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Economic Insights
April 29, 2015
ECONOMICS
Avery Shenfeld
(416) 594-7356
[email protected]
Benjamin Tal
(416) 956-3698
[email protected]
Andrew Grantham
(416) 956-3219
[email protected]
Not-So-Super Cycle
by Avery Shenfeld
Even if growth has nearly stalled in the first
quarter, Canada is still in the expansion phase
of what has already been, for North America
at least, a fairly long cyclical upswing. But
for a number of reasons, this is shaping
up to be a not-so-super cycle for overall
growth, and particularly, for commodities
tied to global conditions.
To our south, the US economy has
made much faster progress towards full
employment than one might have expected,
at least looking at GDP growth. While that
sounds like a positive story, it isn’t in terms of
what it implies for the American economy’s
sustainable growth pace beyond 2015.
Nick Exarhos
(416) 956-6527
[email protected]
It reflects a trend towards weaker growth in
the size of the workforce, and slower gains in
output per hour, than seen in prior decades,
one that is likely to see little improvement
over the coming years. For the US, two is
the new three in terms of the potential
sustainable pace for real GDP growth (see
pages 9-11).
Canada
has
similar
issues
with
demographics, but at the national level
we’ve been far from the fate of countries
like Japan, where the workforce is headed
for the retirement home. But what hasn’t
been well appreciated is that a significant
proportion of the growth we’ve been seeing
in the age groups that drive new entrants
to the workforce has been driven by nonpermanent residents (see pages 7-8). We
will have to ramp up the pace of permanent
immigration if Canada isn’t to face a new
squeeze on potential growth.
Regionally, there are already demographic
issues that could hamper some provinces’
ability to grow their way out of existing
debt burdens. Indeed, every province east
of Ontario has seen a drop in its workingage population in the past year, and in some
cases, going back several years.
For Canada’s resource sector, slowing
potential growth in Europe, China and
the US, coupled with pressures from new
supply, has made this a less-than-super cycle
for commodity prices (see pages 3-6).
Supply will, of course, adjust to new
pricing realities as the weaker incentives for
additional capital spending on new projects
take hold, but that’s cold comfort for the
firms doing the retrenching in output. To
sustain higher prices and allow room for the
supply switch to be turned back on, we’ll
need the demand lift from somewhat better
global growth.
For 2016-17, there’s still upside, not in
elevating long-term potential growth, but
from the boost to demand inherent in
getting countries that still have substantial
slack, including Europe, China and Japan,
back on track. But we’re not likely to return
to the 5% global GDP pace that backstopped
the best years of this millennium. There’s
still going to be a business cycle for resource
producers, just one that’s not so super in
terms of pricing or demand.
http://research.cibcwm.
com/res/Eco/EcoResearch.
html
CIBC World Markets Inc.
CIBC
World
Markets
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Avenue,
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York,
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856-4000,
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CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
MARKET CALL
•
An anaemic Q1 will likely delay a first Fed hike until July, long enough for upside surprises on Q2
growth indicators and wages to hit the tape. Because equilibrium neutral rates will be lower in this
cycle than in the past, the Fed funds rate path will be below the FOMC’s dot projections.
•
Although it’s come off the boil recently, the US$ will be temporarily re-energized by Chair Yellen
lifting off from zero rates. But the FX drag to US exports, a gentler pace to rate hikes, and improving
economic results in the Eurozone should see the dollar shed some of its strength further out.
•
By setting a low bar in the first half of the year in its updated projections on the Canadian economy,
the Bank of Canada has reduced the chances that growth disappointments will push it to cut rates
once again. The continued pass-through from a weaker C$ onto core inflation, and still-narrow
economic slack, will also mean that Governor Poloz will be in position by mid-2016 to take back any
easing in policy provided in 2015.
•
A re-tightening cycle in Canada after 2015 will be executed very slowly with the C$ in mind, as
the Bank tries to limit the loonie’s appreciation. The loonie has gathered greater-than-anticipated
strength from a wait-and-see approach from Poloz, but a competitive exchange rate will be needed
for Canada to regain manufacturing capacity, and give a lift to non-energy exports.
