Alberta Economic and Financial Market Outlook
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The document provides an economic and financial market outlook for December 2010. It makes the following key points: 1) The global economy has regained balance as growth fears subside. Emerging economies continue to drive growth, while advanced economies are recovering. 2) The US economy is gaining speed and the likelihood of a double-dip recession is now remote. Growth is expected to accelerate to 3.3% in 2011 and 3.6% in 2012 supported by business and consumer spending. 3) European sovereign debt issues pose ongoing risks but overall European growth is expected to continue, albeit at moderate levels of 1.7-1.9% through 2012.
Alberta Economic and Financial Market Outlook
- 1. ECONOMIC AND FINANCIAL MARKET OUTLOOK December 2010 Global economy regains its balance • Growth scare comes to an end Advanced and emerging economies GDP growth • European sovereign debt crisis won’t derail recovery % change, year-over-year 15 • Emerging economies are still hot and driving the global economy World Advanced Economies Forecast • US gains speed making the likelihood of a double dip remote 10 Emerging and Developing Economies • Federal Reserve’s loose monetary policy and government tax pack- age to spur faster growth in 2011 and 2012 5 • Inventory rebuilding will no longer be a driver of US growth • US business and consumer spending to kick it up a notch next year 0 • Canada’s economy blasted out of recession with growth slowing in more recent quarters -5 2004 2005 2006 2007 2008 2009 2010 2011 2012 • The transition to private demand from public support is underway and Canada looks to be further ahead than the US Source: IMF, RBC Emerging Markets, RBC Economics Research • Inflation pressures are muted and the Bank will be in no hurry to raise the policy rate as long as risks to Canada’s trading partners persist • Canadian dollar to appreciate against the US dollar breaching parity early in 2011 Another wave of European troubles hit up against the shores of the global economy with worries about the solvency of Ireland, Spain and Portugal tak- ing centre stage. While the great divide between the performance in the pe- ripheral and core European economies did not prevent another decent quarter for growth, the chasm between the two areas remains deep. Overall European growth is forecast to continue as both business and consumer indicators are consistent with expansion although gains are likely to be moderate going for- ward. Our forecast is that the Eurozone economies will expand by 1.7% in 2010, 1.8% in 2011 and 1.9% in 2012. The UK also surprised to the upside in recent quarters and is on track to grow by 1.8% this year. In 2011, we forecast growth of 2.1% as private demand fills the void created by the government’s austerity measures. The economy will Craig Wright grow at a faster 2.4% in 2012. The real story for global growth is flowing from Chief Economist the emerging economies led by China where growth is forecast at 9.7% in 416-974-7457 2010 and 8.8% in 2011. The IMF forecasts emerging economies will grow by craig.wright@rbc.com 7.1% this year and 6.4% in 2011 while the advanced economies grow by 2.7% and 2.2% respectively. Overall the world economy is projected to grow by Paul Ferley 4.8% this year, 4.2% in 2011 and 4.5% in 2012. Assistant Chief Economist 416-974-7231 The US economy shows renewed vigour paul.ferley@rbc.com The downdraft in US growth in the middle of the year looks to have come to an end with the number of upside surprises in the economic data solidly out- Dawn Desjardins pacing downside surprises. The consensus forecast is for the US economy to Assistant Chief Economist grow by 2.7% in 2010, in line with RBC’s call but down from June’s 3.3% 416-974-6919 projection. The consensus call for 2011 growth has been edging up from No- dawn.desjardins@rbc.com vember’s forecast of 2.4%. Similarly, RBC’s call is that the economy will ex- pand by 3.3% in 2011, an upgrade from our September forecast for growth of Nathan Janzen Economist 3.0%. In 2012, the end of the deleveraging by households and businesses will 416-974-0579 support stronger growth even as the period of government retrenchment begins nathan.janzen@rbc.com with RBC forecasting that the US economy will grow by 3.6%.
