november 2018 canadian gdp up 0.1% in august on oil sands production rebound the hurt from red...

CANADIAN GDP UP 0.1% IN AUGUST ON OIL SANDS

PRODUCTION REBOUND

THE HURT FROM RED OCTOBER

US ECONOMY CONTINUES TO LEAD THE PACK

CANADA’S ECONOMY KEEPS UP ITS GROWTH STREAK

CANADA’S HOUSING MARKET STAYS SOFT IN OCTOBER

November 2018

ECONOSCOPE, © ROYAL BANK OF CANADA

IN BRIEF

Volume 42, Number 11

November 2018

RBC ECONOMICS

RESEARCH

Craig Wright SENIOR VICE PRESIDENT &

CHIEF ECONOMIST

Dawn Desjardins

VICE PRESIDENT &

DEPUTY CHIEF ECONOMIST

Paul Ferley ASSISTANT CHIEF ECONOMIST

MACROECONOMICS

Robert Hogue SENIOR ECONOMIST

REGIONAL ECONOMIES

Nathan Janzen SENIOR ECONOMIST

MACROECONOMICS

Josh Nye SENIOR ECONOMIST

FINANCIAL MARKETS & MACROE-CONOMICS

Joseph Allegritti RESEARCH ASSOCIATE

Rannella Billy-Ochieng’

ECONOMIST

Ramya Muthukumaran

ECONOMIST

Andrew Agopsowicz

SENIOR ECONOMIST

EDITOR

Adrianna Pineda

[email protected]

SUBSCRIPTION INFORMATION

[email protected]

Highlights This Month

2 CANADIAN GDP UP 0.1% IN AUGUST ON OIL SANDS

PRODUCTION REBOUND

Details were softer than the increase would imply, with a jump in oil

sands production and utilities output not likely to be repeated.

6 THE HURT FROM RED OCTOBER

Concerns about rising protectionism and slowing global growth saw

equity markets drop in October.

7 US ECONOMY CONTINUES TO LEAD THE PACK

A strong consumer backdrop and ongoing fiscal stimulus has helped

the US economy accelerate in 2018.

9 CANADA’S ECONOMY KEEPS UP ITS GROWTH STREAK

Canada’s economy extended its growth streak to seven months, but

the increase in August was narrowly based.

13 CANADA’S HOUSING MARKET STAYS SOFT IN OCTOBER

Already-soft home resales edged down further by 1.6% from Sep-

tember and new listings fell 1.1% across Canada.

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CURRENT TRENDS Paul Ferley, Nathan Janzen, Josh Nye

HIGHLIGHTS

▲ Canadian GDP rose a stronger-than-expected 0.1% in August as oil sand production rebounded.

▲ Employment rose 11k in October as a jump in full-time employment was partially offset by lower part-time em-ployment.

▲ Retail sales rose 0.2% in Septem-ber with gains in 6 of 11 subsectors.

▲ Canadian housing starts back above 200k in October.

▲ The Canadian trade balance posted a $0.4 billion deficit in September — down from a revised $0.6 billion deficit in August.

▲ CPI inflation ticked up to 2.4% in October from 2.2% in September.

CANADA GDP UP 0.1% IN AUGUST ON OIL SANDS

PRODUCTION REBOUND

LATEST AVAILABLE: AUGUST

RELEASE DATE: OCTOBER 31, 2018

Details were softer than the (slightly) stronger-than-expected 0.1%

headline GDP increase would imply. A 3.2% jump in oil sands pro-

duction won’t likely be repeated to the same extent — the gain re-

traced a similar sized drop the prior month due to transitory pro-

duction disruptions. Similarly, warm weather boosted utilities out-

put for a second straight month. That will reverse as temperatures

return to normal. Activity outside of those components was little

changed. Manufacturing, retail, and wholesale sales all dipped

lower, broadly in line with earlier-released monthly sales reports for

the sectors with other services components posting trend-like in-

creases on balance.

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

2012 2013 2014 2015 2016 2017 2018

Real GDP % change, month-over-month

Source: Statistics Canada


CANADA’S JOBS DATA TELL A FAMILIAR

STORY: HEALTHY LABOUR MARKET, DISAP-

POINTING WAGE GROWTH

LATEST AVAILABLE: OCTOBER

RELEASE DATE: NOVEMBER 2, 2018

Employment rose 11k in October as a jump in full-time em-

ployment was partially offset by lower part-time employ-

ment. Year-to-date job gains have all been full-time. Job

growth was driven by the services sector, particularly busi-

ness, building and support services and wholesale and re-

tail trade. The unemployment rate returned to a cycle low of

5.8%. The decline was partly due to labour force participa-

tion, though the participation rate for 25-54 year-olds rose

to a record high. Wage growth for permanent employees

slowed to 1.9% from as high as 3.9% earlier this year.