INTEREST & FOREIGN EXCHANGE RATES
2015
END OF PERIOD:
2016
28-Apr
Jun
Sep
Dec
Mar
Jun
Sep
Dec
CDA Overnight target rate
98-Day Treasury Bills
2-Year Gov't Bond
10-Year Gov't Bond
30-Year Gov't Bond
0.75
0.65
0.65
1.51
2.12
0.75
0.65
0.65
1.60
2.20
0.75
0.70
0.70
1.75
2.30
0.75
0.70
0.90
1.90
2.50
0.75
0.80
1.20
2.00
2.60
1.00
1.05
1.40
2.20
2.70
1.25
1.20
1.60
2.60
2.85
1.25
1.20
1.70
2.65
3.05
U.S. Federal Funds Rate
91-Day Treasury Bills
2-Year Gov't Note
10-Year Gov't Note
30-Year Gov't Bond
0.125
0.01
0.56
1.96
2.65
0.125
0.05
0.75
2.30
2.60
0.625
0.55
1.05
2.75
2.90
0.875
0.75
1.35
2.70
3.15
0.875
0.75
1.30
2.70
3.25
0.875
0.75
1.50
2.75
3.50
1.125
0.95
1.55
3.10
3.60
1.375
1.15
1.80
3.30
3.65
Canada - US T-Bill Spread
Canada - US 10-Year Bond Spread
0.64
-0.44
0.60
-0.70
0.15
-1.00
-0.05
-0.80
0.05
-0.70
0.30
-0.55
0.25
-0.50
0.05
-0.65
Canada Yield Curve (30-Year — 2-Year)
US Yield Curve (30-Year — 2-Year)
1.47
2.09
1.55
1.85
1.60
1.85
1.60
1.80
1.40
1.95
1.30
2.00
1.25
2.05
1.35
1.85
EXCHANGE RATES
0.83
1.20
119
1.10
1.53
0.80
0.95
2.90
15.23
0.79
1.27
123
1.05
1.45
0.73
0.98
3.25
14.75
0.78
1.29
126
1.04
1.46
0.72
1.01
3.15
14.70
0.79
1.26
125
1.08
1.49
0.75
0.99
3.13
14.83
0.81
1.24
123
1.12
1.52
0.77
0.96
3.18
14.53
0.81
1.23
120
1.15
1.55
0.79
0.94
3.22
14.09
0.82
1.22
118
1.18
1.57
0.82
0.92
3.21
13.68
0.81
1.24
116
1.21
1.59
0.85
0.90
3.21
13.27
CADUSD
USDCAD
USDJPY
EURUSD
GBPUSD
AUDUSD
USDCHF
USDBRL
USDMXN
2
CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
Commodities: Looking for the After-Party
Nick Exarhos and Andrew Grantham
The party’s over, and now we’re dealing with the
hangover. A flood of new supply driven by the prior
commodity cycle’s investment boom has hit the wall of
waning demand in emerging markets, particularly China.
And while lower supply will alleviate the pressure placed
on some prices (for example, oil), a slow global growth
environment going forward will ensure that any afterparty in commodity prices doesn’t live up to the hype of
2007 or even 2011.
countries at this stage were still seeing strong population
growth, whereas China’s is already slowing and due to
ease further going forward (Chart 1, right).
The result is that China’s 8% or so average growth in GDP
per capita since the global downturn was well above that
achieved in the US or France (both around 4.5%), and
even South Korea (6.5%), when those economies were
at the same stage of maturity. While recent stimulus
measures should help manage a “soft landing”, the
global economy needs to get used to a slower Chinese
growth pace over the coming decade.
Global Growth: Failing to Step on the Gas
Ever since the end of the recession, forecasters have
been waiting for global growth to accelerate. Yet it
hasn’t happened, and we remain stuck in the 3½%
or so range that we have been in since the early days
of the recovery (Table 1). The fallout from the financial
crisis meant that growth in many developed countries, in
particular Europe, was slow to recover. That has impacted
developing countries as well, with many still reliant on
Western consumers to buy their exports.
Commodities Still Have a Place in Portfolios
A lower speed limit on global growth is already restraining
prices for many commodities. But that doesn’t mean
investors should shy away from that space. The decline
in oil prices, for example, has been more a story of excess
supply than flailing demand. Meanwhile, a continued
recovery in the US housing market should see lumber
prices perform well over the coming years. Out of the
commodities we cover, oil and lumber are two of our
favourite picks for the coming year (Table 2). In addition
to greater potential upside in prices, they also provide
greater diversification for investors than, for example,
metals, which are often highly correlated with each other
and the broad commodity space (Chart 2).
While there are signs that 2015 will be a better year for
the Eurozone and the US, that’s largely because both are
among the highest net beneficiaries of lower oil prices.
Plenty of spare capacity remains in Europe, allowing it
to grow above its long-run “potential” in 2016 as well.
But that’s not the case stateside, where we see growth
easing to a 2.4% pace next year.
