Economic outlookTrump: Taxes, Trade &

TreasuriesMay 29, 2017

Douglas Porter, CFAChief Economist and Managing Director

BMO Financial Group

OTTAWA15th Annual CIFPs Conference

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Good:

Tax cuts/reform

More infrastructure spending

Less regulation

Not-so-good:

Protectionism

Immigration uncertainty

Restrained by budget deficit and Congress

President Trump’s economic platform

A mix of “good-for-growth” and “not-so-good-for-growth”

Now: “Wreak havoc”

Lumber tariff

Dairy “disgrace”

Problem with energy exports

Aerospace

+ Border tax?

+ Tax competitiveness challenge

US gives notice on NAFTA talks

Canada/US trade relations

Then: “Tweak NAFTA”

February 13, 2017

Nov Jan Mar May

2½-yr high

1.7

1.9

2.1

2.3

2.5

2.7

Bonds(10-year US Treasury yield : %)

Nov Jan Mar May

Record

vs C$

vsMexican

Peso

Broad¹

95

100

105

110

115

US dollar(November 1, 2016 = 100)

Nov Jan Mar May

Election Day

Record

2000

2100

2200

2300

2400

2500

Stocks(S&P 500)

¹ Broad trade-weighted dollar

2016–17

Markets: No longer as Trumped up(as of May 25, 2017)

Sources: ¹ The Conference Board, ² National Federation of Independent Business, ³ National Association of Home Builders

75

100

125

150

175

14 15 16 17

United States ( January 2014 = 100)

Confidence booster… still

Consumer Confidence¹

Housing Market Index³post election

Small Business Optimism Index²

Highest since

2005

2000

2004

0.5

1.6

1.7

1.9

1.9

2.0

2.1

2.8

6.8

6.9

(e)

(e)

(e)

(e)

-1.1

-2 0 2 4 6 8

Brazil

Russia

Japan

Euro Area

Australia

US

UK

Canada

Mexico

India

China

Real GDP

Average growth 2000-10: 4%

(y/y % chng)

Global GDP: Mixed and still sluggish

15 16 17 18World 3.4 3.1 3.2 3.3Emerging markets 4.2 4.1 4.1 4.2G7 1.9 1.5 1.8 1.9

2017:Q1

(e) = estimate [Canada: BMO Economics, other: Bloomberg]

US

Canada

forecast-5.0

-2.5

0.0

2.5

5.0

04 06 08 10 12 14 16 18

Real GDP

Canada rebounds: Should outpace US this year

(y/y % chng)

North American growth: A better 2017

15 16 17 18Canada 0.9 1.4 2.5 1.9US 2.6 1.6 2.1 2.5

Canada: 2017:Q1 = BMO Economics estimate

US

Canada

forecast

4.4%

10.0%

4.4%

[33-year low]5.8%

8.7%

6.5%

4

5

6

7

8

9

10

06 08 10 12 14 16 18

Lack of workers

Unemployment rate (percent)

Jobless rates: US still falling… Canada improving again

Greece 23.2 Spain 18.2 Italy 11.7 France 10.1 Portugal 9.8 Canada 6.5 Ireland 6.4 Australia 5.7 UK 4.6 US 4.4 Germany 3.9 Japan 2.8

US recession forecast

Nominal

Real²

0

40

80

120

160

70 75 80 85 90 95 00 05 10 15

Crude oil price¹

Long-term average price = $55 (today’s dollars)

(US$/bbl)

Oil price collapse in perspective

¹ West Texas Intermediate ² April 2017 US dollars

Source: ² BMO Economics forecasts

-2.5

0.5

1.3

1.4

1.8

2.3

2.4

2.6

2.7

2.8

-5 0 5

NL

NB

PE

NS

SK

QC

MB

ON

AB

BC

2017²

-3.8

-1.0

0.9

1.4

1.7

1.9

2.4

2.4

2.6

3.7

-5 0 5

AB

SK

NS

NB

QC

NL

MB

PE

ON

BC

2016

¹ Oil producers: Alberta, Saskatchewan, Newfoundland and Labrador

Real GDP – Canada (y/y % chng)

