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G L O B A L A N D C A N A D I A N E C O N O M I C O U T L O O K

26 SEPTEMBER 2019

K P M G M I N I N G E X E C U T I V E A N D D I R E C T O R F O R U M

Dr David Williams

Vice President, Policy

PRESENTED TO

OUTLINE 2

▪ Highlights

▪ Global economy

▪ Canadian economy

▪ Risks

▪ Conclusion

HIGHLI GHTS 3

▪ Tepid global GDP growth outlook

▪ Low productivity growth

▪ Trade disputes & uncertainty

▪ Canadian fundamentals look weak

▪ 30-year high population growth lifts GDP, but…

▪ Falling capital intensity

▪ Low productivity growth

▪ Low growth in GDP per capita (0.3% p.a. over past 2 years)

▪ Record national debt (302% of GDP, 8th highest globally)

▪ Risks skewed to the downside

GLOBAL ECONOMIC OUTLOOK

4

0

1

2

3

4

5

6

7

US Euro area Japan China Oil-importingEMEs **

Rest of world World

2018 2019* 2020* 2021*

5TEPID GLOB AL GROWTH OUTLOOK

Source: Bank of Canada

Real GDP growth, annual%

15% of

world GDP

18%

33%

12%

4%

18%

* Projections

** Includes India, Brazil, South Africa, South Korea

6COMMOD ITY PRICES HAVE IMPROVED S INCE JANU ARY

Source: Bank of Canada

Commodity price indices, USD prices, weekly, 3 Jan 2019 = 100

80

90

100

110

120

130

140

150

160

Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

Total (BCPI) Energy Metals and minerals Forestry Agriculture

Index

7LONG-TER M DECLINE IN PRODUCTIV ITY & GDP GROWTH

Source: OECD

8TRADE GROWTH HAS STAL LED

Source: OECD

9TRADE GROWTH HAS STAL LED

Trade growth, y/y % change quarterly data%

Source: Bank of Canada

China provided

most of the growth

in global trade

10UNCERTAIN TY DAMPENS MANU FACT UR IN G & INVESTMENT

Source: OECD

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

3mth 6mth 1 year 2 years 5 years 10 years 30 years (US) /Long term (Can)

U.S. Canada

11INVERTED Y IELD CURVES

Source: Bloomberg 10/9/2019, Bank of Canada 9/9/2019

Yields on Treasury bills/bonds

12US INFL AT I ON EXPECTAT I ONS HAVE DECLINED

Source: Bank of Canada

Monthly data

Fed target:

2% for

PCE

CANADIAN ECONOMIC OUTLOOK

13

14CAN AD I AN ECONOMY IS RUNNING CLOSE TO ITS (ME AGRE )

FULL SPEED

Source: Bank of Canada

Real GDP growth, annual

1.9

1.3

1.9 2.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2018 2019* 2020* 2021*

Potential GDP growth Actual GDP growth* Projected

Potential GDP growth depends on growth in:1. Productivity2. Labour input

%

0.6%0.3%

0.7%

1.1%

1.5%

-1%

0%

1%

2%

3%

4%

5%

1986 1991 1996 2001 2006 2011 2016

GDP per capita GDP Labour productivity (business sector) Population (RHS)

1530 -YR H IGH POPUL AT I ON GROWTH IS L IFT ING GDP,

BUT NOT PRODUCTIV ITY & GDP PER CAPITA

Source: Statistics Canada

3-year CAGR, quarterly data

16CAPI TAL INTENSITY IS BELOW PRE -RECESSION LEVELS

Source: Statistics Canada

Real business investment per worker (before depreciation), Canada, 2008Q1 to 2019Q2*