For China, somewhat slower growth should be expected
given its development stage. Looking historically at when
other countries were at a similar level of GDP per capita,
the 7% growth rate target Chinese authorities have set
for this year doesn’t appear all that elevated (Chart 1,
left). There’s one big difference, however. Most other
Chart 1
China Slightly Ahead in Growth Rates (L),
But Without Demographics to Back it Up (R)
10
Avg. Real GDP
Growth (% Yr/Yr)
8
Population Index
Start Year = 100
125
6
4
Table 1
135
115
2
2.2
2.4
2.9
2.4
EZ
-0.4
0.9
1.7
2.0
China
7.7
* at Purchasing Power Parity
7.4
6.8
6.6
85
t+18
US
US 1934-53
France 1950-69
Korea 1984-2003
China 2007-26 (F)
95
t+15
3.6
t+12
3.4
t+9
3.3
t+6
3.3
t
World*
105
0
Korea 1984-2003
2016F
France 1950-69
2015F
US 1934-53
2014E
China 2007-2014
2013A
t+3
Global Growth Not Joining the Party
Source: OECD, IMF, CIBC
3
CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
Chart 3
Demand Effects Only Partly Responsible (L);
US Rig Efficiency Topping Out (R)
Drop in WTI Since Jun-14
0
US Rig Effeciency
(Weighted Average)
-20
0.3
0.0
-30
-0.3
5yr
10yr
-40
-0.8
%
-50
Est Demand
Effect
Nov-13
2yr
bbl/day
Actual
Decline
Feb-15
0.5
-0.5
300
290
280
270
260
250
240
230
220
210
200
-10
0.8
Nov-14
1.0
Aug-14
1.3
May-14
Correlation to Overall Commodity Complex
Feb-14
Chart 2
Source: Bloomberg, CIBC
Source: Bloomberg, EIA, CIBC
Oil Rout Driven Primarily by Supply
wells offline. With the average shale break-even placed
at around $70/bbl, rig counts in the US have halved from
year-ago levels.
The biggest story this year has been the dramatic
decline in oil. Though crude hasn’t been alone in feeling
the weight of slowing global demand, the principal
component that explains the demand side driving cyclical
commodities shows that the majority of oil’s decline has
been driven off specific supply effects (Chart 3, left). The
shale revolution has driven a near-twofold increase in US
oil production over the past five years, with America now
pumping over 9 mn bbl/day.
And though productivity gains, driven in part by
producers focusing on the highest yielding oil fields and
by technological advances in the hydraulic fracturing
process, have buffered the fall in absolute rig counts,
improvements on that front appear to have reached their
near-term limit. After seeing an upswing as prices initially
tumbled in late-summer 2014, average US rig efficiency
has flat-lined for the past few months (Chart 3, right).
That rapid increase wasn’t matched by a commensurate
rise in worldwide demand, which grew by slightly under
3.5% between 2011 and 2014. The dramatic fall in
prices, however, has meant that American producers have
had to slash investment plans and take more expensive
Crude Imbalance to Narrow by H2
US supply will tail off in the coming quarters, and the
International Energy Agency estimates that there should
be roughly 2 mn bbl/day more in oil demand by the
Table 2
Key Commodities Prices
27-Apr
2012
2013
2014
2015 (f)
2016 (f)
2017 (f)
Oil (WTI)
$/bbl
Natural Gas (Henry)
$/Mn Btu
57
94
98
93
57
68
75
2.48
2.75
3.73
4.35
2.95
3.50
3.75
Gold*
Silver*
$/troy oz
1202
1675
1202
1184
1100
1200
1150
$/troy oz
16.38
30.3
19.5
15.7
15.3
17.6
17.4
Iron Ore (62% Fe)
$/mt
59
129
136
97
59
63
62
C opper
$/lb
2.74
3.62
3.33
3.12
2.75
3.00
3.05
Aluminum
$/lb
0.84
0.92
0.84
0.85
0.84
0.89
0.91
Nickel
$/lb
5.98
7.97
6.82
7.68
7.95
8.26
9.20
Zinc
$/lb
1.02
0.89
0.87
0.98
1.05
1.11
1.11
Lumber**
$/'000 bd ft
255
287
345
338
285
335
350
Potash
$/tonne
305
459
379
297
310
315
315
* end of period,
Source: CIBC
**1st CME Futures
4
CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
Chart 5
1.5
2500
0.5
2000
0.0
1500
1000
fcst
Jan Feb Mar Apr May
-1.0
Jan-15
May-14
Sep-13
-2
0
2
4
6
8
10
12
14
16
3000
1.0
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
YoY, %
2015
Average 2010-2014
$/mmbtu
US Prod Growth (Inv., L)
Henry Hub Price (R)
Source: IEA, CIBC
*Note: Assuming OPEC Supply agerages 30.3 mn bbl/d
Source: Bloomberg, EIA, CIBC
That’s occurring at the same time as Chinese demand,
particularly for steel, slows dramatically, dragging prices
meaningfully lower (Chart 6, right). Our iron ore forecast
matches our expectations for cooler Chinese demand.
fourth quarter of this year than there was in the first,
balancing the global crude market (Chart 4). That rise in
demand will be critical in seeing a sustained recovery in
prices, as production will only be idled until we see prices
ramp back up to producer break-evens. So there’s likely a
longer-term ceiling on prices at around $75/bbl—a level
that we forecast on average for 2017 following a slow
and uneven recovery this year and next.