CANADIAN RETAIL SALES UP 0.2% IN SEP-

TEMBER

LATEST AVAILABLE: SEPTEMBER


Retail sales rose 0.2% in September with gains in 6 of 11

subsectors. Excluding price effects, retail volumes were up

a slightly stronger 0.5% following three consecutive monthly

declines. For Q3 as a whole, sales volumes were up an

annualized 1.5%. That is well below last year’s 5.7% pace

which was the best since 2004.

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Unemployment rate% of labour force


-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2012 2013 2014 2015 2016 2017 2018

Retail sales% change, month-over-month



CANADIAN HOUSING STARTS BACK

ABOVE 200K IN OCTOBER



Some bounce-back in new building activity was to be

expected. Three straight monthly declines from an out-

sized recent peak of 247k in June had left housing

starts tracking below the pace of new building permit

issuance. Indeed, the 206k starts in October is still be-

low the 225k per-month of new permits issued over the

three months ending in September — the latest month

available — suggesting there could yet be stronger

building activity in the pipeline.

CANADA POSTED $0.4 BILLION TRADE

DEFICIT IN SEPTEMBER

LATEST AVAILABLE: SEPTEMBER


The Canadian trade balance posted a $0.4 billion deficit

in September — down from a revised $0.6 billion deficit

in August (previously reported as a $0.5 billion surplus).

Exports and import volumes both declined although non

-energy export volumes were still up 4% from a year

ago. Equipment imports dipped in September but were

still up solidly in Q3 as a whole.

100

120

140

160

180

200

220

240

260

280

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Housing startsThousands

Source: Canadian Mortgage and Housing Corporation

300

350

400

450

500

550

600

650

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Merchandise tradeC$ billions, annualized


Imports

Exports


CANADIAN CPI UP TO 2.4% IN OCTOBER



CPI inflation ticked up to 2.4% in October from 2.2% in Sep-

tember. A 4.6% m/m increases in airfares — likely reflecting

more methodology/sample changes earlier this year more

than underlying price trends — accounted for part of the

headline gain. The Bank of Canada’s three preferred ‘core’

measures (the trim, median, and common CPI) ticked up on

average to 2.0% from 1.9% in September. They have been

close to 2% for most of the year.

-2

-1

0

1

2

3

4

5

2012 2013 2014 2015 2016 2017 2018

Consumer price index% change, year-over-year


Lastest

month

Previous

month

Year

ago

Real GDP Aug 0.1 2.5

Industrial production Aug 0.1 3.9

Employment Oct 0.1 1.1

Unemployment rate* Oct 5.8 6.2

Manufacturing

Production Aug -0.6 3.3

Employment Oct 0.1 -1.8

Shipments Sep 0.2 7.8

New orders Sep -0.3 10.7

Inventories Sep 0.3 12.2

Retail sales Sep 0.2 3.8

Car sales Sep -3.6 -6.8

Housing starts (000s)* Oct 205.9 221.9

Exports Sep -0.2 15.7

Imports Sep -0.4 8.5

Trade balance ($billlions)* Sep -0.4 -3.3

Consumer prices Oct 0.3 2.4

* Levels are shown for the latest period and the same period a year earlier.

Source: Statistics Canada, RBC Economics Research

% change from:

ECONOMY AT A GLANCE


Concerns about rising protection-

ism and slowing global growth

saw equity markets drop in Octo-

ber. The S&P 500 plunged nearly

7%, its worst monthly perfor-

mance in seven years. Other

global benchmarks saw similar

declines, with the MSCI World

index down 7.4% in October. Vol-

atility resurfaced with the VIX

(volatility index) spiking, though

not to the extent seen in the

selloff earlier this year. Equities

peaked in early October just as

the IMF released their latest economic projections. They marked down their global growth forecasts for this year

and next amid increasing trade barriers and tightening financial conditions that are seen weighing on emerging

markets in particular. Concerns about global growth were also evident in the commodities space with oil prices

falling to six-month lows. That’s one reason the Canadian dollar hasn’t seen much of a boost from the USMCA

trade deal.

While the risk-off move saw some intermittent fixed income rallies, Treasury and GoC yields ultimately ended the

month higher. That’s even as lower oil prices weighed on breakeven inflation rates. A push higher in real yields

comes as the Fed and Bank of Canada show no sign of slowing down their tightening cycles. The BoC is now

indicating rates need to rise to a neutral level, while some Fed officials have indicated monetary policy will eventu-

ally need to become restrictive. That contrasts with Europe, where the ECB isn’t likely to raise rates until later

next year while the BoE remains handcuffed by Brexit uncertainty. Monetary policy divergence between the US

and some of its trading partners saw the greenback gain 2% in October, hitting its highest level in more than a

year. Stress on emerging markets from a higher US dollar and rising interest rates was one of the IMF’s key con-

cerns in their October outlook.

