global outlook 2006 – chicken little or peking duck?
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Global Outlook 2006 – Chicken Little or Peking Duck?. January 17, 2006. Presented by: Patricia Croft Vice President & Chief Economist Phillips, Hager & North Investment Management Limited. Outlook 2006 It’s All About Oil and Inflation. Global growth still healthy and better balanced - PowerPoint PPT PresentationTRANSCRIPT
Est. 1964Est. 1964
Global Outlook 2006 – Global Outlook 2006 – Chicken Little or Chicken Little or
Peking Duck?Peking Duck?
Global Outlook 2006 – Global Outlook 2006 – Chicken Little or Chicken Little or
Peking Duck?Peking Duck?
Presented by:
Patricia CroftVice President & Chief Economist
Phillips, Hager & North Investment Management Limited
January 17, 2006January 17, 2006
Outlook 2006 It’s All About Oil and InflationOutlook 2006 It’s All About Oil and Inflation
Global growth still healthy and better balanced
Some improvement in Europe and Japan – Canada remains strong
Soaring energy prices have had little impact but…
Storm clouds on the horizon Tightening Fed
Housing bubbles and yawning current account deficit
Protectionist sentiment
Energy prices
10
20
30
40
50
60
70
0
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
US
$/b
arre
l
WTI Crude
Crude Oil Prices Still Elevated – Chicken Little?Crude Oil Prices Still Elevated – Chicken Little?
Long-term Price of Oil Has Increased – But to $45 not $100Long-term Price of Oil Has Increased – But to $45 not $100
Days of $22-28/barrel are behind us
Global demand shift
Alternative resources take time to develop
Refinery capacity is limited and inadequate
Central bank monetary policy normalization
1.00
1.75
0.00
0.50
1.75
3.50
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
U.S. Canada Australia U.K. Eurozone Japan
Per
cen
tag
e p
oin
ts
Tightening since trough
Tightening in last year
Estimated distance from neutral
Estimated neutal rate = LR core inflation target + LR potential real GDP growth rate
Monetary Policy: Key Theme for 2006Monetary Policy: Key Theme for 2006
House Prices Still HighHouse Prices Still High
50
100
150
200
250
300
1994 1996 1998 2000 2002 2004
Ind
ex, 1
994Q
1 =
100
U.K.AustraliaU.S.Canada
UK in a soft spot but has likely bottomed
Europe doing better – interest rates still low
Japan improving – end of deflation in sight?
China still strong – now bigger and better
Global growth holding up but likely to ease in 2007 as lagged effects of rate hikes start to hit home globally
Outside North America, Things Are Looking Up
-8
-6
-4
-2
0
2
4
6
8
10
12
1997 1998 1999 2000 2001 2002 2003 2004 2005
% c
han
ge
year
ag
o
Retail sales
Manufacturing output
UK Economy on the Mend?
Ye
ar-
ov
er-
ye
ar
% c
ha
ng
e
Germany
-10
-5
0
5
10
15
20
2000 2001 2002 2003 2004 2005
Real GDPPrivate expenditureFixed Capital FormationExports
France
-10
-5
0
5
10
15
20
2000 2001 2002 2003 2004 2005
Real GDPPrivate expenditure
Fixed Capital FormationExports
Italy
-10
-5
0
5
10
15
20
2000 2001 2002 2003 2004 2005
Real GDPPrivate expenditure
Fixed Capital FormationExports
Will 2006 Be Europe’s Year?
Corporate profits are improving and business investment is increasing
Private consumption and employment are increasing moderately
Exports and industrial production are picking up
Risk is the impact of oil prices on both domestic and overseas economies
Japan’s Recovery – Is This the Real Thing?
Japan’s Reliance on China Growing but U.S. Still Top Dog
Japan's key export markets
0
5
10
15
20
25
30
35
40
Jan
-99
Ap
r-99
Jul-
99O
ct-9
9Ja
n-0
0A
pr-
00Ju
l-00
Oct
-00
Jan
-01
Ap
r-01
Jul-
01O
ct-0
1Ja
n-0
2A
pr-
02Ju
l-02
Oct
-02
Jan
-03
Ap
r-03
Jul-
03O
ct-0
3Ja
n-0
4A
pr-
04Ju
l-04
Oct
-04
Jan
-05
Ap
r-05
Jul-
05O
ct-0
5
Per
cen
t o
f to
tal
Export share, USA
Export share, China
Export share, Other Asia
32.1
23.4
5.1
14.1
33.7
28.1
China Vaults to Number Four Global EconomyChina Vaults to Number Four Global Economy
Source: National Bureau of Statistics
Old GDP
Primary15%
Secondary53%
Tertiary32%
New GDP
Primary13%
Secondary46%
Tertiary41%
$1.6 trillion US $1.9 trillion US = 20% increase!