Copper, and Other Metals, to Face Slower Days
Copper faces many of the same demand headwinds
plaguing iron, but does benefit from a more diverse
set of uses. Furthermore, copper production hasn’t
seen the same type of surge experienced by iron ore.
Ore grades in Chile—the country responsible for a third
of the world’s copper production—are on the decline,
and other potential higher quality mine locations are in
jurisdictions with greater country-specific risk.
Natural Gas Upside Capped by Shale Abundance
The shale revolution has gained infamy in crude markets,
but the horizontal drilling techniques applied to oil
extraction took root in the drilling of natural gas. Growth
in landlocked US natural gas production has kept a lid
on meaningful price appreciation, and recent outcomes
could have been worse had it not been for cold weather
saving the day for producers, bringing inventory levels
slightly below their five-year average (Chart 5, left).
Chart 6
Iron Ore Production Continues to Grow (L),
While Marginal Consumer Slows (R)
Global Iron Ore Production
3400
3200
3000
$/mt
160
140
16
120
12
100
8
2600
4
60
0
40
Feb-15
Aug-14
1800
Feb-14
2000
80
Feb-12
2200
The commodity super-cycle drove massive investments in
expanding iron ore production. With companies hoping
to capitalize on surging emerging market demand, global
production has been on a steady climb (Chart 6, left).
YoY, %
2800
2400
Iron Succumbs to Chinese Slowdown
Mt
20
Aug-13
That’s certainly been a fillip to prices, though over the
longer term, trading in natural gas has been at the mercy
of production, where double-digit annual gains haven’t
been abnormal (Chart 5, right). Continued strong
production trends are reasons we think upside remains
modest in Henry Hub prices, though a strong economy in
the US should provide a solid base of demand.
Feb-13
-0.5
Bcf
Jan-13
3500
mn bbl/d
Jan-11
US Natural Gas Storage Levels
World Oil Market: Supply* minus Demand
Aug-12
2.0
May-12
Oil Demand to Catch Up by Q3
Sep-11
Cold Winter Drives Reduction in Storage (L), But Price
of US North Am. Nat Gas Driven by Production (R)
Chart 4
Chinese Steel Prod (L)
Iron Ore Price 62% Fe
(R)
Source: Bloomberg, US Geological Survey, CIBC
5
CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
Chart 7
Chart 8
Metals Driven by Global Industrial Production Output
Gold Gaining Greenback Sensitivity
120
%
Yr/Yr
%
Yr/Yr
80
40
Dec-14
0.0
25
20
15
-0.1
10
-0.2
5
0
-80
2000 2002 2004 2006 2008 2010 2012 2014
Feb-15
Mar-15
Apr-15
-0.3
0
-40
Jan-15
-5
-0.4
-10
-0.5
-15
-0.6
CRB Metals Index (L)
CPB World Production Volume (R)
-0.7
60-day Correlation: Dollar Index and Gold
Source: CPB, CRB, CIBC
Source: Bloomberg, CIBC
end to 2014 and start to 2015 (Chart 9, left). A bottom
has likely been signaled by a small increase in firsthalf contracted prices (Chart 9, right), though sluggish
demand from Brazil and the US will cap potash’s upside.
That should increase the cost of capital for mining projects
going forward, creating a more constrained supply picture
and seeing copper prices perform slightly better than iron
ore. However, neither are likely to reach prior-cycle price
peaks in the medium term, since cyclical metals still largely
respond to the global industrial production cycle (Chart
7). Though we aren’t bulls on metals in general, supply
restrictions, largely driven by the Indonesian export ban,
have us favouring a nickel price appreciation.
Lumber Prices Underpinned by US Housing
The housing market should be a primary beneficiary of
a healthier US economy, and a vastly improved labour
market more specifically. Improved job prospects among
younger demographics in the US should encourage those
stuck living with relatives to branch off on their own.
And while renting a condo and multiples construction
will remain a larger part of the market than in past years,
new single-family sales—the primary driver of American
lumber demand—have been on a clear uptrend. With
interest rate hikes likely coming at a slower pace than in
past cycles, the US housing upturn shouldn’t be disrupted
and as such we are bullish on lumber in the years ahead.
Yellen Hikes to Cap Precious Metal Gains
Despite whatever delays have been created by a lacklustre
Q1, Fed hikes should be coming sooner rather than later.
The US$ should be a prime beneficiary of that move off of
zero, allowing the greenback to gain against most other
major currencies, including that most ancient median of
exchange, gold. And judging from recent correlations,
gold has been gaining sensitivity to the greenback’s moves
(Chart 8). There’s scope for the dollar to give ground
further out, as policy elsewhere normalizes, but higher
interest rates increase the opportunity cost of holding
non-yielding assets like precious metals. That should limit
gold’s upside further out, while weighing only slightly less
on silver, given its more diverse set of industrial uses.
