[PPT] - Alberta To Remain A Growth Leader May, 2018 Derek Holt Vice PowerPoint Presentation

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Alberta To Remain A Growth Leader

May, 2018 Scotiabank Economics Derek Holt Vice President & Head Of Capital Markets Economics

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Despite Protectionism, World Trade Is Rising

1 2 3 4 5 6 12 14 16 18

World Trade Volume

y/y % change, 3MMA Sources: Scotiabank Economics, Netherlands Bureau for Economic Policy Analysis.

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2 4 6 16 17 18 q/q % change, SAAR Sources: Scotiabank Economics, Bloomberg.

Slower, But Not A Standstill

Canadian Real GDP

CDN Growth Is Softer, But More Diversified

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20 40 60 80 100 98 00 02 04 06 08 10 12 14 16 18

Canadian GDP Diffusion Index

balance of y/y growing industries vs. contracting industries, % share of total Sources: Scotiabank Economics, Statistics Canada.

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1 2 3 NL NB NS PE SK MB ON QC AB BC 2018f 2019f y/y % change Sources: Scotiabank Economics.

Alberta Among Growth Leaders

Alberta Is A Growth Leader, But It Is Still Recovering

3 6 9 12 06 07 08 09 10 11 12 13 14 15 16 17 % of workers unemployed for 27–51 weeks

Net Oil-Producing Provinces: NL, SK, AB Net Oil-Consuming Provinces: PE, NS, NB, QC, ON, MB, BC

Long-Term Unemployment

Sources: Scotiabank Economics, Statistics Canada.

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Alberta Remains A ‘Lightweight’ On Debt

Net Debt by Province

10 20 30 40 50 FY07 09 11 13 15 17

QC BC

% of GDP

NL* PE ON NB NS MB SK AB

* Includes pension promissory notes. Sources: Historical debt: Moody’s Investors Service; Statistics Canada; Scotiabank Economics.

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Canadian Business Investment Is Gradually Mending

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20 40 60

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5 10 14 15 16 17 18

Real Canadian Business Investment

y/y % change Sources: Scotiabank Economics, Statistics Canada. Total ex. oil & gas (2013$), LHS Oil & gas (2013$), RHS y/y % change

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5 10 15 20 25 30 35 40 12 13 14 15 16 17 18

Unweighted Investment Intentions

% balance/ diffusion index Business Outlook Survey Investment Machinery/ Equipment Sources: Scotiabank Economics, Bank of Canada.

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Consumers Are Hanging In, But Spending Has Slowed

1 2 3 4 5 14-Q1 14-Q4 15-Q3 16-Q2 17-Q1 17-q4

Consumers Never Retrenched Before Being Over-Stimulated

q/q % change, SAAR Sources: Scotiabank Economics, Statistics Canada. Real consumption

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90 95 100 105 110 115 12 13 14 15 16 17 18

Canadian Export Volumes

Laspeyres volume index, 2007 = 100 Sources: Scotiabank Economics, Statistics Canada.

Stalled!

Canadian Exports Are Elevated, But Erratic

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Canada Has No Spare Industrial Capacity Left

NAFTA risks aside, they still have businesses to run. Capacity pressures require investing and hiring – and dealing with NAFTA risks if and when they arise.

65 70 75 80 85 90 00 02 04 06 08 10 12 14 16 18

CDN Industry Faces Greater Capacity Pressures

% US capacity utilization rate Sources: Scotiabank Economics, Federal Reserve Board, Statistics Canada. Canadian capacity utilization rate 25 50 75 100 Fabricated metals Primary metals Transportation equip. Computers & electronics Chemical products Food products Machinery Plastics & rubber Wood products Paper products

Capacity Utilization Rates

% Sources: Scotiabank Economics, Statistics Canada. Long

term

avg. 2017Q4

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Canadian Inflation Has Been Rising

1.2 1.4 1.6 1.8 2.0 14 15 16 17 18 y/y % change Sources: Scotiabank Economics, Statistics Canada, BEA.

CDN Core Inflation Rising Faster Than in the US

CA average core inflation US core PCE

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1 2 3 4 14 15 16 17 18 SEPH Hourly Earnings of All Empl.* LFS Hourly Wage Permanent Empl.

Canadian Wage Growth

y/y % change Sources: Scotiabank Economics, Statistics Canada. *weighted hourly earnings of salaried and hourly employees.

Canadian Wage Growth Is Picking Up

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Higher Borrowing Costs

0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 3-month T-Bill 2-year Canada 5-year Canada 10-year Canada 30-year Canada

Canada Yield Curve

Current 17q4 18q4 19q4 % Source: Scotiabank Economics. 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00

Bank of Canada Rate Forecasts

% Sources: Scotiabank Economics, Bloomberg. Scotiabank Economics OIS Market-based expectations (as of May. 8)

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Canada Could Import Negative Bond Market Consequences

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4 % of GDP, Including revise 10 yr April 2018 forecast Sources: Scotiabank Economics, CBO.