THE HURT FROM RED OCTOBER

FINANCIAL MARKETS

Josh Nye

“The S&P 500 plunged nearly 7%, its worst monthly per-

formance in seven years. Other global benchmarks saw

similar declines, with the MSCI World index down 7.4% in

October.”


FINANCIAL MARKETS

The US economy has been the excep-

tion to slower growth across the G7

this year. Canadian GDP growth has

moderated from last year’s impressive

3% pace, activity in Japan has sof-

tened, and Europe has been hit by

both transitory factors and political

uncertainty. But fiscal stimulus has

helped the US economy accelerate in

2018, even as higher interest rates

and capacity constraints would typical-

ly see growth leveling off at this point

in the cycle. US GDP was up an annu-

alized 3.5% in Q3, building on a 4.2%

gain in Q2 to deliver the best back-to-

back growth in four years. Consumer

spending led the way as a strong job

market, rising wages, and near-record

confidence have Americans opening

up their pocketbooks. The public sec-

tor also provided support, with federal government spending running at its fastest year-over-year pace since

2010. It wasn’t all positive—business investment was softer than expected after strong gains earlier this year.

And net trade was a sizeable drag in Q3, more than retracing the previous quarter’s add when purchasers likely

tried to get ahead of rising import tariffs. But those factors only served to partially offset robust consumer and

government spending.

The question is, how long will this strength be sustained? In the near-term the economy looks set to maintain an

above-trend pace of growth. The household savings rate is healthy and wages are picking up, suggesting contin-

ued momentum on the consumer side. Rising protectionism and higher interest rates present headwinds to busi-

ness investment, but sentiment remains strong and financial conditions are still broadly accommodative. We

doubt Q3’s soft business investment is the start of a trend. And while much of the boost from government stimu-

lus will occur this year, the fiscal impulse will remain positive in 2019. The trade outlook is less rosy—

protectionist measures have failed to rein in the trade deficit and relative strength in the domestic economy points

to imports outpacing exports again next year. On balance, we look for GDP growth to moderate slightly to 2.5%

in 2019 from 2.9% this year—still well above potential growth of around 2%.

MIDTERM ELECTIONS LIMIT PROSPECTS FOR FURTHER TAX CUTS

US Treasuries sold off throughout September and in early October with 10-year yields hitting a seven-year high

of more than 3.20%. Real yields are rising while implied inflation expectations remain at or below highs seen ear-

lier this year. The US economy’s persistent strength seems to have investors thinking the current cycle has plen-

ty of legs. That sentiment was expressed by Fed Chair Powell, who recently said, “there’s no reason to think that

this cycle can’t continue for quite some time.” His comment that rates might eventually rise above ‘neutral’ lev-

US ECONOMY CONTINUES TO LEAD THE PACK

Josh Nye

▲ The US economy has picked up this year while its G7 partners are

seeing more moderate growth.

▲ A strong consumer backdrop and ongoing fiscal stimulus should

keep the US economy growing at a solid pace next year.

▲ The midterm elections featured few surprises and didn’t change

our economic projections.

▲ The Fed’s November meeting was a non-event but December’s

should see another rate hike.

HIGHLIGHTS


els—a view we’ve expressed for some time, but that markets have been slow to price in—also contributed to the

selloff. Even the usually dovish head of the Chicago Fed recently advocated for rates to eventually rise to a slightly

restrictive setting.

The rise in longer-term yields wasn’t matched at the short end. So the curve-flattening trend seen throughout this

year that has cause so much consternation among market watchers has stalled. We don’t see the yield curve invert-

ing over the next year. The combination of investors pricing in more significant Fed tightening, inflation expectations

creeping higher, and plenty of supply to fund government deficits should keep upward pressure on longer-term

yields. We see US 10-year yields ending this year at 3.30% and continuing to rise throughout 2019.

NO SURPRISES IN LATEST FED ANNOUNCEMENT

November’s FOMC meeting was very straightforward—no rate hike and only minor tweaks to the policy statement.

Risks to the outlook remain “balanced,” and further, gradual rate increases are expected. That guidance has become

synonymous with hikes at every other meeting, a pattern we expect will continue with a move in December and four

more rate increases next year. Markets are pricing in less tightening through the end of next year, even relative to

the Fed’s ‘dot plot’ median of three hikes in 2019. We see little reason for policymakers to slow the tightening cycle,

even as fed funds gets closer to most estimates of the ‘neutral’ rate. With unemployment at its lowest in nearly 50

years and the economy still carrying decent momentum, we think inflation risks are tilted to the upside.