$/worker* 4 quarter average, 2012 chained dollars

-1446-73

-689

-532

-1500 -1300 -1100 -900 -700 -500 -300 -100 100 300 500

TOTAL

NON-RESIDENTIAL STRUCTURESNon-residential buildings

Engineering structures

MACHINERY AND EQUIPMENTIndustrial machinery & equipment

Other electrical, electronic machinery & equipmentOther machinery & equipment

Furniture, fixtures & prefabricated structuresPassenger cars

Aircraft & other transport equipmentCommunications & audio-video equipment

Trucks, buses & other motor vehiclesComputers & computer peripheral equipment

INTELLECTUAL PROPERTY PRODUCTSMineral exploration & evaluation

Research & developmentSoftware

17CAN AD A HAS L ITTLE IDLE CAPAC ITY

Source: Bank of Canada

Estimates of potential GDP less actual GDP (“output gap”), Canada, quarterly

-5

-4

-3

-2

-1

0

1

2

3

2019Q22017Q22015Q22013Q22011Q22009Q22007Q22005Q2

Integrated framework Extended multivariate filter

% of GDP

2019Q2: -0.4% to -0.9% of GDP

18CORE INFL ATI ON MEASURES ARE CLOSE TO 2% TAR GET

Source: Bank of Canada

Year/year percentage change, monthly data

RISKS

19

RISKS TO THE CAN ADI AN OUTLOOK 20

▪ Upside

▪ Stronger U.S. growth (e.g. productivity acceleration; fiscal stimulus)

▪ Looser monetary policy by global central banks

▪ Credit boom accelerates again

▪ Downside

▪ Tighter financial conditions

▪ Weaker growth in China and lower commodity prices

▪ Disorderly unwinding of high global indebtedness (esp. China, HK, Canada)

▪ Risks are skewed to the downside

21CAN AD A’S POST-2005 CREDIT BOOM IS YET TO UNWIND

Credit to GDP ratios in the non-financial sector, market value

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0

50

100

150

200

250

300

350

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

Households Non-financial corporations Government Canadian recessionsSource: BIS, C.D. Howe Institute

% of GDP

Corporate debt boom begins (2006)

Household debt boom begins (2001)

Government debt boom begins (2008)

22BOC: TRADE R ISKS ARE SKEWED TO THE DOWNSIDE

Source: Bank of Canada July MPR

Percentage change in real GDP relative to BOC’s base case projection in 2021Q4

Upside: tariff changes over past 2yrs are reversed and all trade-related uncertainty dissipates

Downside: U.S. imposes 25% tariffs on all imports and trading partners respond in-kind; trade-related uncertainty increases

GDP ↓3% (world) ↓6% (Canada)Global commodity prices ↓30%Terms of trade ↓, CAD ↓25%

CONCLUSION

23

CONCLUSION 24

▪ Tepid global GDP growth outlook

▪ Low productivity growth

▪ Trade disputes & uncertainty

▪ Canadian fundamentals look weak

▪ 30-year high population growth lifts GDP, but…

▪ Falling capital intensity

▪ Low productivity growth

▪ Low growth in GDP per capita (0.3% p.a. over past 2 years)

▪ Record national debt (302% of GDP, 8th highest globally)

▪ Risks skewed to the downside

THANK YOU!

25

david.williams@bcbc.com

QUESTIONS

26

EXTRA CHARTS

27

28NEAR- TER M GLOB AL OUTLOOK WEAKENS

Source: OECD

29LIV ING STAND ARDS HAVE STAGN ATED S INCE 2007

Source: OECD* 2007-17 CAGR

Real GDP per capita, compound annual growth rate, 2007-2018

-1%

0%

1%

2%

3%

Germany Australia OECD* US G7 Japan CANADA Euro area France UK Italy

Labour productivity Labour utilization GDP per capita GDP per capita (2000-07)

30DISAPP OIN T IN G PRODUCTIV ITY GROWTH S INCE 2007

Source: OECD* 2007-17 CAGR

Growth in labour productivity (GDP per hour worked), CAGR

1.1%

0.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

US UK OECD* G7 Germany Japan France Australia CANADA Euro area Italy

2000-07 2007-18

31REAL WAGE GROWTH IS WEAK

Source: Statistics Canada

Real compensation per employee*, 5-year CAGR, Canada

0.6%

-1%

0%

1%

2%

3%

Q1 1984 Q1 1989 Q1 1994 Q1 1999 Q1 2004 Q1 2009 Q1 2014

* Nominal total compensation per employee deflated by household consumption deflator

32EMPLOYMENT GROWTH IS RAIS IN G TOTAL HOURS WORKED

Source: Bank of Canada

Year/year percentage change, quarterly data

-3%

-2%

-1%

0%

1%

2%

3%

4%

Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019

Employment Average hours worked Total hours worked

33CAPI TAL INTENSITY IS FALL IN G

Source: Statistics Canada

Real business gross fixed capital formation per worker, Canada, y/y % change

-4%

-30%

-20%

-10%

0%

10%

20%

30%

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

Non-residential structures Machinery and equipment Intellectual property products Total