca
Paul-André Pinsonnault
Senior Fixed Income Economist
paulandre.pinsonnault@bnc.ca
Krishen Rangasamy
Senior Economist
krishen.rangasamy@bnc.ca
Marc Pinsonneault
Senior Economist
marc.pinsonneault@bnc.ca
Matthieu Arseneau
Senior Economist
matthieu.arseneau@bnc.ca
General: National Bank Financial Markets is a business undertaken by National Bank Financial Inc. (“NBF”), an indirect wholly owned subsidiary of National Bank
of Canada, and a division of National Bank of Canada. This research has been produced by NBF. National Bank of Canada is a public company listed on
Canadian stock exchanges. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may
be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to
buy or sell the securities mentioned herein. Canadian Residents: In respect of the distribution of this report in Canada, NBF accepts responsibility for its
contents. To make further inquiry related to this report or effect any transaction, Canadian residents should contact their NBF Investment advisor.
U.S. Residents: With respect to the distribution of this report in the United States, National Bank of Canada Financial Inc. (NBCFI) is regulated by the Financial
Industry Regulatory Authority (FINRA) and a member of the Securities Investor Protection Corporation (SIPC). This report has been prepared in whole or in part
by, research analysts employed by non-US affiliates of NBCFI that are not registered as broker/dealers in the US. These non-US research analysts are not
registered as associated persons of NBCFI and are not licensed or qualified as research analysts with FINRA or any other US regulatory authority and,
accordingly, may not be subject (among other things) to FINRA restrictions regarding communications by a research analyst with the subject company, public
appearances by research analysts and trading securities held a research analyst account. All of the views expressed in this research report accurately reflect the
research analysts’ personal views regarding any and all of the subject securities or issuers. No part of the analysts’ compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed in this research report. The analyst responsible for the production of this report certifies that
the views expressed herein reflect his or her accurate personal and technical judgment at the moment of publication. Because the views of analysts may differ,
members of the National Bank Financial Group may have or may in the future issue reports that are inconsistent with this report, or that reach conclusions different
from those in this report. To make further inquiry related to this report, United States residents should contact their NBCFI registered representative.
UK Residents: In respect of the distribution of this report to UK residents, National Bank Financial Inc. has approved the contents (including, where necessary,
for the purposes of Section 21(1) of the Financial Services and Markets Act 2000). National Bank Financial Inc. and/or its parent and/or any companies within or
affiliates of the National Bank of Canada group and/or any of their directors, officers and employees may have or may have had interests or long or short positions
in, and may at any time make purchases and/or sales as principal or agent, or may act or may have acted as market maker in the relevant securities or related
financial instruments discussed in this report, or may act or have acted as investment and/or commercial banker with respect thereto. The value of investments
can go down as well as up. Past performance will not necessarily be repeated in the future. The investments contained in this report are not available to retail
customers. This report does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for the securities
described herein nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever. This information is only for
distribution to Eligible Counterparties and Professional Clients in the United Kingdom within the meaning of the rules of the Financial Conduct Authority. National
Bank Financial Inc. is authorised and regulated by the Financial Conduct Authority and has its registered office at 71 Fenchurch Street, London, EC3M 4HD.
National Bank Financial Inc. is not authorised by the Prudential Regulation Authority and the Financial Conduct Authority to accept deposits in the United Kingdom.
Copyright: This report may not be reproduced in whole or in part, or further distributed or published or referred to in any manner whatsoever, nor may the
information, opinions or conclusions contained in it be referred to without in each case the prior express written consent of National Bank Financial.