-6

-4

-2

2

4

6

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bureau of Economic Analysis, RBC Economics Research

U.S. real GDP Quarter-over-quarter, annualized % change

Forecast

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Federal Reserve Board, RBC Economics Research

Forecast

%

U.S. Target Rate


FINANCIAL MARKETS

Canada’s economy extended its

growth streak to seven months with

August GDP rising 0.1%. But the in-

crease was narrowly based, led by a

rebound in oil production following

supply outages in July. Manufacturing,

wholesale and retail trade were all

lower in the month. Thanks to earlier

momentum, GDP is still tracking close

to a 2% annualized pace in Q3. Sof-

tening retail sales and homebuilding

activity suggest the household sector

once again provided less support than

in recent years. But we think a further

pickup in business investment and

another add from net exports provided

enough offset to keep the economy

growing at a trend-like pace. On net

we think GDP growth will average 2%

over the second half of the year—a

not-too-hot, not-too-cold pace that should please the Bank of Canada given an economy operating at capacity.

CANADIAN BUSINESSES REPORT GROWING CAPACITY PRESSURES

The Bank of Canada’s latest Business Outlook Survey showed another quarter of positive sentiment—and that

was before announcement of the new USMCA deal. Even if the survey was a bit stale in that sense, there were

still some notable takeaways. A common theme was growing capacity pressures. More than half of firms said

they’d have difficulty meeting an unexpected increase in demand. The share of companies reporting labour short-

ages was at a decade high, and the intensity of labour shortages was near a record in Q3. More than a third of

firms surveyed said they intend to respond to capacity pressures by investing and/or hiring over the next year.

The latest CFIB Business Barometer also pointed to capacity issues. The share of firms reporting skilled and un/

semi-skilled labour shortages jumped higher in October. Businesses say those shortages are the most significant

factor restricting their ability to increase sales or production—more than insufficient demand or competitive pres-

sures. These surveys support the Bank of Canada’s conclusion that the economy is operating close to full capac-

ity—if not slightly beyond. That should help keep a floor under inflation, and argues for the BoC to continue re-

moving monetary policy stimulus.

BOC RAISES RATES, DROPS “GRADUAL” FROM FORWARD GUIDANCE

The Bank of Canada raised rates in October for the fifth time in 15 months. The move was fully expected but

Governing Council still managed to surprise markets by shifting their forward guidance. The policy statement no

longer indicated rate increases will be “gradual”—a term that markets associated with the Fed’s rate hikes at eve-

ry other meeting. We think Governing Council conversely wants to emphasize that they will be flexible in raising

CANADA’S ECONOMY KEEPS UP ITS GROWTH STREAK

Josh Nye

▲ Canada’s economy grew for a seventh consecutive month in Au-

gust, one of the better streaks seen this cycle.

▲ Businesses surveys point to growing capacity pressures and labour

shortages in particular.

▲ The BoC no longer indicated rate hikes will be “gradual,” but that

doesn’t necessarily mean they’ll speed up the pace of tightening.

▲ We don’t see the overnight rate reaching a ‘neutral’ setting until

2020.

HIGHLIGHTS


rates, potentially speeding up or slowing down the pace of tightening based on incoming data—particularly how

households are handling higher borrowing costs. While their guidance on the pace of tightening is now less specific,

the ultimate destination is clearer: they indicated the overnight rate “will need to rise to a neutral stance” to keep infla-

tion on target. The BoC estimates ‘neutral’ is in the range of 2.5-3.5%, well above the current 1.75% overnight rate.

That change in language was seen as a hawkish development. Markets are now expecting the overnight will reach the

lower end of that neutral range by the end of 2019.

But we aren’t ready to change our forecast for next year. Sure, the BoC says monetary policy needs to become neu-

tral, but they didn’t give a timeframe for that adjustment. We still think they’ll have to be gradual in removing accommo-

dation given household sensitivity to rising rates. Our forecast assumes higher borrowing costs will weigh on the

household sector a bit more than the BoC has penciled in next year. As such, we only look for two rate increases in

2019. In our view, it won’t be until 2020 that the overnight rate shifts into the central bank’s neutral range.

-10

-8

-6

-4

-2

0

2

4

6

8

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Statistics Canada, RBC Economics Research Forecasts

Canada's real GDP Quarter-over-quarter % change, annualized rate

Forecast

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bank of Canada, RBC Economics Research Forecasts

%

Bank of Canada Overnight RateForecast


FINANCIAL MARKETS

UK GDP growth picked up to a 0.6%

non-annualized pace in Q3, the fastest

in nearly two years. Solid consumer

spending and a rebound in exports pro-

vided much of the lift, while business

investment fell for a third consecutive

quarter. We don’t expect last quarter’s

acceleration will be sustained as strong-

er consumer spending over the summer

has started to fade, while capital spend-

ing continues to be weighed down by

Brexit uncertainty. On the latter, Octo-

ber’s PMI surveys showed deteriorating

sentiment in both the manufacturing

and services industries—the composite

reading is at its lowest since the month

after the referendum—as key Brexit

deadlines draw closer. There have been

bouts of optimism that a deal might be

reached between the UK and EU,

though passage through UK parliament remains another hurdle. Until there is greater clarity, the Bank of England will

remain on the sidelines as they did in November. Economic fundamentals argue for less accommodation—

unemployment is low, wages are rising and core inflation is close to target. Indeed, BoE Governor Carney sounded

somewhat hawkish in his latest comments, noting upside news on pay growth that should support firming price pres-

sures. So if the central bank’s assumption of a ‘smooth’ Brexit transition comes to fruition, we expect they will raise

rates early next year. That scenario would also likely see some release of pent up investment that should help sustain

the economy’s expansion.