Regional outlook: Ch-Ch-changes

Oil producers¹

2017:“Toronto and surrounding cities are in a housing bubble”

– BMO Economics2016:“Party will end in the Toronto and Vancouver housing markets this year”

– Canadian bank2015:“Canada is in serious trouble”

– Deutsche Bank 20152014:“Why Canada isn’t immune to a US-style housing crash”

– Maclean’s2013:“Inside the great real estate crash of 2013”

– Maclean’s2012:“Canada’s housing crash begins”

– Canadian Business2011:“Canada’s housing bubble deemed close to bursting”

– CBC News2010:“Canada’s housing bubble: An accident waiting to happen”

– CCPA2009:“Why Canada’s housing bubble will burst”

– The Tyee2008:“Canada’s housing bubble could soon burst”

– US investment firm

Canada

Housing: Bubble Trouble?

-2.6

-0.9

2

2

1.8

3.5

3.7

4.0

11.4

19.8

31.7

$339,000

$469,000

$372,000

$294,000

$357,000

$393,000

$998,000

$534,000

$889,000

-5 0 5 10 15 20 25 30 35 40

Saskatoon

Calgary

Edmonton

Winnipeg

Montreal

Ottawa

Vancouver

Canada

Toronto

Existing home prices¹

Governments move to cool market

Canada

Canadian house prices: Location, location, location

Averageprice

(y-t-d avg)

¹ HPI composite benchmark where available ² Average price (y-t-d)

(y/y % chng : nsa : as of April 2017)

33% gapActual

Trend

150

300

450

600

750

900

00 03 06 09 12 15 18

Average sale price

Homes – Greater Toronto Area ($ 000s)

Toronto home prices: Any questions?

-5

0

5

10

15

05 07 09 11 13 15 17

Debt growth²(y/y % chng)

0.6

0.8

1.0

1.2

1.4

1.6

1.8

90 95 00 05 10 15

Debt ratio(ratio to personal disposable income)

Debt ratio at record highs, more to come¹ Households, nonprofits and unincorporated businesses ² Consumer credit and residential mortgages only

Households¹

Canadian consumers: “Vulnerabilities are elevated and rising”

Canada

US

crossover

Canada

US

Sources: Federal and provincial budgets/fiscal updates

-1.4

-0.5

-2.5

0.01

0.3

-0.6

0.6

0.0

-1.2

-0.8

-3.2

0.1

-$28.5 bln

-$9.9 bln

-$0.8 bln

$0.00 bln

$0.14 bln

-$0.2 bln

$2.5 bln

$0.0 bln

-$0.8 bln

-$0.7 bln

-$10.3 bln

$0.3 bln

-3.75 -3.00 -2.25 -1.50 -0.75 0.00 0.75 1.50

Federal

All provinces

Newfoundland and Labrador

Prince Edward Island

Nova Scotia

New Brunswick

Quebec

Ontario

Manitoba

Saskatchewan

Alberta

British Columbia

Budget balance

Quebec: Before GF transfers

Canada (% of GDP)

Provincial deficits: Some progress, some trouble

surplusdeficit

– FY17/18

(e) = estimate ¹ Source: Federal Budget 2017

forecast¹

(C$ blns : lhs)

(e)

(% of GDP : rhs)

-9

-6

-3

0

3

-60

-40

-20

0

20

80 90 00 10 20

Federal government budget balance Fiscal 17/18 deficit $28.1 bln

Strengthening economy provides upside versus budget assumptions

Little in the way of new measures, but “infrastructure” spending detailed

Deficits persist through forecast horizon

Debt/GDP stable

Canada

Budget 2017: Beauty (economy) and Beast (deficit)

¹ (to March 2017)

