September 2019Andrew Grantham, Executive Director & Senior Economist

Wrong-Footed

He Said, Xi Said 1

“We cannot continue to allow China to rape our

country, and that’s what they’re doing.”

“China has total respect for Donald Trump and for

Donald Trump’s very, very large brain.”

“There are some bored foreigners, with full

stomachs, who have nothing better to do than point

fingers at us.”

Slowing Global Trade (L)

Exposes Open Economies to Greatest Deceleration (R)2

-4

-2

0

2

4

6

8

2017 Q

1

2017 Q

3

2018 Q

1

2018 Q

3

2019 Q

1

Global Trade Volume

(% SAAR)

0

10

20

30

40

50

-2 -1 0 1

GDP Acceleration/Deceleration vs 2017 (%-pts)

Exports as

% GDP

US

Jpn

GerS.Kor

Ita

Aus

Cda

Source: CRB, National Statistics Agencies, CIBC

New Tariffs Will Slow China More Than Desired (L)

Beijing Can’t Keep Up Pace of Fiscal Rescue (R)3

-8

-7

-6

-5

-4

-3

-2

-1

0

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019F

China Advanced Countries

General Government Cyclically Adjusted Balance

(% GDP)

Source: National Statistics Agencies, Bloomberg, CIBC

4.5

5.0

5.5

6.0

6.5

7.0

Curr

ent

Rate

(Q

2)

Min

us

Impact

of

new

and h

igher

tarr

iffs

China GDP (% Yr/Yr)

Target Range

Interest Rate Cuts Haven’t Worked (L)

Eurozone Needs Germany to Take the Brake Off Debt (R)4

6

7

8

9

10

11

12

-1

0

1

2

3

4

5

Mar-

03

Nov-0

5

Jul-

08

Mar-

11

Nov-1

3

Jul-

16

Mar-

19

German 10YYield (L)German HHSavings Rate (R)

% %

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

2018 2019 2020 2021

CIBC base case - Debt Limitdeficit in 2020, higher in 2021+Germany Allows Debt-BrakeLimit Deficit by 2021Current Policy

EZ Fiscal Stimulus/Drag (%-GDP)

Source: Eurostat, European Commission, IMF, CIBC

US Yield Curve: the Grim Reaper? 5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1985 1990 1995 2000 2005 2010 2015

Diff, 2 Year-3 Month Gov. Bond Yield (%-Pts)

Only Five of 16 Indictors in Negative Territory 6

Source: BEA, BLS, Census, Markit, Bloomberg, CIBC

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

Exis

ting h

om

e s

ale

s

Housi

ng S

tart

s

Auto

Sale

s

Consu

mer

Conf.

Core

Dura

ble

Ord

ers

New

hom

e S

ale

s

Const

r Spendin

g

Export

s

HH

Incom

e

Init

ial Cla

ims

Core

Reta

il S

ale

s

Manf.

Pro

ducti

on

Unem

plo

ym

ent

ISM

Payro

lls

Hours

Correlation Between Negative Trends and Recession

Months by IndicatorCurrently Negative

Government Spending Caps - Raised 7

Source: CBO, CIBC

19.5

20.0

20.5

21.0

21.5

2019F 2020F 2021F

Prior With Raised Spending Caps

US Gov. Outlays (% of GDP)

Bond Yields Rise As Mid-Cycle Ease is Concluded

Well Before Fed Tightens 8

Source: Federal Reserve, CIBC

-1.0

-0.5

0.0

0.5

1.0

1.5

Aug-98 Dec-98 Apr-99 Aug-99 Dec-99

Interest Rates Changes During A Mid-Cycle Ease (%)

US 10yr Fed Funds

2020 Marks a Mid-Cycle Growth Nadir

But 2021 Is Still Below 2014-18 Trend9

Avg 2014-18 2017A 2018A 2019F 2020F 2021F

World* 3.6 3.8 3.6 3.1 2.9 3.3

US 2.5 2.4 2.9 2.2 1.7 2.1

Canada 1.9 3.0 1.9 1.6 1.4 1.9

Euroland 1.9 2.4 1.9 1.0 0.6 1.2

UK 2.1 1.8 1.4 1.0 0.4 1.4

Japan 1.0 1.9 0.8 1.2 0.9 1.1

China 6.9 6.8 6.6 6.2 5.8 5.9

* at Purchasing Power Parity

BoC: Playing Up Trade Impact on Canada 10

“Business investment contracted

sharply after a strong first quarter,

amid heightened trade uncertainty”

“escalating trade conflicts and related

uncertainty are taking a toll on the

global and Canadian economies”

But…Domestic Spending a Bigger Contributor to Slowdown Here 11

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

Domestic Consumption

Other (net trade, investment, inventories)

Contribution to GDP Growth Change Since 2017

(%-pts)

Source: National Statistics Agencies, CIBC

Canada-China Trade Tensions Mainly a Provincial Story 12

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

Sask Man N&L Alb NB Ont BC Que PEI NS

Change in China Exports as % GDP

(Jan-Jul 2019 vs 2018)

Source: Statistics Canada, CIBC

Canada’s Q2 Growth is a Head Fake 13

-0.20.00.20.40.60.81.01.21.4

Min

ing,

Oil &

Gas

Real Est

ate

Whole

sale

Public A

dm

in

Tra

nsp

ort

Healt

h

Agri

c.