MORE TEMPORARY FACTORS WEIGHING ON EURO AREA GROWTH

Euro area GDP growth fell short of expectations in Q3, slipping to a 0.2% non-annualized pace that was the weakest

in four years. Italy’s economy was flat, also a first since 2014, as political uncertainty appeared to weigh on domestic

demand. Activity picked up in France as a number of temporary factors that limited growth over the first half of the

year dissipated, while Spain’s economy continued to expand at a steady rate. Germany’s Q3 GDP is not yet available

but growth looks to have slowed due to disruptions in the auto sector. The trade sector has also provided less support

amid weaker exports to emerging markets. A confluence of transitory factors has weighed on euro area growth this

year—activity should pick up somewhat as those issues fade but we’re not likely to see a return to the last year’s im-

pressive pace. The ECB seems willing to look through transitory wobbles in the data. Draghi indicated in October that

growth was weaker than expected but not enough for the central bank to change their policy path. Asset purchases

should come to an end (on a net basis) after December while policy rates are expected to start moving higher later

next year. But Draghi has also indicated that monetary policy is not on a pre-set course, noting the ECB has options if

the economic situation worsens.

UK SENTIMENT WANING AS BREXIT DEADLINES DRAW CLOSER

Josh Nye

▲ The UK economy picked up in Q3 but business investment contin-

ued to moderate…

▲ …and business surveys point to deteriorating sentiment as Brexit

deadlines approach.

▲ Once again, temporary factors were behind some of the weakness

in Q3 euro area growth.

▲ Australia’s unemployment rate fell to a six-year low but underutili-

zation remains elevated.

HIGHLIGHTS


RBA CONTINUES TO SOUND UPBEAT BUT RATES LIKELY TO REMAIN STEADY

The Reserve Bank of Australia continued to strike a positive tone in November, taking note of stronger GDP growth

over the first half of 2018 and the lowest unemployment rate in six years. They expect the economy will continue to ex-

pand at an above-trend rate going forward, lifted by business investment, exports and government spending. But they

described the household sector as a source of “continuing uncertainty,” a view we share and one that was reinforced

by soft retail sales in Q3. Consumer spending looks to have provided less support to growth over the second half of the

year, and we see that trend persisting in 2019 amid a weaker housing market and limited room for households to dip

into savings. Recent employment trends have been positive but wage growth will likely be slow to pick up as underutili-

zation rates point to more slack than unemployment itself suggests. We continue to think that the process of tightening

capacity translating into greater wage and inflationary pressure will be a slow one—as international experience sug-

gests. As such, the RBA is likely to keep the cash rates steady well into next year, even if they remain optimistic on the

growth outlook.

-3

-2

-1

0

1

2

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Eurostat, RBC Economics Research

% change, quarter-over-quarter

Eurozone real GDP growth

Forecast

-1

0

1

2

3

4

5

6

7

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: ECB, RBC Economics Research

Forecast%

ECB refi rate


CANADA’S HOUSING MARKET STAYS SOFT IN OCTOBER

The mortgage stress test and higher interest rates no doubt were still top-of-mind for homebuyers in October.

Already-soft home resales edged down further by 1.6% from September. The annual rate of increase in

benchmark prices was unchanged at 2.3%.

More than half of local markets saw a monthly decline in resale activity, including Toronto, Montreal, Halifax,

Calgary and Edmonton. Vancouver and Winnipeg bucked the trend with modest increases, though in the case

of Vancouver the number of transactions remained near five-year lows.

After rising in the previous two months, new listings fell 1.1% across Canada, which kept the majority of local

markets in balance. Montreal was among the few markets where sellers had the upper hand in setting prices.

Vancouver’s benchmark price was up only 1.0% from a year ago, a five-year low point. More buying options

have emerged for fewer buyers in the past year—especially in the detached home segment.

In October, annual price increases were strongest in Victoria (8.5%), Hamilton (6.8%), Ottawa (6.6%) and

Montreal (6.3%). The increase in Toronto’s benchmark price accelerated slightly to a rate of 2.6% from 2.0%

in September.