- 2. Economic surprise index Consumers still worried but expect improvement ahead Despite the round of stronger than expected activity, US consumers remain in Index level 80 the doldrums. The Conference Board’s measure of confidence shows that con- sumers view current conditions as poor with 46.5% of those surveyed indicat- 40 ing that jobs are still hard to get. However, consumers expect conditions to be somewhat better in six months time with the expectations index rising strongly 0 in November. In the near-term, concerns about taxes, foreclosures, medical costs and jobs continue to undermine confidence. -40 Consumers emerge from hibernation -80 The pace of consumer spending surprised to the upside in the third quarter Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 increasing at a 2.8% annualized pace, the fastest pace of increase since late Source: Bloomberg, RBC Economics Research 2006. The recovery in spending on autos and parts helped propel consumption higher supplemented by an increase in spending on services. Following the extraordinary contractions recorded in 2008 and 2009, we look for consumer Consumer Confidence spending to sustain this firmer pace, a key underpinning of our above- SA, 1985=100 consensus forecast for 2011. We are assuming that the tax package reached in 160 early December will be passed largely in its current form and as such have boosted our consumption profile in 2011 by 0.4 percentage points. The exten- 120 sion of proposed tax cuts for all income-earners and emergency unemploy- ment insurance benefits as well as the payroll tax cut will boost disposable 80 incomes and support a 3.1% rise in consumer spending next year. We look for spending to accelerate further in 2012 and increase 3.4% as debt and net 40 Current Situation worth return to healthier conditions. Consumer Expectations 0 Waiting for a turnaround in housing 04 05 06 07 08 09 10 Even with efforts to modify mortgages and record low mortgage rates, the Source: The Conference Board, RBC Economics Research housing market has been unable to generate a self-sustaining recovery. The temporary uptick in activity on the back of the government’s tax rebate scheme proved short-lived with sales falling back and housing starts easing. Personal consumption expenditure On the upside, recent data suggest that housing market activity is in the proc- 6 Annualized % change, quarter-over-quarter ess of establishing a post-tax credit floor and that the sharp contraction evident in construction spending as recently as the third quarter will not be repeated. 4 Lacklustre sales means that prices have failed to build upward moment and while prices have stabilized recently, they are still 23.5% lower than their peak 2 level on average. Real estate equity was up 7.6% relative to its recent low while financial asset values rose 14.6% as of the end of the third quarter of 0 2010. On balance, households are starting to see their net wealth restored how- -2 ever, even with these gains just over one-third of losses had been recovered mid-year. -4 05 06 07 08 09 10 11 12 Fed taking out all the stops trying to support economy Source: Bureau of Economic Analysis, RBC Economics Research The Federal Reserve has given itself a failing grade in meeting its dual man- date of achieving price stability and full employment. Inflation measures con- tinue to move lower with the core CPI rate falling to 0.6% in October, the low- U.S. net wealth est on records back to 1959. The core PCE deflator, which is the one that the Fed monitors, stands at 0.9%, a record low and about half the pace of their Indexed to peak 100 assumed target of about 2%. The unemployment rate at 9.8% is a shade below its recent high and still stands well above the long-term average of 5.7% which 90 historically reflected full employment. 