RBC Economics Financial Update Dawn Desjardins

RBC Economics Financial Update Dawn Desjardins

CICA/RBC Q4 2011 Business Monitor Economic Results Overview

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

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

World economy expected to post moderate growth in 2012 Advanced versus emerging economies GDP growth % change, year-over-year 10 8 Forecast 6 4 2 0-2 -4-6 -8 Annual Growth Rates 2010 2011f 2012f Advanced Economies 3.1 1.6 1.2 Emerging and Developing 7.3 6.2 5.4 World 5.1 3.8 3.3 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: IMF, RBC Economics Research 5

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

Policies have been wide-ranging and starting to work Short-term funding spreads Basis points 400 360 320 280 240 Canada U.S Eurozone U.K. 200 160 120 80 40 2007 2008 2009 2010 2011 2012 Source: Bloomberg, RBC Economics Research 7

Debt issuance marginally improved, yields still high Government bond yield spreads Spread over 10-year German Bunds, basis points 4000 3500 3000 2500 2000 1500 1000 500 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

Deficits are big providing little room to manoeuvre Global government deficits % of GDP 4 2 Forecast -2-4 -6-8 -10 Advanced Economies Emerging and Developing Economies 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: IMF, RBC Economics Research 9

Tighter fiscal policy planned Estimates of Fiscal Drag* Percentage points of GDP 4 3 2 1 United States Euro Area Japan United Kingdom Canada Emerging Economies -1-2 2009 2010 2011 2012 *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

Low interest rates will prevent another global downturn Real policy rates: international % change, year-over-year 6 Forecast 4 2 0-2 -4-6 2000 2004 2008 2012 Canada U.S. U.K. Euro Area Source: Statistics Canada, Bureau of Labor Statistics, RBC Economics Research 11

Output gap: international % 6 Output gaps are large 4 2 0-2 -4-6 -8-10 U.S. Euro Zone Canada U.K. 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Bureau of Economics Analysis, Congressional Budget Office, European Commission, Statistics Canada, RBC Economics Research 12

. and unemployment rates elevated Unemployment rate vs 10 year average: international % 5 4 3 2 U.S. Canada Euro Zone United Kingdom 1 0-1 -2-3 -4 2000 2002 2004 2006 2008 2010 Source: Bureau of Labor Statistics, Statistics Canada, Statistical Office of the European 13

High inflation rates won t last given slack, steady commodity prices Headline inflation rate: international Annual % change 5.0 Forecast 4.0 3.0 2.0 1.0 0.0-1.0 2000 2004 2008 2012 Canada U.S. U.K. Euro Area Source: Statistics Canada, Bureau of Labor Statistics, RBC Economics Research 14

Exceptionally accommodative monetary policy = low term rates 10-year bond yields: international % 8 6 Canada U.S. U.K. Euro Forecast 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: FRB, ECB, BoC, BoE, RBC Economics Research 15

China yielding to domestic and foreign pressures 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012 Real GDP: China % change, year-over-year 16 14 12 10 9.1 10.0 10.1 11.2 12.7 14.2 9.8 9.0 10.5 9.3 11.4 12.1 10.5 9.9 9.6 9.7 9.6 Forecast 9.1 8.7 8.4 8 6 4 2 Source: CNBS, Haver Analytics, RBC Emerging Markets Research, RBC Economics Research 16

US economy starting 2012 on firmer footing U.S. real GDP Quarter-over-quarter annualized % change 10 8 Forecasted Values: 6 4 2 0-2 -4-6 Annual Growth Rates 2009 2010 2011f 2012f 2013f -8 Real GDP -3.5 3.0 1.7 2.4 3.0-10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bureau of Economic Analysis, RBC Economics Research 17

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) 400 200-200 -400-600 Private Government -800-1000 2005 2006 2007 2008 2009 2010 2011 2012 Source: Bureau of Labor Statistics, RBC Economics Research 18

However given the substantial surplus labour, rate will fall slowly Unemployment rate: U.S. % 11 10 9 8 7 6 5 4 3 Forecast 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bureau of Labor Statistics, Federal Reserve, RBC Economics Research 19

U.S. households have not fully recovered their losses Household net worth: U.S. Level, Trillions of Dollars 70 65 60 55 50 45 40 35 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Federal Reserve, RBC Economics Research 20

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 Q3-1981 Q2-1990 120 Q2-2001 Q2-2008 115 110 105 100 95 90 Q4- Q2- Q4- Q2- Q4- Q2- Q4- Q2- Q4- Q2- Q4- Q2- Q4-2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 Source: Haver Analytics, Bloomberg, RBC Capital Markets, RBC Economics Research 21

Borrowing costs are low and profit growth strong Corporate bond yields: U.S. Effective yield 10 Corporate profits: U.S. Index, 2008 = 100 180 9 8 7 6 5 4 3 2 1 160 140 120 100 80 60 40 20 2004 2005 2006 2007 2008 2009 2010 2011 2004 2005 2006 2007 2008 2009 2010 2011 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

Businesses investing in capital goods Nonresidential investment: U.S. SAAR, Billions of chained 2005 $ 1600 1400 Forecast 1200 1000 Equipment and Software 800 600 400 200 Structures 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Bureau of Labor Statistics, RBC Economics Research 23

Downdraft from housing nearing an end but don t expect miracles Residential investments: U.S. Contribution to Real GDP Change (%) 0.6 Forecasted values: 0.4 0.2 0.2 0.2 0.0-0.2 0.0-0.4-0.6-0.8-1.0-1.2 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bureau of Economics Analysis, RBC Economics Research 24

