Canadian Economic Outlook October 28, 2015

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Canadian Economic Outlook Bilal Hasanjee, CFA®, MBA, MScFinance October 28 th , 2015

Transcript of Canadian Economic Outlook October 28, 2015

Page 1: Canadian Economic Outlook  October 28, 2015

Canadian Economic OutlookBilal Hasanjee, CFA®, MBA, MScFinance

October 28th, 2015

Page 2: Canadian Economic Outlook  October 28, 2015

Disclaimer

NOTICE & DISCLAIMER: This publication has been prepared for informational purposesonly. Opinions, estimates and projections contained herein are my own and alsoextracted from third party sources and as of the date hereof and are subject to changewithout notice. The information and opinions contained herein have been compiled orarrived at from sources believed reliable, but no representation or warranty, express orimplied, is made as to their accuracy or completeness and neither the information northe forecast shall be taken as a representation for which the author or his employer incurany responsibility. The author does not accept any liability whatsoever for any lossarising from any use of this information. This publication is not, and is not intended to beconstructed as, an offer to sell or solicitation of any offer to buy any financial instrumentreferred to herein, nor shall this publication be construed as an opinion as to whether youshould enter into financial transaction or trading strategy involving any financialinstrument.

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Canadian Economic Outlook

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Shock resistant financial system, but……

As an aftermath of 2008 financial crisis, as theworld economy faced worst post-warfinancial meltdown, Canadian economy stoodout as an exception in terms of robustness ofits financial system

Canadian banks avoided the fates of itscounterparts in the US and other developingeconomies due to the quality of its consumer(mainly, mortgage) loans

Higher oil prices also helped the Canadianeconomy in maintaining jobs and spending,whilst constant inflow of immigrants alsohelped pushing the house prices higher

Bank of Canada maintained low interest ratesthroughout to keep in tandem with theneighbouring US and other developedeconomies

Source: Bank of Canada

Bank of Canada Interest Rate Action

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However, lower interest rates and further ratecuts by BOC in 2015, twice, helped fuel thehouse purchases and consumer debt piled up

Canadian consumer debt is at alarming 165%of disposable income. House prices are nowover valued by 34% against disposableincomes, compared with their long-termaverage. Compared with rents, theovervaluation is 89% ! (Source: TheEconomist).

With more than 50% fall in oil prices since2014, job losses have occurred in the energysector and Canadian economy is officially inrecession!

Source: Bank of Canada

Oil price, job losses and real estate prices

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Teranet- National Bank House Price Index, Composite 11 cities (June 2005=100)

Canadian Interest Rates & Mortgages

Source:www.globalpropertyguide.com

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Good news is that lower CAD againstits trading partners is expected tomake our exports more competitive

This may result in higher employmentand output

CAD and Exports Outlook

Source: Goldman Sachs Investment Research

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Key Risks to the Economy and the Financial System

Although house price growth on a national basis has slowed modestly, it continues to outpace incomegrowth, and overvaluation in the Canadian housing market remains a concern

According to Bank of Canada, the most important domestic financial system risk continues to be abroad-based decline in Canadian employment and incomes that significantly reduces the ability ofhouseholds to service their debt, leading to a widespread correction in house prices.

The probability of this risk materializing is low, but if it were to materialize, the impact on theeconomy and the financial system would be severe.

Although the low price of oil has increased the vulnerability of the Canadian financial system to futureadverse shocks, it is unlikely, on its own, to trigger significant financial system stress

The possibility of sharply higher long-term interest rates globally and in Canada is another key riskMarket overreactions to surprise changes in monetary policy in the United States or Europe couldresult in a rapid rise in global risk premiums, with possible spillovers to domestic financing costs andasset prices

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Source: Bank of Canada: Financial System Review, June 2015

Key Risks to the Economy and the Financial System

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Source: Bank of Canada

Key Risks to the Economy and the Financial System

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A Liberal Government and CAD

Foreign investors typically prefer stability and continuity in governments. As animmediate reaction to the Labor victory, CAD depreciated further

However a majority government helped limit the CAD sell-off as it calmed the foreigninvestors - a majority victory is a far better outcome than a minority one

According to Deutsche Bank, Trudeau’s infrastructure spending plan could add up to0.5% to GDP growth by end of 2016

Although, running fiscal deficits (as proposed by Trudeau) may result into weakeningCAD, however it may could result into two positive outcomes:

Make Canadian exports more competitive, resulting into higher output and employment

Active fiscal management will take pressure off from Bank of Canada to implementmonetary solutions (rate cuts)

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Conclusion

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Conclusion

Key drivers of global economic developments for the next 6 months:

Drop in commodity prices

Weakness in emerging market growth

Appreciation of the US dollar

US Growth

Euro Zone Problems

EMEs and DEs are projected to slow for the fifth year in a row!

4 Key risks to the Canadian Economy:

Correction in house prices

Sharp increase in long term interest rates

Stress emanating from China and EMEs

Financial Stress from Euro area

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Conclusion

US productivity growth and consumer spending are key engines to the globaleconomic growth

US higher interest rate cycle is asynchronous to most of the developed economies(except UK) and may force them to move in tandem

China’s PBOC has plenty of fiscal and monetary flexibility to fight off any recessionarytail winds