80 What’s a central bank to do? 70 To mitigate further downward pressure on prices, the Fed launched QE2 on 60 November 3 promising to purchase another $600 billion of US Treasury bonds. The policy is aimed at maintaining interest rates at levels that are low 50 enough to incent households and businesses to access financing. The Federal 00 01 02 03 04 05 06 07 08 09 10 Funds rate is being maintained in the 0% to .25% band and given this latest Source: Federal Reserve Board, RBC Economics Research injection of stimulus, we see little chance that the Fed will be comfortable rais- ing the policy rate until 2012. More likely, the process for unwinding policy 2
- 3. stimulus will begin with the Fed allowing maturing bonds to roll off its bal- ance sheet with the next step being the draining of reserves and eventually the U.S. interest rate forecast sales of some of its stock of US Treasury bonds. These policy measures will % exert modest upward pressure on interest rates although increases will be lim- 8 Forecast ited over our forecast horizon. RBC forecasts that the yield on the 10-year US Fed funds 10-year Treasury bond will be 4.00% at the end of 2011 with 2-year rates forecast to 6 finally breach the 1% mark in Q2. In early 2012, we expect the Fed to begin the process to normalize interest rates and boost the Fed Funds target in the 4 first quarter. By year-end 2012, we look for a Funds target of 2.25% with the yield on the 10-year US Treasury note at 4.50%. 2 Business investment will be key to a sustained recovery 0 00 01 02 03 04 05 06 07 08 09 10 11 12 US businesses have engaged in two activities since the recovery began: re- building inventories and investing in equipment and software. These two com- Source: Federal Reserve Board, RBC Economics Research ponents have accounted for between 1.4 and 3.9 percentage points of the quar- terly growth rates recorded over the past five quarters. The estimated 30% jump in pre-tax corporate profits in 2010 and record high cash balances have U.S. nonresidential investment allowed businesses to rebuild their stocks and invest in computers and soft- Indexed to Past Rec ession GDP Troughs 150 ware. The easing of credit standards by financial institutions as indicated in Q1-1982 140 Q1-1991 the Fed’s survey of senior loans officers and low financing costs have also Q3-2001 Forec ast 130 opened the door to business investment. The tax package that is presently Q2-2009 120 winding its way through the US Senate and House includes expensing and 110 bonus depreciation programs that will be supportive of business investment. 100 To account for these changes, we increased our 2011 forecast for non- 90 residential investment by 1.9 percentage points in 2011 and 2.5 percentage 80 points in 2012 to 12.7% and 14.6% respectively. 70 07 07 08 08 09 09 10 10 11 11 12 12 0 0 0 0 0 0 0 0 0 0 0 0 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Slow and winding road back to full employment Private sector payrolls have recovered 1.2 million of the 8.5 million jobs lost Sourc e: Bureau of Economic Analysis, RBC Ec onomics Reseac h during the recession resulting in only a minor decline in the unemployment rate. There are, however, indications that the pace of job gains is set to acceler- ate as businesses may be hitting the limits in terms of utilizing their current U.S unemployment rate workforce. The average workweek has lengthened and overtime hours for % manufacturing are up. One of the more significant developments has been the 12 Forecast steady increase in the hiring of temporary