Our view is that the prevailing softness in Canada’s housing market is the new norm—at least for a while. We

expect overall activity to stay in a holding pattern over the coming year and price gains to be limited.

ONE (SMALL) STEP BACK...

Clearly there isn’t much to re-ignite the flame of Canada’s housing market out there at this stage with many buy-

ers still wrestling with the mortgage stress test and rising interest rates. So the news from the Canadian Real Es-

tate Association that home resales took a relatively small step back in October shouldn’t be a big surprise. Nor

should it be worrisome because this is part and parcel of a cooler market. The 1.6% month-to-month drop in activ-

ity recorded in October easily fits our range-bound outlook for the overall Canadian market over the coming year.

CURRENT ANALYSIS ROBERT HOGUE


FORECAST DETAIL - CANADARBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS

= Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019

Household consumption 4.0 4.3 3.1 2.2 1.0 2.6 1.6 2.0 1.8 1.7 1.6 1.7 2.4 3.5 2.1 1.8

Durables 12.2 7.2 -0.6 2.1 1.5 2.1 1.0 1.7 1.6 1.6 1.5 1.5 4.5 6.5 1.8 1.5

Semi-Durables 2.8 6.0 2.3 -0.7 -0.4 4.8 1.2 1.9 1.8 1.6 1.8 1.8 2.2 3.3 1.6 1.8

Non-durables 2.1 5.6 0.4 3.5 -0.5 1.0 1.7 2.5 2.0 1.7 1.7 1.8 1.7 2.6 1.5 1.9

Services 3.0 2.8 5.2 2.0 1.7 3.2 1.8 2.0 1.8 1.8 1.7 1.8 2.2 3.2 2.6 1.9

Government expenditures 4.8 0.8 3.5 3.8 2.6 1.6 2.5 2.5 2.0 2.0 2.0 2.0 2.2 2.3 2.6 2.1

Residential investment 7.1 -1.3 -0.1 13.5 -10.5 1.1 -3.0 -3.0 -3.6 -2.0 -0.5 0.3 3.3 2.9 -0.9 -2.2

Business investment 14.3 7.5 5.9 8.0 11.4 1.9 2.9 2.1 3.0 3.0 4.0 4.0 -9.4 2.8 6.3 2.9

Non-residential structures 5.9 6.7 8.9 4.0 8.2 2.2 2.5 2.2 3.0 3.0 4.0 4.0 -11.5 0.7 5.1 2.9

Machinery & equipment 28.5 8.7 1.6 14.5 16.4 1.4 3.5 2.0 3.0 3.0 4.0 4.0 -6.0 6.0 8.2 3.0

Final domestic demand 4.9 3.2 3.6 4.1 1.7 2.1 1.7 1.8 1.6 1.6 1.8 1.9 1.1 3.0 2.5 1.7

Exports 2.6 6.4 -9.9 3.9 2.4 12.3 0.5 3.5 3.3 2.2 2.3 2.5 1.0 1.1 2.9 3.1

Imports 14.9 4.1 1.3 7.7 4.2 6.5 -4.8 4.0 4.0 1.6 2.5 2.5 -1.0 3.6 3.7 2.3

Inventories (change in $b) 8.9 12.8 18.3 15.8 15.8 14.1 6.8 9.0 11.8 11.3 11.0 10.0 1.0 13.9 11.4 11.0

Real gross domestic product 4.0 4.6 1.7 1.7 1.4 2.9 2.0 2.1 1.9 1.7 1.7 1.7 1.4 3.0 2.1 1.9

OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED

Business and labour

Productivity 2.2 2.6 1.1 1.1 -0.2 0.2 0.8 0.9 1.3 1.0 1.1 1.0 0.6 1.8 0.4 1.1

Pre-tax corporate profits 25.7 35.4 14.5 7.9 0.0 4.6 2.4 1.4 2.0 -0.6 1.9 1.6 -1.9 19.9 2.1 1.2

Unemployment rate (%)* 6.6 6.5 6.2 6.0 5.8 5.9 5.9 5.8 5.8 5.8 5.8 5.8 7.0 6.3 5.9 5.8

Inflation

Headline CPI 1.9 1.3 1.4 1.8 2.1 2.3 2.7 2.3 2.1 2.5 2.3 2.5 1.4 1.6 2.3 2.4

Core CPI 2.0 1.4 1.4 1.6 1.8 1.8 2.1 2.0 2.0 2.4 2.2 2.5 1.9 1.6 1.9 2.3

External trade

Current account balance ($b) -55.9 -59.6 -71.7 -65.9 -69.9 -63.5 -62.3 -60.1 -59.3 -56.9 -56.9 -56.9 -65.4 -63.3 -64.0 -57.5

% of GDP -2.6 -2.8 -3.3 -3.0 -3.2 -2.9 -2.8 -2.7 -2.6 -2.5 -2.4 -2.4 -3.2 -2.9 -2.9 -2.6

