RBC Economics Financial Update Dawn Desjardins

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1 RBC Economics Financial Update Dawn Desjardins

2 CICA/RBC Q Business Monitor Economic Results Overview

3 Business and Economic Optimism Begin to Stablize 100 % 80 % 60 % 40 % 20 % 0 % National Optimism Business Optimism Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11

4 Key Metric Projections Are Positive And Consistent With Last Quarter 8% 6% 4% 2% 0% -2% -4% -6% -8% Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 Q4 10 Q1 11 Q2 11 Q3 11 Q4 11 Revenue Profit Number of Employees

5 World economy expected to post moderate growth in 2012 Advanced versus emerging economies GDP growth % change, year-over-year 10 8 Forecast Annual Growth Rates f 2012f Advanced Economies Emerging and Developing World Source: IMF, RBC Economics Research 5

6 World economy still faces many risks Share of World GDP Output, 2010 (e) Share of World GDP Output, 2010 (e) Rest of World 35% Rest of World 35% Australia Australia 1% 1% Canada 2% Euro zone Euro zone U.K. 15% 15% 3% Canada 2% China 13% Japan 6% Japan 6% U.K. U.S. 3% 20% U.S. 20% Middle East/Africa 5% China 13% Middle East/Africa 5% -Higher Risk Moderate Risk Lower Risk 6

7 Policies have been wide-ranging and starting to work Short-term funding spreads Basis points Canada U.S Eurozone U.K Source: Bloomberg, RBC Economics Research 7

8 Debt issuance marginally improved, yields still high Government bond yield spreads Spread over 10-year German Bunds, basis points Greece Ireland Portugal Spain Italy 2009-Jan 2009-Jul 2010-Jan 2010-Jul 2011-Jan 2011-Jul 2012-Jan Source: Financial Times, RBC Economics Research 8

9 Deficits are big providing little room to manoeuvre Global government deficits % of GDP 4 2 Forecast Advanced Economies Emerging and Developing Economies Source: IMF, RBC Economics Research 9

10 Tighter fiscal policy planned Estimates of Fiscal Drag* Percentage points of GDP United States Euro Area Japan United Kingdom Canada Emerging Economies *change in the cyclically adjusted general government budget balance Source: International Monetary Fund, RBC Economics Research Source: IMF Fiscal Monitor, September 2011, RBC Capital Markets 10

11 Low interest rates will prevent another global downturn Real policy rates: international % change, year-over-year 6 Forecast Canada U.S. U.K. Euro Area Source: Statistics Canada, Bureau of Labor Statistics, RBC Economics Research 11

12 Output gap: international % 6 Output gaps are large U.S. Euro Zone Canada U.K Source: Bureau of Economics Analysis, Congressional Budget Office, European Commission, Statistics Canada, RBC Economics Research 12

13 . and unemployment rates elevated Unemployment rate vs 10 year average: international % U.S. Canada Euro Zone United Kingdom Source: Bureau of Labor Statistics, Statistics Canada, Statistical Office of the European 13

14 High inflation rates won t last given slack, steady commodity prices Headline inflation rate: international Annual % change 5.0 Forecast Canada U.S. U.K. Euro Area Source: Statistics Canada, Bureau of Labor Statistics, RBC Economics Research 14

15 Exceptionally accommodative monetary policy = low term rates 10-year bond yields: international % 8 6 Canada U.S. U.K. Euro Forecast Source: FRB, ECB, BoC, BoE, RBC Economics Research 15

16 China yielding to domestic and foreign pressures Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q Real GDP: China % change, year-over-year Forecast Source: CNBS, Haver Analytics, RBC Emerging Markets Research, RBC Economics Research 16

17 US economy starting 2012 on firmer footing U.S. real GDP Quarter-over-quarter annualized % change 10 8 Forecasted Values: Annual Growth Rates f 2012f 2013f -8 Real GDP Source: Bureau of Economic Analysis, RBC Economics Research 17

18 Pace of hiring by private companies is accelerating Government and total private payrolls: U.S. 3-month moving average of change in employment (SA, thousands of people) Private Government Source: Bureau of Labor Statistics, RBC Economics Research 18

19 However given the substantial surplus labour, rate will fall slowly Unemployment rate: U.S. % Forecast Source: Bureau of Labor Statistics, Federal Reserve, RBC Economics Research 19

20 U.S. households have not fully recovered their losses Household net worth: U.S. Level, Trillions of Dollars Source: Federal Reserve, RBC Economics Research 20

21 U.S. consumer just doesn t have the fire power this time U.S. Real PCE: Indexed to Pre-recession GDP Peaks 130 Forecast 125 Q Q Q Q Q4- Q2- Q4- Q2- Q4- Q2- Q4- Q2- Q4- Q2- Q4- Q2- Q Source: Haver Analytics, Bloomberg, RBC Capital Markets, RBC Economics Research 21

22 Borrowing costs are low and profit growth strong Corporate bond yields: U.S. Effective yield 10 Corporate profits: U.S. Index, 2008 = Source: Bank of America Merrill Lynch, Bureau of Economics Analysis, RBC Economics Research Source: Bank of America Merrill Lynch, Bureau of Economics Analysis, RBC Economics Research 22