workers. Temporary workers ac- 10 counted for about 26% of the new hiring to-date. The hiring of temporary 8 workers typically leads full-time hiring by 3 months. Initial claims for unem- ployment insurance have also trended lower in recent months. These factors 6 support our call for an acceleration in the pace of job gains in 2011. However 4 even if payrolls increase at a monthly pace of about 240,000 next year as we 2 expect, the immense slack in labour market conditions means this will only reduce the unemployment rate to 9.0% by the end of next year. Additional job 0 gains in 2012 are expected to result in the unemployment rate falling to 8.4% 00 01 02 03 04 05 06 07 08 09 10 11 12 by the end of that year. Source: Bureau of Labor Statistics, RBC Economics Research Recovery will keep trade flowing US import demand has been strong despite the steady weakening in the US U.S. real exports and imports dollar. Export demand also picked up, recording double-digit gains in the early Annualized % c hange, quarter-over-quarter days of the recovery. On balance, the trade sector acted as a drag on the econ- 40 omy’s growth rate and is likely to continue to weigh on growth in 2011 and 30 2012. As the domestic economy establishes a firmer growth trajectory, we 20 look for import growth to remain firm. Continued US import demand will be 10 an important factor supporting the global recovery going foward. Outside the 0 US, economies that are facing fiscal constraints will likely limit purchases of -10 US goods especially if the US dollar trends higher against their currencies as -20 Exports Imports we expect. -30 -40 Canada’s economy taps on the brakes 05 06 07 08 09 10 11 12 After being one of the leading advanced economies moving out of recession Source: Bureau of Economic Analysis, RBC Economics Research (Canada’s GDP rose above its pre-recession peak in the third quarter), real 3
- 4. output hit a rough patch during the summer months resulting in growth of just Canada's real GDP 1.0% in the third quarter. This was a sharp slowing from the 5.25% average pace recorded in late 2009 and early 2010. Still, industrial production stands 9 Annualized % change, quarter-over-quarter more than 8% higher than a year earlier and the number of employed is back 6 Forecast to its pre-recession high. For the year, Canada’s economy is projected to grow by 3.1% in 2010. In 2011 and 2012, RBC forecasts gains of 3.2% and 3.1%. 3 0 Shifting down a gear but staying in drive -3 The mid-year slowdown reflected a pullback in housing investment which fell Annual growth rates 2009 2010f 2011f 2012f after five consecutive quarterly increases and a mild downturn in exports -6 -2.5 3.1 3.2 3.1 which resulted in net trade trimming 4.0 and 3.5 percentage points off the sec- -9 ond and third quarters’ growth rates respectively. Financial conditions remain 05 06 07 08 09 10 11 12 easy and supportive of domestic growth which will be the main engine of the Source: Statistics Canada, RBC Economics Research expansion going forward. The support from inventory rebuilding and govern- ment investment is clearly on the decline and will fade out completely in 2011. Consumers have been a mainstay of the recovery to-date. Going forward the Consumer and business spending pace of consumer spending is likely to slow from 2010’s solid clip with the Contribution to annualized GDP growth slack being taken up by business investment in capital goods, and to a lesser 2.0 Consumption Government BFI extent, non-residential structures. 