Transcript No Slide Title

THE ECONOMIC &
INVESTMENT OUTLOOK
KEY ISSUES
• Global demand decelerating, but still
expanding at a healthy pace
• U.S. economic growth down a notch
• Canadian economy still adjusting to
stronger dollar
GLOBAL EXPANSION SLOWING,
BUT WILL REMAIN ROBUST
WORLD ECONOMIC GROWTH, 1970-2006
8
Per cent change in real GDP
Average growth rate in real GDP,
1970-2004: 3.7%
7
6
5
4
3
2
1
0
70
72
74
76
78
80
82
84
86
88
90
Forecast by TD Economics as at March 2005
Source: International Monetary Fund, TD Economics
92
94
96
98
00
02
04
06
U.S. EXPANSION BROADLY BASED
U.S. INSTITUTE FOR SUPPLY MANAGEMENT:
PURCHASING MANAGERS' INDEXES
70
Index
Index
Non-Manufacturing
65
70
65
60
60
55
55
50
50
45
45
Manufacturing
40
40
35
35
96
97
98
99
00
01
Last month plotted: May 2005;
Source: Bloomberg, U.S. Institute for Supply Management
02
03
04
05
U.S. EMPLOYMENT VOLATILE
U.S. LABOUR MARKET
400
300
Thousands of jobs
Net Job Change in
Non-Farm Payrolls
200
100
0
-100
-200
Last month plotted: May 2005
-300
Jan. Apr.
2002
Jul.
Oct.
Jan.
2003
Apr.
Jul.
Oct.
Jan. Apr.
2004
Seasonally-adjusted data; Source: U.S. Department of Labor
Jul.
Oct.
Jan. Apr.
2005
OIL PRICES REMAIN HIGH
REAL AND NOMINAL OIL PRICING
100
2005 U.S. dollars
2005 U.S. dollars
90
100
90
Inflation-adjusted oil price
WTI Crude oil prices divided by core CPI
80
80
70
70
60
60
*55.01
50
50
40
40
30
30
20
20
10
10
Nominal WTI oil price
0
0
1974
1979
1984
1989
1994
1999
*Last Plotted: June 14, 2005 price of West Texas Intermediate (WTI) crude oil
Core CPI: Consumer Price Index excl. food and energy
Source: International Monetary Fund, The Globe and Mail, U.S. Dep't of Labor
2004
TWIN DEFICITS DRIVING U.S. DEPENDENCE
ON FOREIGN CAPITAL
U.S. TWIN DEFICITS*
4
Per cent of nominal gross domestic product
Federal Budget Balance
2
0
-2
-4
Current Account Balance
-6
-8
96
97
98
99
00
01
02
03
04
05F
06F
*Current account data are for calendar years; budget data are for fiscal years; budget forecasts
are from U.S. Congressional Budget Office (CBO) Jan. 2005 Budget and Economic Outlook;
current account forecasts are by TD Economics as at March 2005;
Source: U.S. Bureau of Economic Analysis, CBO
HIGH CONSUMER INDEBTEDNESS WILL TAKE
EDGE OFF CONSUMPTION GROWTH
U.S. HOUSEHOLD DEBT
16
Per cent of pers. disp. income
Per cent of pers. disp. income
Total Household Debt
(right scale)
120
14
Debt-Service Payments*
(left scale)
100
12
80
10
8
60
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
* Debt payments consist of the estimated required payments on outstanding mortgage and
consumer debt; Last plotted:Q1-2005 for total household debt & Q4-2004 for debt-service
payments; Source: U.S. Federal Reserve Board, U.S. Department of Commerce
PROFIT REBOUND DRIVING INVESTMENT
U.S. CORPORATE PROFITS AND BUSINESS INVESTMENT
35
30
25
Per cent
Per cent
Forecast
Business Investment*
(left scale)
15
14
13
20
12
15
11
10
10
5
9
0
8
-5
-10
-15
Corporate Profits**
(right scale)
-20
7