Chart 9
Heathier Chinese Potash Imports Continue in ‘15 (L),
a Reason to Believe in a Price Bottom (R)
China Monthly Imports (Mt)
1.0
H1 China
Contracted Potash Prices
500
$/mt
0.8
Potash Prices Finding a Bottom
400
0.6
In fertilizer markets, there are some more encouraging
signs regarding Chinese demand. The economic rotation
toward the consumer has been a cause of poorer results
for cyclical commodities. But a more protein-intensive
diet amongst emerging market populations will be a
strong source of potash demand going forward. Though
the breaking of the producer cartel had smacked prices
in recent years, Chinese import shipments saw a strong
300
0.4
200
0.2
100
2013
6
2014
Nov
Sep
Jul
May
Mar
Jan
0.0
0
2015
Source: Bloomberg, CIBC
CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
Non-Permanent Residents—
A Major Demographic Force
by Benjamin Tal
Chart 2
Demographic forces don’t explain everything, but they’re
important. In Canada, it is common knowledge that
immigration accounts for more than three quarters of
population growth. What is less known, is the dramatic
impact of the meteoric ascent in the number of nonpermanent residents (NPRs) on the nation’s demographic
landscape—mainly among young Canadians. From
an economic and policy perspective, non-permanent
residents in general, and temporary workers in particular,
should no longer be seen as marginal and reversible
factors aimed at solving temporary mismatches in
local job markets. Rather, they should be viewed as an
important demographic force capable of influencing and
potentially altering the trajectories of macro-economic
variables such as housing activity and consumer spending.
Young & Non-Permanent
NPRs: Age 18-24
250
000s
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
200
150
100
50
NPRs: Age 18-24
2009-2013
Share in
population
03
04
05
06
07
08
09
10
11
12
13
0
Share in
population
growth
Source: Statistics Canada, CIC, CIBC
Rising Fast
The vast majority (95%) of NPRs are below the age of
45, a key econmic demographic in Canada. The number
of NPRs in the age group 18-24 has risen strongly (note
the acceleration since 2009 in Chart 2, left). While this
group represents only 5% of the total number of that age
group in the population, it accounted for almost 50% of
its growth over the past half-decade (Chart 2, right).
At close to 770,000, the number of non-permanent
residents (NPRs) in Canada is at a record high. The pace
at which this category is growing is also unprecedented.
Over the past decade, the total number of NPRs rose
by no less than 450,000. The composition of the NPR
population is also changing with the share of those with
work permits rising from less than 40% to the current
58%. The fact that most of this advance came at the
expense of the share of refugees in the NPR pie, suggests
more rapid economic contribution from the current stock
of NPRs (Chart 1).
But even more impressive is the tremendous impact of
NPRs on the 25-44 age group. Chart 3 tells the tale. The
number of NPRs in that age category has doubled since
2006 and, in fact, accounted for all the growth in that
Chart 3
NPRs Accounted for All the Growth in Age 25-44
Since 2006
Chart 1
Non-Permanent Residents (NPRs) in Canada
Annual Growth
90
80
70
Distribution (2013)
Age 25-44
200
14.4
%
000s
record
high
60
40
000s
150
150
27.5
%
50
Index 2006=100
Growth: 2006-2013
200
100
100
58.1
%
50
30
50
20
10
0
06 07 08 09 10 11 12 13
Source: Statistics Canada, CIC, CIBC
Workers
Students
Humanitarian
0
Population less
NPRs
NPRs
06 07 08 09 10 11 12 13
7
0
-50
Population
less NPRs
NPRs
Source: Statistics Canada, CIC, CIBC
CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
Chart 5
Chart 4
NPRs: A Significant Offset To Weak Demographics
in Ontario
Contribution of NPR to Population Growth
Age 18-44
(2006-2013)
350%
100
300%
000s
Ontario
2006-2013
50
250%
0
200%
150%
-50
100%
-100
50%
0%
Population less NPRs
NPRs
-150
ONT
BC
CAN
Age 18-24
QUE ALTA SASK MAN
Source: Statistics Canada, CIC, CIBC
Age 25-44
Source: Statistics Canada, CIC, CIBC
age group in the population as a whole. If not for the
rapid growth of NPRs, the number of that economically
important age group in the Canadian population would
have fallen.
As strong as those numbers are, they actually understate
the real tally. The figures presented here are based on
Statistics Canada’s projections derived from 2012 actuals,
rather than data subsequently released by Citizenship
and Immigration Canada (CIC). The total NPR estimate
by Statistics Canada is about 2.4%-pts shy of CIC growth
in 2013. As for 2014, Statistics Canada’s projection of
only a 4.4% growth is also way too weak. Based on
preliminary CIC data (14% growth in new permits and
9% in extensions through three quarters of 2014), and the
absence of any evidence of a spike in return of work visa
holders through this period, it is reasonable to expect an
overall 2014 annual increase in NPRs of no less than 8%.