1.5 Business to be at helm of growth going forward 1.0 Large Canadian firms are facing an embarrassment of riches with profits rising at a double-digit pace, cash balances at all-time highs, improved access to fi- 0.5 nancing and interest rates at very attractive levels. To-date, businesses have 0.0 rebuilt their work force and invested in machinery and equipment. Conditions in the non-residential construction market have also improved although the -0.5 pace of investment is running well below its pre-recession peak. Looking 2010 H2 2011 H1 2011 H2 ahead, survey data shows that businesses are planning to continue to invest in Source: Statistics Canada, RBC Economics Research capital equipment to take advantage of lower prices for imported goods result- ing from the strengthening in the Canadian dollar. Even with increases in re- cent quarters, business investment has fallen short of the previous recovery Liquidity at Canadian private non-financial reflecting the significant levels of unused capacity (the capacity utilization rate corporations stands 3.9 percentage points below its long-term average). As the recovery Cash & short-term sec urities as a % of nominal GDP matures and demand returns to more normal levels, business investment is 30 expected to make a more substantial contribution to the economy’s growth 25 momentum. 20 15 Canadian dollar strength spurs import demand While the terms of trade boost to national income falls well short of the gains 10 generated in the pre-recession days of sustained increases in commodity 5 prices, conditions are much more favourable than during the dark days of the 0 financial market crisis. Import prices are lower than in early 2009 and export 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 prices have started to rise. The persistent strengthening in the Canadian dollar Source: Statistics Canada, RBC Economics Research from its early 2009 low maps closely with the decline in import prices which have fallen by 8% as the Canadian dollar gained 19.4% against the US dollar. As a result, import growth has solidly outpaced exports resulting in the trade Canadian dollar forecast sector acting as a weight on the overall level of GDP output for most of 2010. In 2011, we expect Canada’s dollar will outperform the US dollar once again U.S dollar per Canadian dollar 1.1 although the gains are likely to be relatively limited with C$1 buying US$1.02 Forecast by mid-year. Commodity prices are forecast to remain firm in line with global 1.0 growth setting up for export growth to accelerate. Import demand, in contrast, 0.9 is likely to slow from the heady increases recorded in recent quarters. As a result, the drag from net exports is forecast to lessen and turn to support in 0.8 2011 and 2012. 0.7 Housing market started out strong and then stumbled 0.6 Home sales maintained strong momentum in the early days of 2010 as house- 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 holds raced to beat the implementation of tax changes (in two of the largest Source: Bank of Canada, RBC Economics Research provinces) and a mild tightening in mortgage rules. Expectations that interest rates would eventually head higher also buoyed activity and the pace of sales 4
- 5. continued at a near-record clip. By April however much of this demand had been satisfied and the pace of sales slowed as did prices. Our view is that Affordability Canada housing activity has returned to more sustainable levels with both sales and % of household inc ome taken up by ownership costs 60 prices forecast to post only small increases in 2011. Affordability has im- proved in recent months reflecting the combination of slower price gains and 50 the persistence of very low interest rates which will be enough to stave off a round of sharp declines next year. 40 30 Household debt alert! The sharp rally in the housing market