Heading into a period of fiscal drag Fiscal assumptions contribution to GDP: U.S. Annual PPT 1.5 1.0-0.3-1.2 0.5 0.0-0.5-1.0-1.5 Budget Control Act Payroll Tax Cuts 2010 Tax Package ARRA Impact 2009 2010 2011 2012 2013 Source: Bureau of Economics Analysis, Macroeconomic Advisers, RBC Economics Research 25

Federal Reserve is committed to keeping interest rates low Interest rates: U.S. % 7 Forecast 6 5 10 Year Bond Yield 4 3 2 1 Fed Funds Rate 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Federal Reserve, RBC Economics Research 26

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 2 1 0-1 -2 U.S. 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Statistics Canada, Bureau of Labor Statistics, RBC Economics Research 27

as increases reflected rise in volatile components WTI oil and food prices Index, 1967=100 US$/barrel 600 500 400 Forecast 160 140 120 100 300 CRB Foodstuffs Index (LHS) 80 200 100 WTI Oil Price (RHS) 60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0 Source: Wall Street Journal, RBC Economics Research 28

1995 96 1996 97 1997 98 1998 99 1999 00 2000 01 2001 02 2002 03 2003 04 2004 05 2005 06 2006 07 2007 08 2008 09 2009 10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Canada to run deficit until 2016-2017 Federal government budgetary balance Billions of dollars Fed budget projection: 30 20 10 0 0.5-10 -20-30 -40-27.4-31.0-17.0-7.5-3.4-50 -60 Excluding savings targeted by the Deficit Reduction Action Plan Source: Department of Finance, RBC Economics Research 29

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 120 100 80 G7 Average 60 40 30.4 20 Canada Germany United Kingdom France United States Italy Japan Source: OECD, RBC Economics Research 30

Fiscal restraint will weigh on growth this year and next Impact of Economic Action Plan on Canadian GDP growth Annual PPTs 1.5 1.0 0.5 0.0-0.5-1.0 2008 2009 2010 2011 2012 2013 Source: Statistics Canada, RBC Economics Research 31

More concern about household finances Household debt-to-income ratio Credit market debt as a % of personal disposable income 180 160 140 U.S. 120 100 Canada 80 60 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: Statistics Canada, Bureau of Economic Analysis, RBC Economics Research 32

Pace of debt accumulation has slowed Household debt growth: Canada % change, year-over-year 12 10 8 6 4 2 0 Mortgage debt Long-term average (1992-2009) Consumer credit Long-term average (1992-2009) -2 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: Statistics Canada, RBC Economics Research 33

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 10 9 8 7 6 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Statistics Canada, RBC Economics Research 34

Canada s labour market shifting gears after robust gains Labour market: Canada SA, Millions 19 Forecast % 9 18 17 Unemployment Rate (RHS) Employment (LHS) 8 16 7 15 6 14 13 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 5 Source: Statistics Canada, RBC Economics Research 35

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 2010 3.3 2011f 2.0 2012f 2.4 2013f 2.2 3 2 1-1 2007 2008 2008 2009 2009 2010 2010 2011 20112012 2012 2013 Source: Statistics Bureau of Canada, Economics RBC Analysis, Economics RBC Research Economics Research 36

Real estate gains will be more moderate in 2012 Home resales: Canada Thousands of units 600 500 400 Home resales Annual percent change 2009 7.8 2010-3.9 2011f 2.2 2012f 0.4 455 300 200 100 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: Canadian Real Estate Association, RBC Economics Research 37

Prices to stabilize after strong gains in 2010/2011 Home prices in Canada Annual % change, detached bungalow benchmark Forecasted values: 14 12 10 Annual percent change Home prices 2009-0.8 2010 8.2 2011f 5.3 2012f 0.5 8 6 4 2 0-2 -4 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: Royal LePage, RBC Economics Research 38

Housing affordability mild deterioration reflects high prices/low rates Housing affordability (Bungalows): Canada % of household income taken up by ownership costs 60 50 40 30 20 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: Statistics Canada, Royal Lepage, RBC Economics Research 39

Bank of Canada worried about effects of global turmoil Interest rates: Canada % 7 Forecast 6 5 10 Year Bond Yield 4 3 2 BoC Overnight Rate 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bank of Canada, RBC Economics Research 40

Strong business balance sheets support investment Canadian capital investment Indexed to real GDP trough (2009-Q2) = 100 150 Forecast 140 Non-residential 130 120 Residential 110 100 90 2006 2007 2008 2009 2010 2011 2012 2013 Source: Statistics Canada, RBC Economics Research 41

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 $ 30 160 25 140 Machinery and Equipment Forecast 120 20 100 15 80 10 60 540 Structures 20 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Statistics Canada, RBC Economics Research Source: Statistics Canada, Economics Research 42

Canada dollar: strong fundamentals, subject to risk appetite Canadian dollar forecast US$/C$ 1.10 Forecast 1.00 Parity 0.90 0.80 0.70 End of period rates 2009 2010 2011 US$/C$ 0.96 1.00 0.98 2012f 1.00 0.60 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bank of Canada, RBC Economics Research 43

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: 4 2 0-2 -4 Annual Growth Rates 2009 2010 2011f 2012f 2013f -6 Real GDP -2.8 3.2 2.3 2.3 2.7-8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Statistics Canada, RBC Economics Research 44

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