-15

-65

-348

CanadaMexico

China

-375

-300

-225

-150

-75

0

75

85 95 05 15

Goods trade balance with… (US$ blns : 12-mnth ms)

United States

US trade trends

Exportsto:

Importsfrom:

Totaltrade

Canada 270.1 284.7 554.8

Mexico 234.0 299.3 533.3

China 120.1 468.0 588.1

(US$ blns : 12-mnth total)¹

line: weekly averages dots: daily closes forecasts: BMO Economics

parity

Poloz takes over at BoC(June 1, 2013)106.1¢

68.7¢

74.2¢

60

70

80

90

100

110

11 12 13 14 15 16 17

Trade uncertainties, housing worries, oil

Canada

Canadian dollar: Where next?

Canadian dollar (US¢ : as of May 25, 2017)

Bank of Canada Governor

Stephen Poloz

Year-end 2016 74.5 2017 75.0 2018 78.5

¹ Average of three new core inflation measures

0.2

1.2

1.6

1.9

2.2

2.6

2.7

4.1

0 2 4 6

Japan

China

Canada

Euro Area

US

India

UK

BrazilTotal

Core¹ 1.4%

1.6%

-3.0

-1.5

0.0

1.5

3.0

4.5

09 11 13 15 17

forecast

Total

Core

1.9%

2.2%

-3.0

-1.5

0.0

1.5

3.0

4.5

09 11 13 15 17

Consumer price index (y/y % chng)

Inflation edging up… except in Canada

United States Canada Total CPI(latest month)

Consumer price index – Canada

Inflation and deflation

Deflationary Bread -7.3%

Fresh fruit -6.2%

Fresh vegetables -5.9%

Home entertainment equipment -5.3%

Beef -4.8%

Sports equipment -4.2%

Women’s clothing -2.8%

Dairy and eggs -1.5%

Electricity -1.3%

Coffee and tea -1.1%

Inflationary Gasoline 15.9%

Books 7.3%

Air fares 3.9%

Cigarettes 3.9%

Home insurance 3.6%

Health care services 3.3%

Property taxes 2.8%

Tuition fees 2.8%

Child care 2.2%

Beer 2.1%

(y/y % chng : as of April 2017)

Overall CPI: 1.6%

Up 4.8% y/y in late May

Down 5.1% y/y in Ontario

Canada

US

0

1

2

3

4

5

6

7

07 09 11 13 15 17

10-year bonds

forecast

Canada

US0

1

2

3

4

5

6

7

01 04 07 10 13 16

Overnight rate

Record spreadBoC: On hold

Interest rates: More US rate hikes coming

Canada US Current 1.46 2.25 End-2017 1.80 2.60 End-2018 2.35 3.00

(% : as of May 25, 2017)

Canada US Current 0.50 0.75-1.00 End-2017 0.50 1.25-1.50 End-2018 1.25 2.00-2.25

-6.0

0.8

1.9

3.7

5.2

5.3

5.6

6.6

7.8

8.8

15.3

15.6

-10 0 10 20 30

Russia

TSX

Australia

Japan

UK

China

Brazil

DJIA

S&P 500

Germany

Nasdaq

India

-11.3

0.4

1.8

7.0

7.5

8.0

9.5

13.4

14.4

17.5

37.5

52.2

-20 0 20 40 60

China

Japan

India

Australia

Nasdaq

Germany

S&P 500

DJIA

UK

TSX

Brazil

Russia

Equity markets (% chng)

Global stocks: Tables turn

20162017 year-to-date

(as of May 25, 2017)

Canadian economy:Worst of the oil shock overBetter 2017 outlook

US economy:Trump policies a wildcard

Global economy:Stronger in 2017Geopolitics: North Korea, Syria

Financial markets:Fed hikes could pressure risk assets in 2017Trump disappointment a risk

Uncertainties loom: EU elections, Brexit

Outlook in a nutshell