China’s Far Reaching ImpactChina’s Far Reaching Impact
It has altered world trading patterns, shifting income
It has pressured wages of low skilled workers in rich countries
It has helped companies increase return on capital without pressure from workers for higher wages
U.S. Economy Remarkably ResilientU.S. Economy Remarkably Resilient
Despite higher oil prices, natural disasters and consumer worries, real growth still strong
Federal Reserve appears to be close to end of tightening cycle
Biggest risk: U.S. consumer Negative personal savings rate
Rising debt servicing costs
Higher energy costs
Real estate reliant
Why is the Fed Still Tightening?
US capacity indicators
70
72
74
76
78
80
82
84
86
88
90
Q1
1970
Q4
1972
Q3
1975
Q2
1978
Q1
1981
Q4
1983
Q3
1986
Q2
1989
Q1
1992
Q4
1994
Q3
1997
Q2
2000
Q1
2003
Q4
2005
%
2
3
4
5
6
7
8
9
10
11
12
%
Capacity utilization rate, all industries (left)
Unemployment rate (right)
Cap U LR avg = 81.4%
4.9%
Will the Fed Tighten Too Much?
Yield Curve is Flat But Real Rates Still LowYield Curve is Flat But Real Rates Still Low
US yield curve slope - 10-year Treasury bond - 3-month T-bill
-1
0
1
2
3
4
5
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Per
cen
tag
e p
oin
ts
Real US 3-month T-bill rates
-3-2-101234567
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
%
Core Inflation Well Behaved – So Far
US consumer price inflation
-3
0
3
6
9
12
15
18
1960 1966 1972 1978 1984 1990 1996 2002
Per
cen
t, Y
ear-
ove
r-ye
ar
Core CPI
Headline CPI
US Real House Prices
90
100
110
120
130
140
150
160
170
1975 1980 1985 1990 1995 2000 2005
Ind
ex
Source: Office of Federal Houising Enterprise Oversight, Bureau of Labor Statistics
U.S. House Prices Continue to SurgeSustained low interest rates tend to fuel asset bubbles
U.S. Consumer Using Home as a Cash Machine
Source: "Estimates of Home Mortgage Originations, Repayments, and Debt on One-to-Four Family Residence”, Kennedy and Greespan, Federal Reservce 2005
Net equity extraction through cash-out refinancing
As a percent of disposable income
-50
0
50
100
150
200
250
Q1
1990
Q2
1991
Q3
1992
Q4
1993
Q1
1995
Q2
1996
Q3
1997
Q4
1998
Q1
2000
Q2
2001
Q3
2002
Q4
2003
Q1
2005
US
$ B
illio
ns,
qu
arte
rly
rate
-2
0
2
4
6
8
10
12
% o
f d
isp
inco
me
Current Account Deficit Still a Dollar Risk
US Dollar and Current Account Balance
-7
-6
-5
-4
-3
-2
-1
0
1
2
1973 1975 1978 1980 1983 1985 1988 1990 1993 1995 1998 2000 2003 2005
% o
f G
DP
70
80
90
100
110
120
130
140
150
Ind
ex
% of GDP (left)
Trade-weighted value of US dollaragainst major currencies (right)
Canadian Economic Growth Strong But UnbalancedCanadian Economic Growth Strong But Unbalanced
Higher energy prices benefit Canada as we are a net energy exporter
However, high energy prices create a transfer of wealth from central Canada to Alberta
The Canadian dollar has become a petro currency – a stronger dollar will further challenge the manufacturing base
Fiscal policy is loose – monetary policy is tightening
Canadian Job Creation Has Been Very Strong
Cumulative job creation since January 2004
0
50
100
150
200
250
300
350
400
450
500
Jan
-04
Mar
-04
May
-04
Jul-
04
Sep
-04
No
v-04
Jan
-05
Mar
-05
May
-05
Jul-
05
Sep
-05
No
v-05
Th
ou
san
ds
Total
Full-time
