Canada In a Messy World By Avery Shenfeld, Chief Economist & Managing Director

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1 Canada In a Messy World By Avery Shenfeld, Chief Economist & Managing Director November 2011

2 Canadian Growth Resumes After Disruptions in Autos and Energy 108 Monthly GDP Index Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Canada US 2

3 Slack Keeps Fed On Hold Through 2013; Fed Extending Term to Anchor Long Rates 6 % decline in non-farm payrolls from peak recession /recovery Months from Employment Trough

4 Global Growth Disappointments A Drag on Canada s Exports, Commodity Prices 5.5 World GDP, % chg (at purchasing power parity) A 2011F 2012F Actual/CIBC Forecast Source: IMF, CIBC *Assumes US extends payroll tax cut and extended jobless benefits IMF Forecast (June '11) 4

5 Emerging Markets Now the Drivers For Commodities Rallies 60% BIC (Brazil, India, C hina) Share of Total C onsumption 40% 20% 0% 1990's Today Pe etroleum Refined Copper Coal Primary Nickel Note: latest coal data as of 2009; petroleum data as of 2010; nickel and copper data as of 2011 Q2, copper data excludes Brazil Source: EIA, CRU, WBMS 5

6 Commodities Drive C$ Softer Global Growth Keeps Loonie in Check US$/bbl US /C$ Arrows denote BoC rate hikes Apr-10 Aug-10 Dec-10 Apr-11 Aug Crude Oil (WTI) Canadian Dollar 6

7 The Continental Divide % Output Gap Employment/ Population Ratio 65 % Canada US Canada US 7

8 Canada Sees 2% Growth in 2012 But it Will Take Low Rates to Get There GDP growth (s.a.a.r.) Forecast % 6.0% % 2.0% 00% 0.0% -2.0% -4.0% -6.0% -8.0% Q1-07 Q1-08 Q1-09 Q1-10 Q1-11 Q1-12? Real GDP Growth (L) Overnight Interest Rate (R) 8

9 Bond Yields To Drift Higher; Remain Low By Historical Standards 6 10-yr bond yields (%) Canada US Forecast Dec00 Dec04 Dec08 Dec12 9

10 Consumers Reduced Debt Appetite Slows Retail Sales: Low Rates Needed for Longer 10% y/y chg y/y 20% 16% 6% 12% 8% 2% 4% 0% -2% -4% -8% -6% -12% Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Real Retail Consumption (L) Consumer Credit (R) 10

11 Debt Service Costs Unthreatening If Overnight Rates Contained to 2% or less % of personal disposable income Q4-91 Q4-93 Q4-95 Q4-97 Q4-99 Q4-01 Q4-03 Q4-05 Q4-07 Q4-09 Q4-11 Q Q Q4-89 Q

12 Gasoline and Food Inflation Should Ease Giving Lift to Consumer Spending Power 2005= = World Commodity Price Index: Food (L) Cdn CPI: Food (R) Source: Bureau of Labour Statistics, Statistics Canada, CIBC 12

13 Housing Starts Easing But Not Crashing 260 '000 units, SAAR F 2012F 13

14 Canadian Housing Market Still Balanced Unit Sales as a share of New Listings Sellers' Mkt Balanced Market Buyers' Mkt Source: CREA, CIBC 14

15 Mortgages Outstanding Still Growing Faster Than Incomes y/y % chg Source: Bank of Canada, CIBC 15

16 House Price Inflation Cooling We Hope 25 y/y % chg Unweighted Weighted Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Source: CREA, CIBC 16

17 Mortgage Arrears Very Low Canada as a % of total portfolio By Province 0.85 as of August BC Ma an/ Sa ask Alta Canada Ont Que Atl Source: CBA, CIBC 17

18 Number of Stretched Households on the Rise But Not to Troubling Levels Yet % % Effective Mortgage Interest Rates (L) Share of Households with >40% service ratios (R) Source: The Financial Monitor, CIBC 18

19 Optimism On Investment Spending A Plus for Industrial Properties Equipment Spending Plans, Balance of Opinion (%-pts) 98:Q3 99:Q2 00:Q1 00:Q4 01:Q3 02:Q2 03:Q1 03:Q4 04:Q3 05:Q2 06:Q1 06:Q4 07:Q3 08:Q2 09:Q1 09:Q4 10:Q3 11:Q2 Source: Bank of Canada Business Outlook Survey 19

20 Private Construction A Needed Offset to Government Infrastructure Pullback 160 bns 2002C $ Forecast Gov't C apital Spending Business Investment: Non-Res Structures Business Investment: Machinery 03 3:1 03 3:4 04 4:3 05 5:2 06 6:1 06 6:4 07 7:3 08 8:2 09 9:1 09 9:4 10 0:3 11 1:2 12: :1F 12: :4F 13: :3F 20

21 Fiscal Credentials: Canada s Earlier Hard Work Paid Dividends 250 General Government Debt, % (2011) Gross 200 Net JPN ITA FRA UK US GER CAN General Government Net Debt, % of GDP Fcst CAN US UK FRA GER JPN ITA 21

22 West is Best in Real GDP Growth, Y/Y % Chg BC A lta Sask Man Ont Qué NB NS PEI N&L 22

23 TSX Forward PE Low by Historical Standards, Matching US Jan-07 May-10 Valuation gap closed TSX Composite S&P

24 Analysts Cutting 2012 Earnings Expectations 9 Ratio of Downgrades to Upgrades Normal = 1.5: Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 24

25 Quality Dividend Stocks Should Outperform 105 Total Return, April 5= % % 85 *S&P/TSX Canadian Dividend Aristocrat s 80 5-Apr 3-May 31-May 28-Jun 26-Jul 23-Aug 20-Sep 18-Oct High Quality Dividend Stocks* TSX Composite 25

26 Canadian REITs Helped by Low Bond Yields; Vacancies Peaked at Low Levels 18% Vacancy Rate US Office Vacancy Rate (REIS) 16% 14% 12% US Industrial Vacancy Rate (Colliers) 10% 8% C dn Office 6% C dn Industrial 4% 2% 0% Q4/01 Q2/03 Q4/04 Q2/06 Q4/07 Q2/09 Q4/10 26

The Oil Shock: How Shocking Is It? By Avery Shenfeld, Chief Economist & Managing Director

The Oil Shock: How Shocking Is It? By Avery Shenfeld, Chief Economist & Managing Director May 211 Global Growth Shy of Pre-Recession Pace 6 Annual Global Real GDP growth 5 5% 4 3 2 4 yrs before recession