Housing starts (000s)* 222 207 223 229 225 219 196 203 198 196 193 192 198 220 211 195

Motor vehicle sales (mill., saar)* 2.07 2.10 2.08 2.05 2.12 2.07 2.05 2.03 2.00 1.99 1.98 1.97 1.98 2.08 2.07 1.98

INTEREST AND EXCHANGE RATES %, END OF PERIOD

Overnight 0.50 0.50 1.00 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.25 2.25 0.50 1.00 1.75 2.25

Three-month 0.52 0.71 1.00 1.06 1.10 1.26 1.59 1.65 1.90 2.15 2.15 2.20 0.46 1.06 1.65 2.20

Two-year 0.75 1.10 1.52 1.69 1.78 1.91 2.21 2.30 2.45 2.45 2.40 2.45 0.75 1.69 2.30 2.45

Five-year 1.12 1.40 1.75 1.87 1.97 2.07 2.34 2.45 2.55 2.65 2.70 2.75 1.12 1.87 2.45 2.75

10-year 1.62 1.76 2.10 2.04 2.09 2.17 2.43 2.60 2.70 2.80 2.90 2.90 1.71 2.04 2.60 2.90

30-year 2.30 2.14 2.47 2.27 2.23 2.20 2.42 2.70 2.80 2.90 2.95 2.95 2.31 2.27 2.70 2.95

Canadian dollar 1.33 1.30 1.25 1.26 1.29 1.31 1.29 1.29 1.28 1.27 1.28 1.28 1.34 1.26 1.29 1.28

*Quarterly averages, level

Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts

GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED

Annual2017 2018 2019


FORECAST DETAIL - UNITED STATESRBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS

= Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019

GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED

Consumer spending 1.8 2.9 2.2 3.9 0.5 3.8 4.0 2.7 1.7 2.3 2.3 1.8 2.7 2.5 2.7 2.5

Durables 1.9 8.6 7.8 12.6 -2.0 8.6 6.9 2.8 2.2 2.3 2.2 1.6 5.5 6.8 5.9 3.2

Non-durables 1.9 4.0 2.3 4.0 0.1 4.0 5.2 3.5 1.9 2.5 2.4 1.8 2.7 2.1 2.9 2.9

Services 1.7 1.7 1.4 2.6 1.0 3.0 3.2 2.5 1.6 2.3 2.3 1.8 2.3 2.0 2.1 2.3

Government spending -0.8 0.1 -1.0 2.4 1.5 2.5 3.3 2.7 2.4 2.4 2.4 2.0 1.4 -0.1 1.7 2.5

Residential investment 11.1 -5.5 -0.5 11.2 -3.4 -1.4 -4.0 0.3 2.0 5.1 4.1 2.2 6.5 3.3 -0.1 1.5

Business investment 9.6 7.3 3.4 4.9 11.5 8.7 0.8 5.7 4.0 3.6 1.6 1.6 0.5 5.3 6.7 3.7

Non-residential structures 12.8 3.8 -5.8 1.3 13.9 14.5 -7.9 5.2 4.0 4.0 2.0 2.0 -5.0 4.6 5.0 2.9

Non-residential equipment 9.1 9.7 9.8 9.9 8.5 4.6 0.4 6.5 3.5 3.5 0.7 0.7 -1.5 6.1 7.0 3.2

Intellectual property 7.9 6.6 1.7 0.7 14.1 10.5 7.9 5.0 4.8 3.6 2.6 2.6 7.5 4.6 7.4 4.9

Final domestic demand 2.6 2.6 1.7 4.0 1.9 4.0 3.1 3.0 2.1 2.6 2.3 1.8 2.3 2.5 2.9 2.6

Exports 5.0 3.6 3.5 6.6 3.6 9.3 -3.5 4.5 1.8 2.8 2.8 2.8 -0.1 3.0 4.3 2.4

Imports 4.8 2.5 2.8 11.8 3.0 -0.6 9.1 0.5 2.5 4.2 3.5 3.2 1.9 4.6 4.4 3.2

Inventories (change in $b) -2.4 11.9 64.4 16.1 30.3 -36.8 76.3 40.0 30.0 32.0 32.0 37.0 23.4 22.5 27.5 32.8

Real gross domestic product 1.8 3.0 2.8 2.3 2.2 4.2 3.5 2.8 1.8 2.4 2.2 1.8 1.6 2.2 2.9 2.5

OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED

Business and labour

Productivity 1.0 1.2 1.5 0.8 0.9 1.4 1.2 1.8 1.8 1.2 1.1 1.0 0.2 1.1 1.4 1.3

Pre-tax corporate profits 3.0 3.6 2.8 3.3 5.9 7.3 8.0 7.0 6.1 3.8 3.2 2.5 -1.1 3.2 7.1 3.9

