2015 Outlook: Tidal Shifts

2015 outlook: Tidal shifts

Douglas Porter, CFA Chief Economist, BMO Financial Group February 4, 2015 [email protected] • 416-359-4887

A presentation of BMO Capital Markets Economic Research www.bmocm.com/economics • 1-800-613-0205

General Disclosure “BMO Capital Markets” is a trade name used by the BMO Investment Banking Group, which includes the wholesale arm of Bank of Montreal and its subsidiaries BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. in the U.K. and BMO Capital Markets Corp. in the U.S. BMO Nesbitt Burns Inc., BMO Capital Markets Ltd. and BMO Capital Markets Corp are affiliates. Bank of Montreal or its subsidiaries (“BMO Financial Group”) has lending arrangements with, or provide other remunerated services to, many issuers covered by BMO Capital Markets. The opinions, estimates and projections contained in this report are those of BMO Capital Markets as of the date of this report and are subject to change without notice. BMO Capital Markets endeavours to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. However, BMO Capital Markets makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets or its affiliates that is not reflected in this report. The information in this report is not intended to be used as the primary basis of investment decisions, and because of individual client objectives, should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer to sell or the solicitation of an offer to buy any security. BMO Capital Markets or its affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets or its affiliates, officers, directors or employees have a long or short position in many of the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The reader should assume that BMO Capital Markets or its affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. Dissemination of Research Our publications are disseminated via email and may also be available via our web site http://www.bmonesbittburns.com/economics. Please contact your BMO Financial Group Representative for more information. Conflict Statement A general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for managing conflicts of interest in connection with investment research which is available at http://researchglobal.bmocapitalmarkets.com/Public/Conflict_Statement_Public.aspx. ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States, personal and commercial banking clients are served by BMO Harris Bank N.A., Member FDIC. Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets. BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A, BMO Ireland Plc, and Bank of Montreal (China) Co. Ltd. and the institutional broker dealer businesses of BMO Capital Markets Corp. (Member SIPC), BMO Nesbitt Burns Securities Limited (Member SIPC) and BMO Capital Markets GKST Inc. (Member SIPC) in the U.S., BMO Nesbitt Burns Inc. (Member Canadian Investor Protection Fund) in Canada, Europe and Asia, BMO Capital Markets Limited in Europe, Asia and Australia and BMO Advisors Private Limited in India. “Nesbitt Burns” is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. “BMO Capital Markets” is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license. ® Registered trademark of Bank of Montreal in the United States, Canada and elsewhere. TM Trademark Bank of Montreal © COPYRIGHT 2015 BMO CAPITAL MARKETS CORP. A member of BMO Financial Group 1 Market volatility

(as of February 3, 2015) Stocks Canadian dollar 10-year GoC yield 2100 Record 21000 (US$/C$) (percent) 4 1.05

1800 S&P 500 18000 (lhs) Record 3 1500 15000 0.95

1200 12000 TSX 0.85 2 (rhs) 900 9000

Record 600 6000 0.75 1 08 10 12 14 08 10 12 14 08 10 12 14 Oil prices slide lines: weekly averages record dots: daily close

2 Three big shifts

1. USA: Growth leader

2. Oil price plunge

3. Canadian dollar sinks

Two half shifts 1. Housing boom ends… in some cities 2. Interest rates: Rise… in one country Fall… in another

China [Q4] 7.3 India 5.4 Australia 2.7 UK [Q4] 2.7 Canada 2.6 US [Q4] 2.5 Mexico 2.1 Eurozone 0.8 13 14 15 16 Russia 0.6 World 3.3 3.2 3.2 3.6 Brazil -0.2 Emerging markets 4.6 4.3 4.0 4.7 Japan -1.2 G7 1.51.72.12.0

-202468 Another sub-par year

4 North American growth divergence in 2015 (q/q % chng : ar) 13 14 15 16 Real GDP Canada 2.0 2.4 2.0 2.2 9 US 2.2 2.4 3.1 2.6

6 Canada

3 US

Weather -3

-6 Canada: 2014:Q4 = BMO estimate forecast -9 04 05 06 07 08 09 10 11 12 13 14 15 US to outpace Canada by most since 1996

© BMO Capital Markets www.bmocm.com/economics 5 US consumer positives United States Confidence¹ Auto sales Job growth (1985 = 100) (mlns : 3-mnth ma) (y/y % chng) 120 20 3 8¾-yr high 7½-yr high 2 100 8½-yr high 1 16 80 0 -1

