CANADA: THE PROVINCIAL AND FISCAL OUTLOOK. December 2014

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1 CANADA: THE PROVINCIAL AND FISCAL OUTLOOK December 214

2 ECONOMIC OUTLOOK Crude oil prices have fallen sharply in recent months. The implications of lower oil prices play out very differently across regions in Canada. Oil-rich provinces have recorded the sharpest downgrades in their respective outlooks. The hit to these economies is more pronounced in nominal terms but real economic momentum will also be lost. On the flip side, the outlook is more upbeat for most non-resource based economies. Solid economic growth from the U.S., another downward leg in the Loonie and lower energy costs should provide a lift to manufacturing-based economies. The tourism sector is also expected to record healthy gains over the next two years. All told, our forecast calls for Ontario to average real GDP growth of 2.% over the period, placing it at the top of the growth charts. British Columbia (+2.4%), Alberta (2.3%) and Nova Scotia (+2.3%) are expected to follow closely behind. This marks a changing of the guard, as Alberta has recorded a sizeable growth advantage over the rest of the country in recent years. REAL GROSS DOMESTIC PRODUCT (GDP) Annual average per cent change F 21F 216F CANADA N. & L P.E.I N.S N.B Québec Ontario Manitoba Sask Alberta B.C F: by TD Economics as at December 214. PROVINCIAL REAL GDP, Annual % Change Ontario B.C F 214F NOTICEABLE SWINGS IN NOMINAL GDP GROWTH FORECAST % growth, Nominal GDP, NOT MUCH RESPITE FOR OIL PRICES AND THE LOONIE IN 21 USD per barrel USD/CAD Price of WTI (LHS) Exchange rate (RHS).92 Alberta Canada Manitoba Québec Sask Dec-14 Oct Atlantic by TD Economics as at December CAN NL PE NS NB QC ON MB SK AB BC by TD Economics as at December Q1 214Q3 21Q1 21Q3 216Q1 216Q3 Sources: Bloomberg, Bank of Canada, TD Economics..82

3 PROVINCIAL GOVERNMENT FINANCES OVERVIEW Fiscal update season showed three provinces have revised their fiscal targets to show an improvement relative to their original budget forecasts: B.C., New Brunswick and Nova Scotia. Budget balances have been revised lower in Alberta, Manitoba, Newfoundland and Labrador and Prince Edward Island. The rest of the provinces remain on track relative to their 214 spring budget targets. The recent slide in oil prices will pose challenges to the revenue outlooks of Alberta, Newfoundland and Labrador and Saskatchewan. Federal government revenues will be negatively impacted as well. In September, Moody's upgraded Saskatchewan to AAa and put Manitoba on a negative outlook. FEDERAL AND PROVINCIAL CREDIT RATINGS S&P Moody's DBRS Canada AAA Aaa AAA Newfoundland and Labrador A+ Aa2 A Prince Edward Island A Aa2 A (low) Nova Scotia A+ Aa2 A (high) New Brunswick 1 A+ Aa2 A (high) Québec A+ Aa2 A (high) Ontario 2 AA- (Neg) Aa2 (Neg) AA (low) Manitoba 3 AA Aa1 (Neg) A (high) Saskatchewan 4 AAA Aaa AA Alberta AAA Aaa AAA British Columbia AAA Aaa (Neg) AA (high) Notes: 1 New Brunsw ick dow ngraded to A+ from AA- by S&P in June Ontario put on negative outlook by S&P in April 212 and Moody's in July Manitoba dow ngraded to a negative outlook by Moody's in September Saskatchew an upgraded to Aaa by Moody's in September 214. British Columbia put on negative outlook by Moody's in December 212. Sources: S&P, Moody's and DBRS /21 Government Budget Balance (Percent of GDP) Federal BC AB SK MB ON QC NB NS PE NL Federal 17. BC 214/21 Government Net Debt (Percent of GDP) -2. AB 6.1 SK 29.2 MB 39.9 ON 1.1 QC NB NS PE 26.4 NL DEFICIT ELIMINATION TIMETABLE In Surplus SK, BC, AB By CAN, NL*, QC, PE By MB By ON, NB, NS *Government has indicated it is premature to project w hen province w ill reach budgetary balance. In the 214 Budget, fiscal w as set as a target. Source: Federal/provincial budgets and fiscal updates. Source: Government and Budget Updates, TD Economics. Source: Government and Budget Updates, TD Economics.