23 Businesses investing in capital goods Nonresidential investment: U.S. SAAR, Billions of chained 2005 $ Forecast Equipment and Software Structures Source: Bureau of Labor Statistics, RBC Economics Research 23

24 Downdraft from housing nearing an end but don t expect miracles Residential investments: U.S. Contribution to Real GDP Change (%) 0.6 Forecasted values: Source: Bureau of Economics Analysis, RBC Economics Research 24

25 Heading into a period of fiscal drag Fiscal assumptions contribution to GDP: U.S. Annual PPT Budget Control Act Payroll Tax Cuts 2010 Tax Package ARRA Impact Source: Bureau of Economics Analysis, Macroeconomic Advisers, RBC Economics Research 25

26 Federal Reserve is committed to keeping interest rates low Interest rates: U.S. % 7 Forecast Year Bond Yield Fed Funds Rate Source: Federal Reserve, RBC Economics Research 26

27 Inflation will not present a problem for policy makers Headline inflation: Canada and U.S. % change, year-over-year 6 5 Forecast 4 3 Canada U.S Source: Statistics Canada, Bureau of Labor Statistics, RBC Economics Research 27

28 as increases reflected rise in volatile components WTI oil and food prices Index, 1967=100 US$/barrel Forecast CRB Foodstuffs Index (LHS) WTI Oil Price (RHS) Source: Wall Street Journal, RBC Economics Research 28

29 Canada to run deficit until Federal government budgetary balance Billions of dollars Fed budget projection: Excluding savings targeted by the Deficit Reduction Action Plan Source: Department of Finance, RBC Economics Research 29

30 However given the small relative size of debt, not of great concern Government net debt to GDP: G7 Net financial liabilities as a % of GDP G7 Average Canada Germany United Kingdom France United States Italy Japan Source: OECD, RBC Economics Research 30

31 Fiscal restraint will weigh on growth this year and next Impact of Economic Action Plan on Canadian GDP growth Annual PPTs Source: Statistics Canada, RBC Economics Research 31

32 More concern about household finances Household debt-to-income ratio Credit market debt as a % of personal disposable income U.S Canada Source: Statistics Canada, Bureau of Economic Analysis, RBC Economics Research 32

33 Pace of debt accumulation has slowed Household debt growth: Canada % change, year-over-year Mortgage debt Long-term average ( ) Consumer credit Long-term average ( ) Source: Statistics Canada, RBC Economics Research 33

34 Large stock of debt creates vulnerabilities if things go wrong Household debt service ratio: Canada Mortgage & nonmortgage interest payments as a % of PDI 11 Forecast Source: Statistics Canada, RBC Economics Research 34

35 Canada s labour market shifting gears after robust gains Labour market: Canada SA, Millions 19 Forecast % Unemployment Rate (RHS) Employment (LHS) Source: Statistics Canada, RBC Economics Research 35

36 6 5 4 Consumers cool pace of spending after 2010 s splurge Personal consumption expenditures: Canada Year-over-year year-over-year % change PCE Forecasted values: Annual percent change f f f Source: Statistics Bureau of Canada, Economics RBC Analysis, Economics RBC Research Economics Research 36

37 Real estate gains will be more moderate in 2012 Home resales: Canada Thousands of units Home resales Annual percent change f f Source: Canadian Real Estate Association, RBC Economics Research 37

38 Prices to stabilize after strong gains in 2010/2011 Home prices in Canada Annual % change, detached bungalow benchmark Forecasted values: Annual percent change Home prices f f Source: Royal LePage, RBC Economics Research 38

39 Housing affordability mild deterioration reflects high prices/low rates Housing affordability (Bungalows): Canada % of household income taken up by ownership costs Source: Statistics Canada, Royal Lepage, RBC Economics Research 39

40 Bank of Canada worried about effects of global turmoil Interest rates: Canada % 7 Forecast Year Bond Yield BoC Overnight Rate Source: Bank of Canada, RBC Economics Research 40

41 Strong business balance sheets support investment Canadian capital investment Indexed to real GDP trough (2009-Q2) = Forecast 140 Non-residential Residential Source: Statistics Canada, RBC Economics Research 41

42 Business invest to boost capital stock Non-financial Nonresidential corporate investment: liquidity: Canada Canada Cash SAAR, & Billions deposits of as chained a % of GDP 2002 $ Machinery and Equipment Forecast Structures Source: Statistics Canada, RBC Economics Research Source: Statistics Canada, Economics Research 42

43 Canada dollar: strong fundamentals, subject to risk appetite Canadian dollar forecast US$/C$ 1.10 Forecast 1.00 Parity End of period rates US$/C$ f Source: Bank of Canada, RBC Economics Research 43

44 Canada s economy: volatile in 2011, to maintain momentum in 2012 Canada's real GDP quarter-over-quarter % change, annualized rate 8 6 Forecasted values: Annual Growth Rates f 2012f 2013f -6 Real GDP Source: Statistics Canada, RBC Economics Research 44

45 Disclaimer The material contained in this report is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part, without express authorization of the copyright holder in writing. The statements and statistics contained herein have been prepared by RBC Economics Research based on information from sources considered to be reliable. We make no representation or warranty, express or implied, as to its accuracy or completeness. This publication is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities. Registered trademark of Royal Bank of Canada. Royal Bank of Canada. 45

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