Educati

on

Pro

f, S

ci &

Tech

Fin

ance Insu

rance

Accom

m.

Const

.

Oth

er

Info

& C

ult

ura

l

Reta

il

Art

s, E

nt

& R

ec.

Manf.

Adm

in &

Wast

e

Uti

liti

es

Estimated Q2 Contribution to Growth By Industry (%pts)

Alberta Eases

Mandated Cuts

Source: Statistics Canada, CIBC

Household Savings Historically Low (L)

Particularly in Ontario (R)14

0

3

6

9

12

15

18

21

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018

Household Savings Rate (%, 4 Qtr. MA)

Lowest Since 1961

Source: Statistics Canada, Ontario Finance, CIBC

0

1

2

3

4

5

6

7

8

9

2003 -

Q1

2004 -

Q4

2006 -

Q3

2008 -

Q2

2010 -

Q1

2011 -

Q4

2013 -

Q3

2015 -

Q2

2017 -

Q1

2018 -

Q4

Quebec

Ontario

Household Savings Rate (%)

Harsh, But Not Unprecedented, Restraint in Ontario (L)

There Has Been Wiggle Room in the Past (R) 15

-1.2

-0.8

-0.4

0.0

0.4

0.8

2012/13 -

2016/17

(Budget

2013 P

roj.

)

Actu

al (2

012/13 -

2016/17)

Budget

2019 (

2019/20-

2023/24 p

roj.

)

Avg % Yr/Yr Program Spending

-6

-4

-2

0

2

4

6

8

10

12

14

1995 1999 2003 2007 2011 2015 2019 2023

Real Program Spending

5Y Average

% Yr/Yr

Forecast

Source: Ontario Finance, CIBC

Exports and Capital Spending Have Been Serial Disappointments 16

Source: Bank of Canada, CIBC

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

Cons. Housing Gov't Bus. Fixed Inv. Exports

2012 2013 2014 2015 2016 2017 2018 2019

Difference Between Bank of Canada's Initial and Final

Estimate of GDP Contribution (%)

Capacity Additions Have Run Ahead of Needs (L)

Pointing to Disappointments in Future Capital Spending (R)17

80

85

90

95

100

105

110

Manufacturing Indexes (2000 = 100)

Production Capacity

0.0

0.1

0.2

0.3

0.4

2020F 2021F

BoC CIBC

Bus. Fixed Inv. Contribution to Real

GDP Growth (%pts)

Source: Statistics Canada, CIBC

Canadian Exports Have Fallen Short

vs. Foreign Demand Measure18

0

1

2

3

4

5

Total Non-Energy Non- Commodity BoC Non-Commodity

Foreign DemandMeasure*

Real Export Growth Since Beginning of 2017

(%, SAAR)

Source: Bank of Canada, CIBC

Canadian Housing Data Starting to Recover 19

-25

-20

-15

-10

-5

0

5

10

15

Unit Home Sales Housing Starts Dwellings UnderConstruction

Year-Over-Year Change (%)

End-2018 Latest

Source: Statistics Canada, CMHC, CIBC

Overbuilding? Not so Obvious in Ontario 20

4000

5000

6000

7000

8000

9000

10000

11000Jan-1

0

Mar-

11

May-1

2

Jul-

13

Sep-1

4

Nov-1

5

Jan-1

7

Mar-

18

May-1

9

Newly Completed and

Unabsorbed Units

Approx. 2000

Increase

-200

0

200

400

600

800

1000 Change vs 2015-17 Average

Source: CMHC, CIBC

Canadian Inflation Closer to Target Today… 21

0.0

0.5

1.0

1.5

2.0

2.5

EZ US (corePCE)

AUS(trimmed

CPI)

UK Cda (3 coreavg)

1Y ago Latest

Core Inflation % Y/Y (CPI ex-food/energy unless stated)

Source: National Stat. Agencies, Bloomberg, FRED, CIBC

…and over the Past Decade 22

-2.0

-1.6

-1.2

-0.8

-0.4

0.0

0.4

UK (CPI) Canada (CPI) US (PCE) Eurozone(HICP)

Japan (CPI)

Actual Price Level Relative to Central Bank Target Since 2010 (CAGR, %)

Source: National Stat. Agencies, Bloomberg, FRED, CIBC

Key Takeaway 23

For inquiries regarding financing, cash management,

investment or other banking services for municipalities,

please contact:

Steve Kuwahara, Market Vice-President and Head of

CIBC’s Public Sector and Not-for-Profit Group, email

steve.kuwahara@cibc.com, tel 416-980-6320

Key Takeaway (2) 24

For Canada, slower growth is mainly

domestically, not globally-driven

25

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