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. 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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 © BMO Capital Markets www.bmocm.com/economics 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 © BMO Capital Markets www.bmocm.com/economics 3 Global GDP: Some good, some bad, some ugly 2014:Q3 (y/y % chng) Real GDP 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 © BMO Capital Markets www.bmocm.com/economics 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 0 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 © BMO Capital Markets www.bmocm.com/economics 7 Commodity outlook Oil price plunge SuperCycle over… …But some sectors stay solid Global growth should firm Impact on Western Canada © BMO Capital Markets www.bmocm.com/economics 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 © BMO Capital Markets www.bmocm.com/economics 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 © BMO Capital Markets www.bmocm.com/economics 11 Provincial deficits: Some progress, some trouble Canada – FY14/15 (% of GDP) Budget balance 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 © BMO Capital Markets www.bmocm.com/economics