in 2009 and early 2010 resulted in Cana- 20 Std. two-storey Det. bungalow dian consumer debt levels reaching an all-time high relative to income in the Std. townhouse Std. condo third quarter of 2010. Both mortgage and consumer credit growth increased at 10 an above-trend clip although the low interest rate environment prevented a rise 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 in the cost to service this debt. With conditions in the labour market improv- Source: Statistics Canada, Royal LePage, RBC Economics Research ing, and nearly all of the net wealth losses that occurred during the economic and financial market downturn being recovered early in the year, Canadian households continued to take on debt. We expect interest rates will move Canadian net wealth higher in 2011 although remain low relative to historical averages which will Indexed to pre-rec ession peak 110 limit the pressure on household balance sheets. After raising the overnight rate by 75 basis points from its 0.25% trough in the period from June through Sep- 100 tember, the Bank held its policy rate at 1% in the fourth quarter pointing to 90 weaker global growth, softer domestic output and a lack of inflation pressures. Our baseline forecast that the economic recoveries in both the U.S. and Can- 80 ada will be solidly in place and worries about their sustainability will ease 70 sufficiently by the second quarter of 2011, sets up for the Bank to resume 60 gradually increasing the policy rate. With inflation quiescent, the Bank will be in no hurry to remove policy stimulus and we look for a cumulative increase in 50 the overnight rate of 100 basis points in 2011 to 2.0% with another 150 basis 02 03 04 05 06 07 08 09 10 points in increases to 3.5% in 2012. Term rates will also move higher, al- Sourc e: Statistic s Canada, RBC Ec onomic s Researc h though like the policy rate, we expect only modest increases with the 10-year rate forecast to end 2011 at 3.8% and 2012 at 4.15%. Canadian core inflation Inflation won’t be an issue through 2012 % c hange, year-over-year 4.0 The headline inflation rate has been volatile in recent months reflecting the Forec ast pass-through from the harmonization of sales taxes in Ontario and BC and movements in energy prices. As of October, the core rate, which excludes 3.0 BoC inflation these factors, stood at 1.8% and the all-items inflation rate rose to 2.4%. The target excess capacity that was generated during the economic downturn is slowly 2.0 being whittled away and our profile for Canadian growth in 2011 and 2012 is consistent with the output gap being eliminated in the middle of 2012. With 1.0 the output gap persisting in the near term, there is limited scope for a signifi- cant pickup in the core inflation rate. 0.0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: Statistics Canada, RBC Ec onomics Researc h 5
- 6. Economic forecast detail — Canada Real growth in the economy Quarter-over-quarter annualized % change unless otherwise indicated Forecast Forecast 2010 2011 2012 year-over-year % change Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 2011 2012 Consumer spending 4.1 2.3 3.5 2.6 2.6 3.0 3.0 2.5 2.2 2.2 2.2 2.2 0.4 3.4 2.8 2.4 Durables 3.7 -4.5 3.4 6.2 5.6 6.3 6.3 5.5 4.7 4.7 5.2 5.1 -1.5 5.2 5.0 5.2 Semi-Durables 19.8 -4.8 6.4 2.0 2.5 2.8 3.5 2.2 1.2 1.5 1.4 1.4 -2.2 5.0 2.6 1.8 Non-durables 2.9 3.4 4.9 2.5 2.3 3.0 3.0 2.1 1.8 1.8 1.7 1.7 0.7 2.3 2.9 2.1 Services 2.6 4.4 2.5 2.0 2.1 2.3 2.3 2.1 2.0 2.0 1.8 1.8 1.1 3.3 2.3 2.0 Government spending 1.3 2.7 0.9 2.2 1.3 0.3 0.1 0.1 0.4 0.1 0.5 1.0 3.5 3.3 1.1 0.3 Business investment 14.7 9.7 9.4 7.4 7.4 7.0 7.7 7.7 5.7 5.1 4.0 3.9 -16.0 7.1 7.8 6.0 Residential