60 -2 12 -3 40 -4

20 8 -5 05 08 11 14 05 08 11 14 05 08 11 14 Bonus: Gas prices, mortgage rates

¹ Source: Conference Board © BMO Capital Markets www.bmocm.com/economics

6 Jobless rates: US falling fast… Canada not so much Unemployment rate (percent)

10 10.0% Greece 25.8 US Spain 23.7 9 8.7% Portugal 13.4 Italy 12.9 8 Ireland 10.5 France 10.3 7 6.7% Canada Canada 6.7 [33-year low] 5.8% Australia 6.1 6 5.6% UK 5.9

Vancouver 5.9% US 5.6 5 Victoria 4.9% Germany 4.8 4.4% British Columbia 5.5% forecast Japan 3.4 4 06 07 08 09 10 11 12 13 14 15 US participation rate: Lowest since 1978

Oil price plunge

SuperCycle over…

…But some sectors stay solid

Global growth should firm

Impact on Western Canada

8 Commodities: Oil spill

(as of February 3, 2015)

Crude oil (US$/bbl) Natural gas (US$/mmbtu) 150 8.0 Brent 120 6.4 90 4.8 60 WTI¹ 3.2 30 1.6 09 10 11 12 13 14 15 09 10 11 12 13 14 15

Lumber² (US$/1,000 bd ft) Base metals (US$000s/ton) 500 12 32 Nickel Copper 400 9 (rhs) (lhs) 24 300 6 16 200 100 3 8 09 10 11 12 13 14 15 09 10 11 12 13 14 15

¹ West Texas Intermediate ² 2x4 kiln-dried, Prince George

© BMO Capital Markets www.bmocm.com/economics 9 Regional outlook: The changing of the guard Canada (y/y % chng) ——————— 2014 ——————— —— 2015 —— Employment¹ Retail sales² Real GDP³ (3-mnth ma) AB 2.8 AB 6.6 BC 2.6 MB 2.3 BC 6.3 ON 2.5 SK 1.4 ON 5.5 MB 2.3 NS 0.8 MB 4.8 NS 2.1 BC 0.7 NL 4.6 QC 2.1 ON 0.6 NB 4.1 SK 1.9 QC -0.2 PE 4.0 NB 1.6 PE -0.5 SK 3.7 PE 1.6 NB -1.6 QC 2.0 AB 0.5 NL -2.5 NS 1.3 NL -1.0

-4 0 4 048 -2 0 2 4

¹ December 2014 ² November 2014 ³ 2015 BMO forecast

10 What’s ahead for British Columbia?

Growth drivers: Increasing ties to Asia US expansion Natural gas exports?

Challenges: Mining investment softening Slower population growth

Less fiscal restraint needed

Vancouver: Housing market balanced… again

British Columbia 0.2 $0.4 bln Alberta -0.1 -$0.5 bln Saskatchewan 0.1 $0.1 bln Manitoba -0.6 -$0.4 bln Ontario -1.7 -$12.5 bln Quebec -0.3 -$1.0 bln New Brunswick -1.2 -$0.4 bln Nova Scotia -0.7 -$0.3 bln Prince Edward Island -0.7 $0.0 bln Newfoundland and Labrador -2.5 -$0.9 bln All provinces -0.8 -$15.6 bln Federal -0.1 -$2.9 bln deficit surplus -3 -2 -1 0 1

Quebec: Before GF transfers

Sources: Federal and provincial budgets/fiscal updates © BMO Capital Markets www.bmocm.com/economics

12 Ottawa’s finances: Budget delayed to April Federal budget balance – Canada –C$ blns – – % of nominal GDP – 20 2

0 0 -2

-20 -4

-6 -40 -8 Prior trough forecast¹ -60 -10 89 96 03 10 17 62 72 82 92 02 12 Budget balanced in 2015?

¹ Source: 2014 Economic and Fiscal Update © BMO Capital Markets www.bmocm.com/economics 13 Canadian political landscape 2015

Federal election Latest polls¹ 2011 Votes Seats (%) (%) Stephen Harper [Conservatives] Conservatives 32 39.6 166 Thomas Mulcair [NDP] NDP 21 30.6 103

Liberals 34 18.9 34

Bloc Québécois 5 6.0 4

Justin Trudeau [Liberals] Other 8 4.9 1

At least 4 provincial elections this year (Saskatchewan, Manitoba, Newfoundland and Labrador, Prince Edward Island) ¹ Weighted average poll, ThreeHundredEight.com

14 Will Canadian housing calm, correct, crash? Seven Year Glitch 2014: “Why Canada isn’t immune to a US-style housing crash” Maclean’s 2013: “Inside the great real estate crash of 2013” Maclean’s 2012: “Canada’s housing crash begins” Canadian Business 2011: “Canada’s housing bubble deemed close to bursting” CBC News 2010: “Canada’s housing bubble: An accident waiting to happen” CCPA 2009: “Why Canada’s housing bubble will burst” The Tyee 2008: “Canada’s housing bubble could soon burst” US investment firm