Uneven Geographical Distribution
The contribution of NPRs is far from uniform (Chart 4). The
most significant impact is in Ontario, with NPRs playing
an enormous role in the growth of the age group 18-44
since 2006. Here the impact is mainly due to the notable
decline in the number of permanent Ontarians in the age
group 25-44, with NPRs providing a significant offset. In
fact, if not for the rise in NPRs, that age group would have
experienced a dazzling 120,000 decline since 2006 (Chart
5). The impact on British Columbia is also significant with
NPRs accounting for all the growth in that age group.
Recent changes to the temporary foreign workers
program might lead to a modest impact on the “at risk”
pool of workers that is subject to a “certification” of local
worker availability, and new limits on permit extensions.
This group consists of just over 29,000 of the “lower
skilled” who are neither live-in caregivers nor agricultural
workers. Even if all these workers lost their eligibility
in 2015 (which they will not), this would reduce the
stock of valid visa holders by only about 3.7%. We can
expect a spike of this subset of lower skilled to receive
Permanent Resident Status (there has already been a spike
in applications), and in those that obtain temporary visas
in other program categories.
It is not a coincidence that those two provinces are
also the ones to experience long-lasting strong housing
market activity. In fact, given the above demographic
picture, it is fair to assume that NPRs play an important
role in demand for rental units in both provinces—a factor
that contributed to the recent boom in the condo market
in centres such as Toronto and Vancouver.
The impact on Alberta is relatively muted despite the fact
that the skill shortage in the province was one of the
catalysts behind past changes to the temporary workers
program. Atlantic Canada is not represented in the chart
due to the fact that its population aged 18-44 actually
declined during that period, despite a modest offset from
the rise in NPRs.
So ...?
The numbers are simply too large to ignore. NPRs are
a demographic force with significant macro-economic
implications. Any future policy action aimed at limiting
growth in that category should be supplemented by an
offsetting boost to immigration policies.
8
CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
Two is the New Three: The US Economic Speed Limit
Avery Shenfeld and Andrew Grantham
workforce at full employment, and the output per working
hour. If past is prologue, recent years have been signaling
disappointment ahead on both fronts (Chart 1, right).
Equities aren’t a one-year bet, but a play on a multi-year
stream of earnings. That makes growth beyond 2015
now relevant, and in the US, it’s the upside limits to
growth that will begin to cap performance. By the end of
this year, the Fed’s estimate of “full employment”, a 5.05.2% jobless rate, looks to be in sight. If the Fed steers a
perfect track from then on, the economy will be on the
glide path consistent with staying at full employment,
matching what economists call “potential” growth—the
speed limit above which inflation would become an issue.
The exit of disheartened job seekers from active search
slows work force growth in economic downturns. But the
participation declines pre-dated the recession, and didn’t
reverse despite strong hiring and rising job vacancies.
That’s largely because much of the slowdown has been
demographically driven; growth in the “prime-age”
25-55 year-old population is easing off. Each year more
American baby boomers are reaching age 60 or 65 and
opting to retire. Those under 25 are staying in school
longer, a trend unlikely to change given the heightened
competition for skilled jobs.
In decades past, the US could run at 3% or even 3½%
real growth at full employment. But the evidence
suggests that, in terms of the long-term growth path,
two is the new three.
True, there’s still the drop we’ve suffered in participation
rates for prime-age 25-54 year-olds since 2000 (Chart 2,
left). Some of that reflects rising long-term disability.
Incarceration rates also account for about a 0.1% slowing
in the labour force.
That’s a sobering reality that the Bank of Canada has
already come to terms with. The US Fed, for its part,
has been ratcheting down its estimate for long-term
trend growth. Mid-point forecasts from 2011 still set
the speed limit at 2.6%, but most recently a more
conservative 2.1% has been shown (Chart 1, left). But
even that may be a touch too high; last year’s major drop
in unemployment amidst only tepid growth suggests that
2014 potential growth was only 1.65%.
There would still be former construction workers waiting
for homebuilding to recover, or those locked into a
negative-equity mortgage that prevents a move to where
the jobs are. But even if we allowed for a rebound in
the 25-55 part rate, the labour force would settle at
only 0.7% growth (Chart 2, right) due to the ongoing
slowdown in working-age population growth.