4 HOUSING OUTLOOK The housing market continued to impress this past year with much of the strength concentrated in three large markets Toronto, Calgary and Vancouver. On a regional basis, the drop in oil prices is expected to temper activity in markets such as Calgary and Edmonton. Prior to the slide in oil prices, these markets were considered front-runners in Canada's housing market but are now expected to soften over the near-term as the low oil price environment persists. In most other markets, a relatively stable unemployment rate environment and still low interest rates will remain supportive of housing. We still expect to see a soft landing in the Canadian housing market over the medium term. The Canadian housing market is still estimated to be moderately overpriced and overbuilt, the consequences of which will likely begin to be felt next year, as bond yields (and thus mortgage rates) climb from their current lows. EXISTING HOME SALES Per cent change F 21F 216F CANADA N. & L P.E.I N.S N.B Québec Ontario Manitoba Sask Alberta B.C F: by TD Economics as at December 214. Source: Canadian Real Estate Association SOFT LANDING EXPECTED IN THE HOUSING MARKET thousands thousands 2 13 Housing starts (LHS) 2 Existing home sales (RHS) HOUSING ACTIVITY IN OIL-PRODUCING REGIONS REVISED LOWER % growth, existing home sales, Dec-14 Oct-14 CANADIAN INTEREST RATES TO HEAD NORTH IN THE NEW YEAR Yield, % 4 3-month Treasury bill 1-year Government bond Fed rate hike BoC rate hike Q1 214Q3 21Q1 21Q3 216Q1 216Q3 Sources: Canadian Mortgage and Housing Corporation, Canadian Real Estate Association, TD Economics CAN NL PE NS NB QC ON MB SK AB BC by TD Economics as at December Q1 214Q3 21Q1 21Q3 216Q1 216Q3 Sources: Bank of Canada, TD Economics.

5 BRITISH COLUMBIA Real GDP gains in British Columbia are forecast to pick up to around 2.4% on average over the period. The recovery in the U.S. housing market is expected to continue to fall into place, supported by favourable affordability and strong gains in the U.S. job market. This bodes well for B.C. forestry-related exports. Forestry conditions will remain somewhat challenging in light of weaker economic growth in China and the impact of the pine beetle infestation, which continues to weigh on supply. Prospects for B.C.'s tourism industry have brightened reflecting the mix of improving U.S. personal incomes and the lower Canadian dollar. The B.C. labour market is expected to be supported by improved growth prospects and the thrust from its recent swing from negative to positive in-migration. In recent years, the outperformance of neighbouring Alberta has drawn migrants from British Columbia. A convergence in economic growth profiles between the two provinces should translate into a reversal of fortunes over the forecast period. BRITISH COLUMBIA - TD ECONOMICS' FORECASTS E 214F 21F 216F Real GDP Nominal GDP Employment Unemployment rate (%) Consumer Price Index Retail trade Housing starts Existing home sales Avg. existing home price E, F: Estimate, by TD Economics as of December 214. B.C.: LABOUR MARKET PERFORMANCE Job creation (s) % Source: Haver Analytics. by TD Economics as of December 214. % Growth BRITISH COLUMBIA: HOUSING MARKET 24 = Source: Haver Analytics. by TD Economics as of December 214. B.C.: FISCAL BALANCE AND NET DEBT f Source: 213 Federal Fiscal Reference Tables and 214 Government Budgets.

6 ALBERTA The low oil price environment is expected to weigh on the Alberta economy. Economic growth is expected to continue, but at almost half the rate relative to that chalked up over the past four years. Gains in oil production are expected to moderate, but remain positive as the operating costs of oil sands projects are low relative to the massive up front costs, which are now sunk on existing projects. What's more, the related decline in the Canadian dollar will act as partial shock absorber for oil producers. Still, lower incomes and profits from the energy patch will be felt in capital spending plans and increasingly spill over to other areas of the economy as 21 progresses. Alberta's housing market, which has been among the hottest markets, will likely experience a significant slowing in resale activity and housing starts over the forecast horizon. The Q2 fiscal update reported a downwardly revised surplus for fiscal That said, Premier Jim Prentice recently stated that if oil prices remain at their current low levels, it could lead to a $6-$7 billion budget shortfall over the next fiscal year. ALBERTA - TD ECONOMICS' FORECASTS E 214F 21F 216F Real GDP Nominal GDP Employment Unemployment rate (%) Consumer Price Index Retail trade Housing starts Existing home sales Avg. existing home price E, F: Estimate, by TD Economics as of December 214. ALBERTA: LABOUR MARKET PERFORMANCE Job creation (s) % Source: Haver Analytics. by TD Economics as of December 214. ALBERTA: HOUSING MARKET % Growth 24 = Source: Haver Analytics. by TD Economics as of December 214. ALBERTA: FISCAL BALANCE AND NET DEBT f Source: 213 Federal Fiscal Reference Tables and 214 Government Budgets.