A US Fiscal Train Wreck

US fiscal deficits adjusted for tax reforms and funding agreement

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40 80 120 160 04 06 08 10

Iranian Sanctions Drove Oil To The Moon

USD/bbl WTI Sources: Scotiabank Economics, Bloomberg. Brent UN Security Resolution 1696

Iran Pull-Out Risks Overshooting Oil Prices…

1 2 3 4 5 04 06 08 10 12 14 16 barrels per day, millions Sources: Scotiabank Economics, Central Bank of the Islamic Republic of Iran.

Iranian Sanctions Were A Major Oil Shock

Iranian Crude Oil Exports UN Security Resolution 1696 - Iranian Sanctions Iranian Crude Oil Production

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1 2 3 4 5 6 04 06 08 10

Iranian Sanctions Helped To Stop The Fed In Its Tracks

% Federal Funds Target Rate - Upper Bound Sources: Scotiabank Economics, Bloomberg. UN Security Resolution 1696

1 2 3 4 5 6 04 06 08 10

Iranian Sanctions Helped To Drive 10 Year Treasury Yield Lower

yield, % US Generic Govt 10 Year Sources: Scotiabank Economics, Bloomberg. UN Security Resolution 1696

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2 4 6 04 06 08 10

Inflation Turned Lower

y/y % change PCE Deflator Sources: Scotiabank Economics, Bloomberg. Core PCE UN Security Resolution 1696

…With Various Knock-On Effects

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70 80 90 100 04 06 08 10 12 14 16 18

The World Produces More Oil Now

barrels per day, millions Global Crude Oil Production Sources: Scotiabank Economics, Bloomberg, Energy Intelligence.. UN Security Resolution 1696

Is Now Different?

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Oil Prices Are Above Mid-Cycle Project Break-Evens

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 US projects- break even cost Canadian projects- break even cost

Break Even Costs Are Below WTI

US$/bbl Source: Scotiabank GBM Estimates, The Playbook - Eighth Edition.

Break Even Costs Are Below WTI

Source: Scotiabank GBM Estimates, The Playbook - Eighth Edition. WTI Spot Price

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Supply Deficit To Be Addressed By Relaxed Cuts

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1 2 3 4 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 Δ Oil Supply Δ Oil Demand (Inverted) Oil Market Balance Sources: Scotiabank Economics, Scotiabank GBM, IEA, EIA, JODI, OPEC.

Oil Supply Deficits To Persist Following Q1 Demand Weakness

Mbpd F'cast

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Canadian Oil Prices Still at a Discount

USD/bbl Western Canada Select Crude Oil Differential Sources: Scotiabank Economics, Bloomberg.

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10 20 Toronto Saskatoon Edmonton Calgary Halifax Winnipeg Montreal Quebec City Ottawa Moncton Vancouver y/y % change Sources: Scotiabank Economics, CREA, Real Estate Boards.

Alberta's House Prices are Relatively Resilient

Average home sale price

Alberta’s Home Prices Are Now Relatively Resilient

300 350 400 450 500 550 600 10 11 12 13 14 15 16 17 18 000s of units, annualized Sources: Scotiabank Economics, CREA.

National Home Sales

10-year average

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Mortgage Debt Matters, But The Challenge Is Often Overstated

5 10 15 20 25 30 35 40 Owned dwelling with a mortgage Owned dwelling without a mortgage Rented

Two-Thirds Of CDN Households Don't Have a Mortgage

% Title Sources: Scotiabank Economics, Statistics Canada.

Includes households, non-profits and unincorporated business. .

30 40 50 60 70 80 90 92 94 96 98 00 02 04 06 08 10 12 14 16

US Canada

%

Real Estate Equity as % of Real Estate Assets

Sources: Scotiabank Economics, Federal Reserve Board, Statistics Canada.

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10 12 14 16 00 05 10 15

Household Debt-Service Costs

% of PDI Sources: Scotiabank Economics, Statistics Canada.

Stable Debt Service Ratio

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Demographics Support Housing With Alberta Improving

Source: Statistics Canada.

50 100 150 200 250 300 350 400 000s Source: Statistics Canada, Ministry of Immigration, Refugees & Citizenship Canada. Annual Average ImmIgration Proposed Immigration

Proposed Immigration for Canada

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10 20 30 40 50 60 00 02 04 06 08 10 12 14 16 18

Net Interprovincial Migration

000s, 4QMA Sources: Scotiabank Economics, Statistics Canada. BC Ontario Alberta

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Canadians Usually Don’t Default When House Prices Correct

Canada has witnessed some big price corrections since the late 1980s that corresponded with big shifts in the macro environment, notably in Toronto and Vancouver, and yet each time mortgage arrears barely budged. Implication? Originations are at greater risk than charge-offs.

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Toronto 1989- 95 Vancouver 1990-91 Vancouver 1995-96 Vancouver 2008 Toronto 2008- 09 peak to trough change in provincial mortgages in arrears, bps

Mortgage Arrears During House Price Corrections

Source: Canadian Bankers Association, Scotia Economics.

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Toronto 1989- 95 Vancouver 1990-91 Vancouver 1995-96 Vancouver 2008 Toronto 2008- 09 % change

Large House Price Corrections

Source: CREA MLS, Scotia Economics.

trough to peak in provincial mortgages in arrears, bps

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Alberta To Remain A Growth Leader

May, 2018 Scotiabank Economics Derek Holt Vice President & Head Of Capital Markets Economics

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