6
5
82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
*Annualized quarterly per cent change in non-residential fixed investment; **Corporate profits
as a share of nominal GDP. Forecast by TD Economics as at March 2005
Source: U.S. Bureau of Economic Analysis
U.S. ECONOMIC GROWTH TO TAPER OFF
U.S. REAL GROSS DOMESTIC PRODUCT (GDP)
10
Annualized quarter/quarter per cent change (%)
Forecast
8
7.4
Average annual growth
2004 4.4%
2005 3.6%
2006 3.2%
6
4.2
4.1
4
4.5
4.0
3.8
3.3
3.5
3.5
3.5
3.6
3.1
3.1
2.7
2.5
Q3
Q4
1.9
2
0
Q1 Q2
2003
Q3
Q4
Q1 Q2
2004
Q3
Q4
Forecast by TD Economics as at May 2005
Source: U.S. Bureau of Economic Analysis
Q1 Q2
2005
Q3
Q4
Q1 Q2
2006
MIXED SIGNALS ON U.S. INFLATION
U.S. INFLATION MEASURES
Y/Y % Change
3-Month Ann. %
Change
Core CPI (to May 05)
2.2
2.2
Core PCE (to April 05)
1.6
2.2
Core PPI (to May 05)
2.6
1.6
Unit Labour Costs* (to Q1-05)
4.3
3.3
Benefit Costs (to Q1-05)
5.8
4.3
*Unit Labour Costs are for non-farm business
Source: Bureau of Economic Analysis, Bureau of Labour Statistics
FED TO STICK WITH MEASURED RATE
HIKES IN NEAR TERM
U.S. FEDERAL FUNDS RATE
7
Per cent
Per cent
7
Forecast
6
6
5
5
4
4
3
3
2
2
1
1
0
0
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Actual data to June 15, 2005; Forecast by TD Economics as at May 2005
Source: U.S. Federal Reserve Board
Jan. 06
Jan. 07
CANADIAN JOBS ARE PLENTIFUL
CANADA: EMPLOYMENT RATE
64
Per cent
63
62
61
60
59
58
57
56
55
54
76
78
80
82
84
86
88
90
92
Last plotted: May 2005; Source: Statistics Canada
94
96
98
00
02
04
06
RED-HOT HOUSING MARKET WILL SLOW
CANADIAN HOUSING STARTS
250
Thousands of units
Thousands of units
250
Forecast
200
200
150
150
100
100
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Data are for end of period; Forecast by TD Economics as at March 2005
Source: CMHC
EXPORTS STILL STRUGGLING
WITH STRONGER LOONIE
CANADIAN DOLLAR AND REAL NET EXPORTS*
110
Index: 1992=100
Per cent of GDP
8
Trade-Weighted
Canadian Dollar
(left scale)
6
100
4
90
2
80
Real Net Exports
(right scale)
0
70
-2
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
* Real exports minus real imports; Last plotted: Q1-2005; Source: Statistics Canada
05
COMMODITY PRICES TO REMAIN HIGH
CANADIAN DOLLAR AND COMMODITY PRICES
120
US$ TDCI Index: 1992=100
C$ in US cents
TD Commodity
Price Index*
excluding energy
(left scale)
110
90
85
Canadian Dollar
(right scale)
80
100
75
90
70
80
65
Forecast
70
93
94
95
96
97
98
99
00
01
02
03
60
04
05
06
* Index of Canadian resource commodity prices; Forecast by TD Economics as at May 2005;
Most recent data: May 2005; Source: Bank of Canada
CANADIAN ECONOMY TO GROW
WEAKLY IN NEAR TERM
CANADIAN REAL GDP
Annualized quarter/quarter per cent change (%)
8
Average annual growth
2004 2.9%
2005 2.7%
2006 3.2%
6
5.0
3.6
4
3.5
3.2
3.1
2.6
2.1
2
2.3
3.4
3.2
3.3
3.4
Q1 Q2
2006
Q3
Q4
3.2
2.0
1.3
0
Forecast
-2
-1.2
Q1 Q2
2003
Q3
Q4
Q1 Q2
2004
Q3
Q4
Q1 Q2
2005
Q3
Q4
Forecast by TD Economics as at May 2005; Source: Statistics Canada