2006 provincial real GDP growth
0
1
2
3
4
5
6
7
BC AL SK MB ON QC NB NS PEI NL
%
Source: RBC Financial Group
Provincial labour markets
-2
0
2
4
6
8
10
12
14
16
NL PEI NB NS QC ON BC SK MB AL
%
Unemployment rate (ytd avg %)Job growth (ytd % change)
Provincial retail sales and housing
-15
-10
-5
0
5
10
15
AL SK MB QC NB BC ON PEI NS NL
%
Retail sales (ytd % change)Housing starts (ytd % change)
%
Provincial price pressures
0
1
2
3
4
5
6
7
8
9
PEI NS MB NL NB QC SK ON AL BC
CPI (ytd avg %)Wages & salaries (ytd % change)
Alberta Roars While Central Canada Reels
Canadian Inflation Indicators Flashing Yellow
Capacity utilization and unit labour costs
72
74
76
78
80
82
84
86
88
90
1987
1990
1993
1996
1999
2002
2005
%
-4
-2
0
2
4
6
8
An
nu
al %
ch
ang
e
Capacity utilizationUnit labour costs
For Now – Inflation Remains Tame
Canadian CPI inflation
Core (excl. 8 most volatile items)
Headline
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
%
Bank of Canada Back in Tightening ModeBank of Canada Back in Tightening Mode
Central bank policy interest rates
0
1
2
3
4
5
6
7
2001 2002 2003 2004 2005
(%)
Bank of Canada
U.S. Federal Reserve
Canadian Dollar Was A Star in 2005Canadian Dollar Was A Star in 2005
Performance of the Canadian dollar in 2005
0
2
4
6
8
10
12
14
16
18
20
U.S dollar New Zealanddollar
Australiandollar
UK pound Euro Yen
%
Change in value against selected currencies from Jan. 1 to Dec. 31 2005
Outlook 2006 - SummaryOutlook 2006 - Summary
Global growth set to slow as weakness in the U.S. is partially offset by renewed vigor in Europe and Japan
Canada strong for now – growing regional disparities will challenge policy makers
Monetary policy normalization process to continue
C$ overvalued – U.S. bear market at hand
Risks Energy prices/house prices
Geopolitical instability
Mother Nature
Protectionist sentiment
Easy Monetary Policy has Encouraged Risk Taking
CBOE Volatility Index (VIX)
10
15
20
25
30
35
40
45
50
55
60
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Ind
ex
Old VIX (based on S&P 100)New VIX (based on S&P 500)
Above 40 = Panic
Below 20 = Complacency
Black Monday
Gulf War I Asian Crisis
LTCM
9-11
Gulf War II
Yield curve slope, current and year ago
-50
0
50
100
150
200
250
Japan Eurozone Canada US UK
10 y
ear
- 3
mo
nth
yie
lds,
bp
s
year agocurrent
Global Yield Curves Flattening
Long Bond Yields Still Low and Range Bound
10-year government bond yields
Source: Datastream
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
2000 2001 2002 2003 2004 2005
%
0.0
0.5
1.0
1.5
2.0
2.5
%
Canada (left)US (left)Germany (left)Japan (right)
Japan Soars – U.S. SputtersJapan Soars – U.S. Sputters
Major stock markets since Jan. 2004
90
100
110
120
130
140
150
160
Jan-04 Jul-04 Jan-05 Jul-05 Jan-06
Ind
ex:
Jan
. 1 2
004
= 1
00
S&P 500
S&P/TSX
MSCI EAFE (US$)
Nikkei 225
P/E Ratios Have ConvergedP/E Ratios Have Converged
12
14
16
18
20
22
24
26
28
1998 1999 2000 2001 2002 2003 2004 2005
Rat
io
S&P 500TSXMSCI EAFE
Overweight equities, neutral on bonds, underweight cash
May add to U.S. or EAFE equity holdings
Corporate earnings still strong – corporations flush with cash
Valuation for stocks is reasonable, particularly in the U.S.
Proximity to end of Fed tightening cycle is a positive factor
Asset Mix Summary