© BMO Capital Markets www.bmocm.com/economics 15 Canadian house prices: Regional divide Canada (y/y % chng : as of December 2014) Average Existing home prices¹ home price (ann avg) Calgary 8.8 $461,000 Toronto 7.9 $566,000 Vancouver 5.8 $813,000 Canada 5.4 $408,000 Fraser Valley 2.5 $518,000 Victoria 2.3 $496,000 Saskatoon 0.9 $341,000 Ottawa 0.8 $363,000 Montreal 0.2 $331,000 Regina -3.5 $315,000

-4 -2 0 2 4 6 8 10 12 Sales up 8% in December ¹ HPI composite benchmark

16 Canadian consumers: Borrowing stabilizes… Households¹ Debt ratio Debt growth² 1.8 (ratio to personal disposable income) 15 (y/y % chng)

1.6 Crossover 10 1.4 Canada US 1.2 5 Canada 1.0 0 0.8 US

0.6 -5 90 95 00 05 10 15 05 07 09 11 13 15 …But, debt ratio at record highs ¹ Households, nonprofits and unincorporated businesses ² Consumer credit and residential mortgages only

Loonie drops below 80¢

Bank of Canada changes course

Commodities retreat

US$ rebounds

January: Down 9%, 2nd largest drop ever

18 C$ prognosis: Further fall

Canada (as of February 3, 2015)

1,000 120

110 C$¹ 800 (rhs) C$ parity 100

600 90 BoC commodity price index² 80 (lhs) 400 70

forecast 200 60 00 02 04 06 08 10 12 14

¹ (US¢) ² (1972 = 100) actuals: weekly averages forecast: monthly averages

Canadian dollar (US¢ : as of February 3, 2015)

106

102 parity

94 Poloz takes over at BoC (June 1, 2013) 90

78 11 12 13 14 15

Bank of Canada Governor Stephen Poloz Shock rate cut

20 Inflation poised to plunge Consumer price index (y/y % chng) United States Canada Total CPI 4.5 4.5 (latest month)

Brazil 6.4 3.0 Total 3.0 Total 2.2% India 5.9 1.6% Japan 2.4 1.5 1.5 Core China 1.5 0.8% Core 1.5% 0.0 0.0 Canada 1.5

US 0.8 -1.5 -1.5 UK 0.5

forecast Eurozone -0.2 -3.0 -3.0 09 11 13 15 09 11 13 15 -4 0 4 8 Good news for consumers British Columbia: 0.9%

Consumer price index – Canada (y/y % chng : as of December 2014)

Deflationary Inflationary

GasolineDown 23% in early February -16.6 Beef 22.5 Camera equipment -8.5 Natural gas 16.5 Sugar -5.6 Pork 15.6 Home entertainment equipment -5.5 Cigarettes 11.4 Computer equipment -3.3 Books 9.5 Car rentals -2.5 Water charges 6.1 Household furniture -1.5 Electricity 4.3 Wine -0.4 Tuition fees 3.2 Prescription drugs -0.2 Clothing 2.5

Core CPI 2.2% Overall CPI 1.5%

22 Interest rates: Divergence

(% : as of February 3, 2015) Overnight rate 10-year bonds 6 6 forecast US 5 5 US 4 4 Canada Canada 3 US 1.79% Canada 1.31% 3 2.30% 2 [Year-end ’15]

0.75% 2 1 1.90% Record lows 0%-0.25% 0 1 01 04 07 10 13 07 09 11 13 15 Fed hike in September? Yields slide despite QE end

China 51.7 Germany 11.1 India 29.9 India 5.5 Nasdaq 13.4 Australia 5.2 S&P 500 11.4 UK 4.7 DJIA 7.5 TSX 2.9 TSX 7.4 Nasdaq -0.2 Japan 7.1 S&P 500 -0.4 Germany 2.7 Russia -0.5 Australia 0.7 Japan -0.7 UK -2.7 DJIA -0.9 Brazil -2.9 Brazil -2.1 Russia -45.2 China -2.7

-60 -30 0 30 60 -4 0 4 8 12 Tables turn for TSX

24 Outlook in a nutshell

Global growth to hold steady despite risks

US recovery to strengthen Less fiscal drag, consumers thriving Housing recovery still key

Canada lags behind Exports finally benefit, but oil a big drag Housing slows, but no crash

Interest rates: Modest upward drift in the US Exchange rates: Improving economy drives US dollar higher Stocks: Bull market to continue, but pace to slow