OUTPUT GAP HAS BEEN VIRTUALLY CLOSED
CANADA'S OUTPUT GAP
Actual Real GDP Less Potential Real GDP
Per cent
3
Forecast
Full Capacity
2
Excess Demand
1
0
-1
Excess
Supply
-2
-3
-4
Actual data to Q1-2005
-5
91
92
93
94
95
96
97
98
Forecast by TD Economics as at May 2005
Source: Statistics Canada, Bank of Canada
99
00
01
02
03
04
05
06
CORE INFLATION TO GRADUALLY EDGE UP TO 2%
CANADIAN CONSUMER PRICE INFLATION (CPI)
5
Per cent change year/year
Per cent change year/year
Forecast
Bank of Canada
Core CPI
ex. 8 most
volatile items
4
5
4
3
3
2
2
1
1
Total CPI
0
0
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Actual data to April 2005; Forecast by TD Economics as at March 2005
Source: Statistics Canada
Jul-06
BANK OF CANADA TO KEEP RATES LOW
BANK OF CANADA OVERNIGHT TARGET RATE
7
Per cent
Per cent
7
Forecast
6
6
5
5
4
4
3
3
2
2
1
1
0
0
Jan. 00
Jan. 01
Jan. 02
Jan. 03
Jan. 04
Jan. 05
Actual data to June 15, 2005; Forecast by TD Economics as at May 2005
Source: Bank of Canada
Jan. 06
Jan. 07
BOND YIELDS TO RISE...BUT NOT MUCH
CANADA - NOMINAL 3-MONTH T-BILL RATE & 10-YEAR
GOVERNMENT BOND YIELD
22
Per cent
22
20
3-month T-bill Rate (left scale)
20
18
10-yr. Gov't Bond Yield (right scale)
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
Actual data to: May 2005; Forecast by TD Economics as at May 2005; Source: Bank of
Canada, Global Insight
REAL INTEREST RATES HISTORICALLY LOW
CANADA - REAL 3-MONTH T-BILL RATE & 10-YEAR
GOVERNMENT BOND YIELD*
12
Per cent
12
10
10
8
8
6
6
4
4
2
2
0
0
-2
-2
Real 3-month T-bill Rate (left scale)
Real 10-yr. Gov't Bond Yield (right scale)
-4
-4
-6
-6
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
04
06
*Nominal 3-mth. T-bill Rate and 10-yr. Gov't Bond Yield deflated by Core CPI; Actual data to:
May 2005; Forecast by TD Economics as at May 2005; Source: Bank of Canada, Global Insight
PROFIT GROWTH WILL BE MODEST
U.S. CORPORATE PROFITS & EQUITIES
Indexes: Q1-1990=100
500
Indexes: Q1-1990=100
450
Fcst
.
S&P500
500
450
400
400
350
350
300
300
250
250
200
200
150
150
Pre-Tax Corporate
Profits
100
100
50
50
0
0
90
91
92
93
94
95
96
97
98
99
00
01
02
Last actual: Q1-2005; Forecast by TD Economics as at March 2005;
Source: U.S. Bureau of Economic Analysis, Global Insight
03
04
05
06
CANADIAN DOLLAR A KEY RISK TO OUTLOOK
CANADIAN DOLLAR
92
US cents
C$/US$
1.087
Forecast
88
1.136
84
1.190
80
1.250
76
1.316
72
1.389
68
1.471
64
1.563
60
1.667
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Data are for end of period; Forecast by TD Economics as at April 2005
Source: Bank of Canada
WHAT IS FAIR VALUE FOR THE LOONIE?
APPROACHES TO AN ANCHOR FOR THE DOLLAR
Productivity Gap: Canada/U.S.
Total Labour Compensation Gap: Canada/U.S.
0.77-0.835
0.84
Purchasing Power Parity (PPP)
Statistics Canada
0.85
OECD (2002)
0.81
IMF
0.83
Penn World Table - University of Pennsylvania (IMF)
0.85
Big Mac PPP (The Economist )
0.85
Latté PPP (The Economist )
0.82
TD Economics
www.td.com/economics