Potential growth can be broken down into two
components: the growth in the size of the available
Chart 1
Chart 2
Fed “Long-Run” Forecasts Move Down (L);
Workforce and Productivity Growth Sluggish (R)
Prime-age Participation Down (L); Workforce
Growth Still Slow Even if Part-rate Recovers (R)
1.6
85
84
0.8
83
0.4
82
1.5
1%
Source: FOMC, CBO, CIBC
0.0
81
01
-0.4
Jan-15
Jan-10
Jan-05
Jan-90
2012
2010
2008
2006
2004
2002
2014
9
Jan-00
80
0%
2000
Date of Forecast
Mar'15
Mar'14
Mar'13
Apr'12
Apr'11
Estimate for 2014
Potential GDP
21
2%
Forecast
1.2
17
2.0
Workforce Growth
(% Yr/Yr)
13
Productivity
Workforce
3%
2.5
1.0
Participation Rate
(25-54, %, 12mma)
09
86
Potential GDP
(% Yr/Yr)
4%
05
FOMC "Long-Term"
GDP Forecast
(% Yr/Yr, Midpoint)
Jan-95
3.0
25
Fewer Workers…
25-54 Part Rate
Recovers to 83%
Unchanged Part-Rates
Source: BLS, CIBC
CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
… And Less to Show for Them
Chart 4
Capital Stock Not Deepening in this Cycle
The other driver of potential GDP—productivity—has also
disappointed. Output per hour decelerates in recessions
as businesses hold on to key workers to avoid turnover
costs, but several years into a recovery, it’s usually back in
full bloom. In the US, and across the OECD, this recovery
has paled relative to the prior one in output per hour
(Chart 3). If that didn’t improve, the non-inflationary
speed limit might hold the US economy to as little as
1½% real growth after 2015. So the forces behind this
deceleration and their longevity is critical for investors.
% Yr/Yr
4
Hours
3
Capital Input
2
1
0
Capital spending can boost labour productivity by
providing more or superior equipment to work with.
Economists typically focus in on capital deepening, the
extent to which the growth in the net capital input
exceeds the growth in labour input. On that score, this
cycle has been much weaker than those in decades past,
with no capital deepening at all (Chart 4).
Long-Run Avg 1950-2007
2010-14
Source: BEA, San Francisco Fed, CIBC
sufficient to tilt the economy-wide averages. That was
the case in the 1990s, owing to the leaps achieved by
the information and communications tech (ITC) sector.
Real output is measured on a quality-adjusted basis, so
producing a new chip that is miles ahead of the prior
year’s design shows up as a massive productivity gain.
History suggests that the investment cycle isn’t likely to
quickly get back on its “normal” track, limiting the pickup in productivity. An IMF study found that investment
spending as a percentage of the existing capital stock
tends to see deeper troughs and slower rebounds for
up to a decade after a financial crisis recession than in
other cycles, such as the one tied to the bursting of the
tech bubble. If anything, this cycle has already seen a bit
more improvement than after those past crises (Chart 5),
perhaps helped by aggressive interest rate settings.
The result was a big gain in total factor productivity in
the ITC industry—the output generated not by adding
more labour or capital, but by getting more out of the
same inputs. Then, with a lag, there was a second bump
in total factor productivity outside the ITC sector, with
industries that were intensive in the use of information
and communications technology showing the benefit of
adopting new systems to their workplace.
Other Factors Slowing Productivity
Productivity can also be shifted by changes in the industry
composition of the economy or technological change.
Rapid growth in a highly productive sector can be
This wasn’t just a US story. Most countries showed a
large, one-time lift to productivity growth in the late-
Chart 3
Slower Productivity Growth in US and Across OECD
Investment-to-Capital Ratio Not Out of Line with
Recovery from Financial Crisis
2.5
Productivity Growth (% Yr/Yr)
1.5
Avg 2010-13
1.0
Avg Financial Crises
1989-95
0.5
1.2
1.0
0.0
0.8
-0.5
0.6
-1.0
0.4
-1.5
0.2
-2.0
0.0
Source: OECD, CIBC
10
t+10
t+9
t+8
Source: IMF, BEA, CIBC
t+7
-2.5
OECD
Total
t+6
UK
t+5
EZ
t+4
Canada
t-1
US
2007-13
t+3
1.4
Avg 2004-07
t+2
1.6
Investment-to-capital ratio
(Change vs Pre-recession)
t+1
1.8
2.0
t
2.0
Chart 5
Source: IMF, BEA, CIBC
CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
Chart 6
Chart 7
ICT Sector a Key to Productivity Growth in Late 90’s
and Early 00’s
Growth in Aggregate Hours in Typically LowProductivity Sectors
6
Contribution of ICT Capital Deepening to Output
Growth (%-pts)
Jp
4
2
Chg in Agg.
Hours (mn
2014 vs
2006)
0.6
0.4
0.2
-80
2011
2008
2005
2002
1999
1996
1993
0.0
1990
Sectors Gaining
Hours
3
1
0
-40
Constr
Source: IMF, CIBC
-1
0
40
80
120
-2
Source: BLS, BEA, CIBC
* % chg in GVA minus % chg in aggregate hours worked
come from. “Big data”, robotics and 3-D printing will
aid some sectors, but there doesn’t appear to be any
equivalent to the lift that came from the start of the
internet era.