construction 20.0 1.0 -5.3 -0.6 3.0 1.6 3.0 3.2 1.5 1.4 0.6 0.5 -8.2 10.3 0.9 1.8 Non-residential structures 5.4 0.9 10.9 9.0 8.5 9.9 10.1 10.9 9.5 8.8 7.6 7.5 -19.5 -2.8 9.0 9.3 Machinery & equipment 17.8 32.7 28.7 16.5 12.1 11.2 11.5 10.4 7.6 6.3 5.0 4.8 -20.3 13.9 15.5 8.0 Final domestic demand 5.0 3.5 3.8 3.3 3.1 3.0 2.7 2.3 2.1 2.2 2.1 2.2 -1.8 4.2 3.1 2.3 Exports 10.1 5.6 -5.0 6.8 13.4 12.3 12.1 12.0 9.9 8.7 7.8 6.9 -14.2 5.8 8.8 10.0 Imports 13.2 19.8 6.4 5.8 7.5 7.8 7.4 8.0 6.3 6.0 5.8 5.8 -13.9 13.5 7.8 6.7 Inventories (change in $b) 4.8 15.0 17.5 15.5 11.7 12.3 13.0 12.7 13.0 12.7 11.4 10.6 -2.9 13.2 12.4 11.9 Real gross domestic product 5.6 2.3 1.0 2.9 3.5 4.4 4.2 3.3 3.2 2.8 2.2 2.2 -2.5 3.1 3.2 3.1 Other indicators Year-over-year % change unless otherwise indicated Business and labour Productivity 1.6 0.8 1.0 0.4 0.5 1.5 1.9 1.6 1.5 1.2 1.0 1.1 0.9 0.9 1.4 1.2 Pre-tax corporate profits 15.2 26.3 16.0 13.1 9.2 14.0 16.7 14.2 13.8 13.0 12.1 11.3 -32.3 17.4 13.5 12.5 Unemployment rate (%)* 8.2 8.0 8.0 7.8 7.8 7.7 7.5 7.4 7.3 7.2 7.1 7.0 8.3 8.0 7.6 7.2 Inflation Headline CPI 1.6 1.4 1.8 2.3 2.2 2.6 2.3 1.6 1.6 1.9 2.1 2.2 0.3 1.8 2.2 2.0 Core CPI 1.9 1.8 1.6 1.7 1.6 1.7 1.7 1.7 1.8 1.8 1.9 2.0 1.7 1.7 1.7 1.9 External trade Current account balance ($b) -36.7 -51.9 -70.1 -63.5 -51.2 -46.7 -42.2 -38.2 -34.3 -31.7 -29.7 -28.5 -43.5 -55.6 -44.6 -31.1 % of GDP -2.3 -3.2 -4.3 -3.9 -3.1 -2.7 -2.5 -2.2 -1.9 -1.8 -1.6 -1.6 -2.8 -3.4 -2.6 -1.7 Housing starts (000s)* 198 199 192 176 180 182 182 184 182 181 179 177 149 191 182 180 Motor vehicle sales (mill., saar)* 1.58 1.55 1.60 1.63 1.64 1.65 1.67 1.68 1.68 1.69 1.70 1.70 1.48 1.59 1.66 1.69 *Period average Source: Statistics Canada, RBC Economics Research forecasts 6
- 7. Economic forecast detail — United States Real growth in the economy Quarter-over-quarter annualized % change unless otherwise indicated Forecast Forecast 2010 2011 2012 year-over-year % change Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2009 2010 2011 2012 Consumer spending 1.9 2.2 2.8 2.5 3.0 3.7 3.7 3.6 3.6 3.2 2.8 3.2 -1.2 1.7 3.1 3.4 Durables 8.8 6.8 7.4 10.1 8.9 10.1 10.3 9.1 8.5 6.7 6.7 6.7 -3.7 6.9 9.2 8.2 Non-durables 4.2 1.9 1.8 2.4 2.3 2.6 2.8 2.9 2.8 2.8 2.1 2.8 -1.2 2.5 2.4 2.7 Services 0.1 1.6 2.5 1.4 2.3 3.0 3.0 3.0 3.1 2.8 2.5 2.8 -0.8 0.6 2.4 2.9 Government spending -1.6 3.9 4.0 2.1 1.0 0.0 -0.4 -0.8 -1.1 -0.9 -0.4 -0.1 1.6 1.3 1.3 -0.7 Business investment 3.4 18.9 1.7 4.0 11.5 16.5 17.5 16.2 14.8 13.9 13.0 10.7 -18.3 3.8 11.2 14.8 Residential construction -12.3 25.6 -27.5 0.0 7.0 17.6 19.5 15.3 13.6 14.2 16.9 13.2 -22.9 -3.2 5.5 15.4 Non-residential structures -17.8 -0.5 -5.8 -0.5 -1.5 6.4 9.5 9.5 10.5 11.1 10.5 11.5 -20.4 -14.4 1.7 10.1 Equipment & software 20.5 24.8 16.8 6.9 17.7 19.8 19.8 19.0 16.7 14.9 12.6 9.5 -15.3 15.4 16.7 16.3 Final domestic demand 1.3 4.3 2.9 2.6 3.6 4.4 4.5 4.2 4.0 3.6 3.4 3.4 -3.1 1.9 3.7 3.9 Exports 11.4 9.1 6.3 5.7 10.8 9.1 8.5 9.9 9.3 9.7 9.7 8.7 -9.5 11.5 8.5 9.4 Imports 11.2 33.5 16.8 3.5 6.9 9.9 9.8 10.3 10.1 10.5 9.9 7.5 -13.8 13.9 10.0 10.0 Inventories (change in $b) 44.1 68.8 111.5 88.5 77.1 75.0 73.2 72.2 74.2 72.7 67.0 68.5 -113.1 78.2 74.4 70.6 Real gross domestic product 3.7 1.7 2.5 2.2 3.6 4.1 4.1 3.9 3.7 3.2 3.0 3.5 -2.6 2.7 3.3 3.6 Other indicators Year-over-year % change unless otherwise indicated Business and labour Productivity 6.3 3.7 2.6 1.6 1.4 2.6 2.5 2.5 2.2 1.8 1.6 1.7 3.5 3.5 2.3 1.8 Pre-tax corporate profits 37.6 37.0 27.8 18.8 10.2 9.7 9.0 9.1 8.1 6.9 5.8 5.8 -0.4 29.6 9.5 6.6 Unemployment rate (%)* 9.7 9.7 9.6 9.7 9.5 9.3 9.2 9.0 8.9 8.8 8.6 8.4 9.3 9.7 9.3 8.7 Inflation Headline CPI 2.4 1.8 1.2 1.2 1.4 2.0 2.0 1.6 1.4 1.5 1.5 1.5 -0.4 1.6 1.8 