7 SASKATCHEWAN Although the oil and gas sector accounts for a smaller share of total real GDP in Saskatchewan, the composition of the oil industry points to some acute pressures on its economy. Tight oil plays are more prevalent in this region and are more vulnerable to the recent drop in oil prices due to their shorter development cycles. Saskatchewan's agriculture sector is more oriented towards crops, where large global stockpiles drove some prices to near four-year lows. Looking ahead, we expect a return to normal levels of crop production over the forecast period, following a bumper crop in 213. Barring any major weather events, prices should remain stable in the near term, before trending up over the forecast horizon. Mining activity is expected to record a moderate improvement over the near term. Potash production is assumed to be higher on account of production from the recently expanded Vanscoy mine. The recent mid-year report stated that the government's fiscal plan remains on track. That said, oil price and royalty revenues forecasts were downwardly revised in light of the pullback in oil prices. The persistence of low oil prices represents a further downside risk to the revenue forecast. SASKATCHEWAN - TD ECONOMICS' FORECASTS E 214F 21F 216F Real GDP Nominal GDP Employment Unemployment rate (%) Consumer Price Index Retail trade Housing starts Existing home sales Avg. existing home price E, F: Estimate, by TD Economics as of December 214. SASKATCHEWAN: LABOUR MARKET PERFORMANCE Job creation (s) % Source: Haver Analytics. by TD Economics as of December 214. SASKATCHEWAN: HOUSING MARKET % Growth 24 = Source: Haver Analytics. by TD Economics as of December 214. SASKATCHEWAN: FISCAL BALANCE AND NET DEBT f Source: 213 Federal Fiscal Reference Tables and 214 Government Budgets.

8 MANITOBA In Manitoba, the oil and gas sector which is concentrated in tight oil production has been a solid contributor to economic growth in recent years with real GDP in the sector more than doubling over the period before slowing in 213. In light of weaker oil prices, non-residential and engineering construction has also been revised lower. But, while Manitoba's economy will feel a pinch from a continued slowdown in its rapidly-growing oil industry, its well-diversified nature still leaves it well-positioned to expand at a decent clip. The province's export-oriented manufacturing and wholesale trade sectors stand to benefit from rising U.S. economic growth, while activity in mining is likely to expand despite relatively low prices for most commodities. Moreover, the Manitoba economy is expected to receive a boost from the provincial government's $. billion infrastructure program. And, while the outlook for global crop prices has weakened dramatically, Manitoba's agricultural sector will reap the rewards of its strong position in livestock, where prices remain relatively high. MANITOBA - TD ECONOMICS' FORECASTS E 214F 21F 216F Real GDP Nominal GDP Employment Unemployment rate (%) Consumer Price Index Retail trade Housing starts Existing home sales Avg. existing home price E, F: Estimate, by TD Economics as of December 214. MANITOBA: LABOUR MARKET PERFORMANCE Job creation (s) % Source: Haver Analytics. by TD Economics as of December 214. % Growth MANITOBA: HOUSING MARKET 24 = Source: Haver Analytics. by TD Economics as of December MANITOBA: FISCAL BALANCE AND NET DEBT f Source: 213 Federal Fiscal Reference Tables and 214 Government Budgets.

9 ONTARIO A beneficiary of lower energy prices, Ontario is forecast to average real GDP growth of 2.% over the period, placing it at the top of the growth charts. Lower crude oil prices will provide a further lift to factory activity, where manufacturers have been reaping the benefits of a lower Canadian dollar and rising U.S. demand. Higher manufacturing profits are expected to translate into improved hiring going forward. As exports pick up over the next year, business investment is forecast to follow suit. While most industries including auto parts have been enjoying solid growth, output in Ontario's auto assembly industry looks poised to decline around % over the period, as North American production continues to gravitate to the southern U.S. and Mexico. We still see a soft landing in Ontario's housing market, but with prospects for a gradual increase in interest rates pushed back in our forecast, a cool down is not likely to be observed until 216. The Ontario government s fiscal plan poses some steep challenges over the near-term with a deficit elimination timetable set for fiscal An improved economic growth profile should boost tax revenues and help to keep the government on track. ONTARIO - TD ECONOMICS' FORECASTS E 214F 21F 216F Real GDP Nominal GDP Employment Unemployment rate (%) Consumer Price Index Retail trade Housing starts Existing home sales Avg. existing home price E, F: Estimate, by TD Economics as of December 214. ONTARIO: LABOUR MARKET PERFORMANCE ONTARIO: HOUSING MARKET Job creation (s) % % Growth 24 = Source: Haver Analytics. by TD Economics as of December 214. Source: Haver Analytics. by TD Economics as of December 214. ONTARIO: FISCAL BALANCE AND NET DEBT f Source: 213 Federal Fiscal Reference Tables and 214 Government Budgets.