1990s (Chart 6), but then a fading of that glory in recent
years. That could be due to a maturing tech sector that
makes new equipment or software less revolutionary. R&D
spending across the US private sector has picked up in
recent years, from which there could be payoffs in terms
of the next tech wave.
Additions to labour hours could improve for a short while
as disenchanted prime-age workers return to active job
search, but as we noted, demographic forces will still hold
labour force growth to a 0.7% pace. Add it all up, overall
potential growth looks to run at no better than 2% or so
in the next decade (Chart 8).
One final hurdle for labour productivity is that sectors that
formerly led the economy-wide gains—manufacturing
and information services—have downsized. Total hours
worked in these sectors were still lower in 2014 than
they were in 2006. All of the sectors that have added
labour hours relative to 2006 are those that have trend
(post-1998 average) productivity growth of less than 1%
(Chart 7).
That also implies, however, that the Fed will end up on
a surprisingly shallow path for tightening; our earlier
research found a positive linkage between potential
growth and the neutral rate. Modest growth, but modest
rates will be a mixed bag for equities in the cycle ahead.
Where to from Here?
Chart 8
Looking ahead, while we’re still seeing weakness in
capital equipment orders for now, capital spending
should pick up over the balance of this cycle with an
improvement in economic growth that tightens capacity
use, and raises returns on new investment.
Base Case for 2% Potential Growth in Coming
Decade
4.0%
Potential GDP (% Yr/Yr)
CIBC Forecasts
3.5%
But many of our findings above suggest that we are
unlikely to attain anything better than a 1½% pace for
output per hour. Post-financial-crisis recoveries have
had slower productivity bounces for a decade after the
event. Construction employment is likely to be a major
source of growth as homebuilding comes back to life, a
development that is likely to weigh on a recovery in total
economy output per hour given that sector’s lacklustre
productivity growth trend. There could be an R&D payoff,
but at this point, it’s hard to identify where that would
2%
Productivity
3.0%
2.5%
2.0%
1.5%
1%
Productivity
1.0%
11
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
0.5%
2024
EZ
Manf
2022
0.8
UK
2020
1.0
US
2018
1.2
2016
1.4
Labour Productivity*
Info
5
Serv
Source: CBO, CIBC
Source: CBO, CIBC
CIBC WORLD MARKETS INC.
Economic Insights—April 29, 2015
ECONOMIC UPDATE
CANADA
14Q4A
15Q1F
15Q2F
15Q3F
15Q4F
Real GDP Growth (AR)
2.4
0.8
0.6
0.7
2.7
2014A
2.5
2015F
1.7
2016F
Real Final Domestic Demand (AR)
1.5
0.3
-0.4
-0.6
1.7
1.6
0.9
1.5
Household Consumption (AR)
2.0
1.5
1.8
1.6
1.8
2.8
2.0
1.6
2.6
All Items CPI Inflation (Y/Y)
1.9
1.1
0.7
0.8
1.4
1.9
1.0
2.2
Core CPI Ex Indirect Taxes (Y/Y)
2.2
2.2
2.2
2.1
2.1
1.8
2.2
2.1
Unemployment Rate (%)
6.7
6.7
7.0
7.0
6.8
6.9
6.9
6.6
U.S.
14Q4A
15Q1F
15Q2F
15Q3F
15Q4F
Real GDP Growth (AR)
2.2
0.8
4.2
3.3
2.1
2014A
2.4
2015F
2.9
2016F
Real Final Sales (AR)
2.1
0.9
4.3
3.7
2.4
2.3
2.9
2.6
All Items CPI Inflation (Y/Y)
1.2
-0.1
-0.2
0.4
1.7
1.6
0.5
2.6
Core CPI Inflation (Y/Y)
1.7
1.7
1.7
1.9
2.1
1.7
1.9
2.2
Unemployment Rate (%)
5.7
5.6
5.5
5.4
5.3
6.2
5.4
5.2
2.4
CANADA
Despite some added volatility in Q1 data due to the unseasonably cold weather, the quarter is still set to notch
in a growth pace slightly under 1%. Our full-year real GDP forecasts for 2015/16 are unchanged, though
March’s inflation data suggests that underlying price trends are running hotter than anticipated, likely due to
there being less slack in the economy than previously estimated. That, and the continued pass-through from
the C$, should see core run slightly above 2% this year and next.
UNITED STATES
The US economy is off to a slow start again in 2015, with Q1 GDP tracking only a 1% pace and indicators for
March not showing the sort of pick-up we hoped for in areas such as retail sales and housing construction.
However, solid income growth and still-low gasoline prices are supporting the purchasing power of households,
and should drive an acceleration in real consumer spending and GDP growth in the quarters ahead. For 2015
as a whole, growth is forecast to come in just below 3%, before decelerating to 2.4% in 2016.
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12