Unemployment rate (%)* 4.7 4.3 4.3 4.1 4.1 3.9 3.8 3.7 3.7 3.6 3.6 3.6 4.9 4.4 3.9 3.6

Inflation

Headline CPI 2.5 1.9 2.0 2.1 2.2 2.7 2.6 2.5 2.3 2.4 2.5 2.5 1.3 2.1 2.5 2.4

Core CPI 2.2 1.8 1.7 1.8 1.9 2.2 2.2 2.2 2.1 2.1 2.3 2.4 2.2 1.8 2.1 2.2

External trade

Current account balance ($b) -431 -487 -414 -465 -487 -406 -495 -477 -488 -506 -516 -524 -433 -449 -466 -509

% of GDP -2.3 -2.5 -2.1 -2.3 -2.4 -2.0 -2.4 -2.3 -2.3 -2.4 -2.4 -2.4 -2.3 -2.3 -2.3 -2.4

Housing starts (000s)* 1231 1171 1172 1259 1317 1261 1218 1275 1285 1315 1325 1325 1177 1208 1268 1313

Motor vehicle sales (millions, saar)* 17.1 16.8 17.1 17.6 17.1 17.2 16.9 17.3 17.3 17.3 17.4 17.4 17.5 17.1 17.1 17.4

INTEREST RATES %, END OF PERIOD

Fed funds 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 0.75 1.50 2.50 3.50

Three-month 0.76 1.03 1.06 1.39 1.73 1.93 2.19 2.35 2.65 2.90 3.15 3.35 0.51 1.39 2.35 3.35

Two-year 1.27 1.38 1.47 1.89 2.27 2.52 2.81 2.90 3.10 3.25 3.40 3.60 1.20 1.89 2.90 3.60

Five-year 1.93 1.89 1.92 2.20 2.56 2.73 2.94 3.10 3.25 3.40 3.55 3.65 1.93 2.20 3.10 3.65

10-year 2.40 2.31 2.33 2.40 2.74 2.85 3.05 3.30 3.45 3.60 3.70 3.75 2.45 2.40 3.30 3.75

30-year 3.02 2.84 2.86 2.74 2.97 2.98 3.19 3.50 3.65 3.75 3.80 3.85 3.06 2.74 3.50 3.85

Yield curve (10s-2s) 113 93 86 51 47 33 24 40 35 35 30 15 125 51 40 15

*Quarterly averages, level

Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts December 2016

Annual2017 2018 2019


CANADA - US COMPARISONS CURRENT ECONOMIC INDICATORS

FROM

PRECEDING

MONTH

FROM

YEAR AGO

YEAR-TO-

DATE

LATEST

MONTH

FROM

PRECEDING

MONTH

FROM

YEAR AGO

YEAR-TO-

DATE

LATEST

MONTH

Industrial production* 0.1 3.9 1.7 Aug. 0.1 4.1 0.1 Oct.

Manufacturing inventory -

shipments ratio (level) 1.4 1.4 1.4 Sep. 1.3 1.3 1.4 Sep.

New orders in manufacturing -0.3 10.7 1.6 Sep. 0.3 7.5 -0.8 Sep.

Business loans - Banks 1.9 16.0 7.2 Sep. 0.8 5.8 6.8 Oct.

Index of stock prices** -6.5 -6.2 2.2 Oct. -4.0 8.9 9.6 Oct.

Retail sales 0.2 3.8 4.8 Sep. 0.8 4.6 3.5 Oct.

Auto sales -3.6 -6.8 2.9 Sep. 4.5 -11.8 -8.0 Oct.

Total consumer credit*** 0.6 4.2 4.0 Sep. 0.3 4.8 5.1 Sep.

Housing starts 8.5 -7.2 4.9 Oct. 1.5 -2.9 6.5 Oct.

Employment 0.1 1.1 1.2 Oct. 0.4 1.8 1.6 Oct.

Consumer price index 0.3 2.4 1.5 Oct. 0.3 2.5 1.37 Oct.

Producer price index**** 0.1 6.2 0.9 Sep. 0.7 3.4 0.1 Oct.

Policy rate 1.8 1.00 - Oct. 2.3 1.25 - Oct.

90-day commercial paper rates 2.1 1.3 - Oct. 2.3 1.2 - Oct.

Government bonds -

(10 years) 2.4 2.1 - Oct. 3.2 2.4 - Oct.

Seasonally adjusted % changes unless otherw ise indicated. Interest rates are levels.

*The U.S. series is an index.

**Canada = S&P/TSX; United States = S&P 500

***Excludes credit unions and caisses populaires

****Canada's producer price index is not seasonally adjusted

Business

Households

Prices

Interest rates

CANADA US

november 2018 canadian gdp up 0.1% in august on oil sands production rebound the hurt from red...

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