1.5 Core CPI 1.3 0.9 0.9 0.7 1.0 1.1 1.2 1.2 1.2 1.2 1.3 1.3 1.7 1.0 1.1 1.3 External trade Current account balance ($b) -437 -493 -501 -499 -498 -516 -535 -552 -571 -590 -612 -624 -378 -482 -525 -599 % of GDP -3.0 -3.4 -3.4 -3.3 -3.3 -3.4 -3.4 -3.5 -3.6 -3.7 -3.8 -3.8 -2.7 -3.3 -3.4 -3.7 Housing starts (000s)* 617 602 584 553 616 659 738 785 864 933 1002 1071 554 589 699 968 Motor vehicle sales (millions, saar)* 11.0 11.3 11.6 12.3 12.6 13.1 13.4 13.7 13.9 14.0 14.2 14.3 10.4 11.5 13.2 14.1 *Period average Source: Bureau of Economic Analysis, RBC Economics Research forecasts 7
- 8. Financial market forecast detail Interest rates %, end of period Forecast Forecast 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 2009 2010 2011 2012 Canada Overnight rate 1.00 1.00 1.00 1.50 2.00 2.00 2.50 3.00 3.50 3.50 0.25 1.00 2.00 3.50 Three-month T-bills 0.87 1.00 1.10 1.50 2.00 2.05 2.55 3.05 3.50 3.60 0.19 1.00 2.05 3.60 Two-year GoC bonds 1.36 1.65 1.95 2.50 2.75 3.10 3.20 3.45 3.65 4.00 1.47 1.65 3.10 4.00 Five-year GoC bonds 2.01 2.60 2.80 3.00 3.25 3.55 3.50 3.75 4.00 4.05 2.77 2.60 3.55 4.05 10-year GoC bonds 2.75 3.30 3.35 3.35 3.50 3.80 3.95 4.05 4.15 4.15 3.61 3.30 3.80 4.15 30-year GoC bonds 3.33 3.80 4.00 4.05 4.30 4.40 4.45 4.50 4.50 4.55 4.07 3.80 4.40 4.55 Yield curve (10s-2s) 139 165 140 85 75 70 75 60 50 15 214 165 70 15 United States Fed funds rate 0 to 0.25 0 to 0.25 0 to 0.25 0 to 0.25 0 to 0.25 0 to 0.25 0.75 1.50 2.00 2.25 0 to 0.25 0 to 0.25 0 to 0.25 2.25 Three-month T-bills 0.16 0.15 0.15 0.20 0.25 0.30 0.60 1.40 2.00 2.30 0.06 0.15 0.30 2.30 Two-year bonds 0.42 0.55 0.80 1.25 1.45 1.85 2.00 2.30 2.60 3.05 1.14 0.55 1.85 3.05 Five-year bonds 1.27 1.75 1.90 2.25 2.40 2.85 3.00 3.25 3.50 3.75 2.69 1.75 2.85 3.75 10-year bonds 2.53 3.15 3.25 3.50 3.60 4.00 4.15 4.25 4.45 4.50 3.85 3.15 4.00 4.50 30-year bonds 3.69 4.35 4.55 4.55 4.75 4.85 4.90 4.95 5.00 5.05 4.63 4.35 4.85 5.05 Yield curve (10s-2s) 211 260 245 225 215 215 215 195 185 145 271 260 215 145 Yield spreads Three-month T-bills 0.71 0.85 0.95 1.30 1.75 1.75 1.95 1.65 1.50 1.30 0.13 0.85 1.75 1.30 Two-year 0.94 1.10 1.15 1.25 1.30 1.25 1.20 1.15 1.05 0.95 0.33 1.10 1.25 0.95 Five-year 0.74 0.85 0.90 0.75 0.85 0.70 0.50 0.50 0.50 0.30 0.08 0.85 0.70 0.30 10-year 0.22 0.15 0.10 -0.15 -0.10 -0.20 -0.20 -0.20 -0.30 -0.35 -0.24 0.15 -0.20 -0.35 30-year -0.36 -0.55 -0.55 -0.50 -0.45 -0.45 -0.45 -0.45 -0.50 -0.50 -0.56 -0.55 -0.45 -0.50 Exchange rates %, end of period Forecast Forecast 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 12Q4 2009 2010 2011 2012 Australian dollar 0.97 0.98 0.97 0.96 0.95 0.94 0.92 0.90 0.93 0.95 0.90 0.98 0.94 0.95 Brazilian real 1.70 1.71 1.73 1.75 1.77 1.78 1.78 1.78 1.78 1.78 1.74 1.71 1.78 1.78 Canadian dollar 1.03 1.00 0.99 0.98 0.97 1.00 1.02 1.05 1.03 1.01 1.05 1.00 1.00 1.01 Chinese renminbi 6.69 6.60 6.50 6.40 6.30 6.20 6.20 6.20 6.20 6.20 6.83 6.60 6.20 6.20 Euro 1.36 1.31 1.29 1.25 1.22 1.20 1.18 1.17 1.20 1.25 1.43 1.31 1.2 1.25 Japanese yen 84 83 81 83 88 95 100 105 100 95 93 83 95 95 Mexican peso 12.59 12.25 11.75 11.75 12.00 12.00 12.00 12.00 12.00 12.00 13.10 12.25 12.00 12.00 New Zealand dollar 0.73 0.74 0.75 0.76 0.75 0.73 0.71 0.70 0.73 0.74 0.73 0.74 0.73 0.74 Swiss franc 0.98 0.99 1.00 1.03 1.04 1.06 1.08 1.10 1.09 1.07 1.04 0.99 1.06 1.07 U.K. pound sterling 1.57 1.56 1.57 1.60 1.58 1.56 1.53 1.50 1.54 1.58 1.62 1.56 1.56 1.58 Source: Reuters, RBC Economics Research forecasts 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 pre- pared by RBC Economics Research based on information from sources considered to be reliable. We make no representation or war- ranty, 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. 8