10 QUÉBEC The Québec economy is forecast to record real GDP gains of 2.1% in 21 and 1.9% in 216. Next year, Québec s export sector is likely to become a more important driver of growth, assisted by a steadily rising U.S. export demand, as well as lower energy costs and a weaker Loonie. This bodes well for Québec s manufacturing sector. The machinery, primary metals and aerospace industries are expected to lead the way in terms of gains. The Québec housing market has navigated a soft landing over the past few years. We expect to see some stabilization in the housing market over the forecast period. The December 214 Fiscal Update read more like a mini-budget, with $2.4 billion worth of new savings initiatives outlined in an effort to reach budgetary balance in fiscal These efforts are necessary to help stabilize the province's debt burden. Still, with $1.2 billion worth of savings still to be identified between now and the upcoming spring budget, the public sector contribution to growth is forecast to be weak over the next few years. QUEBÉC - TD ECONOMICS' FORECASTS E 214F 21F 216F Real GDP Nominal GDP Employment Unemployment rate (%) Consumer Price Index Retail trade Housing starts Existing home sales Avg. existing home price E, F: Estimate, by TD Economics as of December 214. QUÉBEC: LABOUR MARKET PERFORMANCE Job creation (s) % Source: Haver Analytics. by TD Economics as of December 214. % Growth QUÉBEC: HOUSING MARKET 24 = Source: Haver Analytics. by TD Economics as of December 214. QUÉBEC: FISCAL BALANCE AND NET DEBT f Source: 213 Federal Fiscal Reference Tables and 214 Government Budgets.

11 After essentially stalling since 29, New Brunswick s economy appears set to post stronger growth. Real GDP is forecast to rise by around 1% in 214, before gaining a step in and averaging growth of just under 2%. A positive outlook for the mining and manufacturing sectors bode well for the economy. Potash production has already commenced from the recentlyexpanded Picadilly mine. The Trevali s Caribou mine is set to begin operations in the spring of 21 and reach full capacity by the end of the year which will provide an added lift to the sector. The forestry sector will also be a solid contributor to growth. A higher outlook for lumber prices, coupled with rising U.S. demand, bodes well for export sales. Employment is forecast to advance at a modest.% this year, which would mark the first annual net job gain since 29. We expect employment to maintain a similar pace of growth over the next two years. The population has been in decline since the beginning of 213 and is forecast to decrease further over the period. New Brunswick also has one of the oldest populations in Canada. These demographic challenges will further limit the extent to which jobs can grow on a sustained basis. Job creation (s) % NEW BRUNSWICK NEW BRUNSWICK: LABOUR MARKET PERFORMANCE Source: Haver Analytics. by TD Economics as of December NEW BRUNSWICK: HOUSING MARKET % Growth 24 = Source: Haver Analytics. by TD Economics as of December 214. NEW BRUNSWICK - TD ECONOMICS' FORECASTS E 214F 21F 216F Real GDP Nominal GDP Employment Unemployment rate (%) Consumer Price Index Retail trade Housing starts Existing home sales Avg. existing home price E, F: Estimate, by TD Economics as of December NEW BRUNSWICK: FISCAL BALANCE AND NET DEBT f Source: 213 Federal Fiscal Reference Tables and 214 Government Budgets. 4

12 NOVA SCOTIA After recording a modest improvement this year, real GDP growth in Nova Scotia is forecast to average 2.3% over the period, likely marking the best performance among the Atlantic provinces. Economic activity in 214 has been spurred by an increase in natural gas production from the Sable and Deep Panuke offshore sites. Higher prices for natural gas on average in 214 have also propped up export sales. While there remains uncertainty surrounding the near-term direction of continental gas demand amid recent weather-related swings, we expect natural gas prices to hover around US$3.6 per MMBtu in 21 and 216. Manufacturing activity should bounce back in 21 and will be aided by the federal shipbuilding project scheduled to be operational in September 21. We note the timing of production from the shipbuilding project will provide a stronger boost to the manufacturing sector in 216. Employment prospects should improve after serially disappointing the last two years. We forecast employment growth at around 1% over the next two years. NOVA SCOTIA - TD ECONOMICS' FORECASTS E 214F 21F 216F Real GDP Nominal GDP Employment Unemployment rate (%) Consumer Price Index Retail trade Housing starts Existing home sales Avg. existing home price E, F: Estimate, by TD Economics as of December 214. NOVA SCOTIA: LABOUR MARKET PERFORMANCE Job creation (s) % Source: Haver Analytics. by TD Economics as of December 214. % Growth NOVA SCOTIA: HOUSING MARKET 24 = Source: Haver Analytics. by TD Economics as of December 214. NOVA SCOTIA: FISCAL BALANCE AND NET DEBT f Source: 213 Federal Fiscal Reference Tables and 214 Government Budgets.

13 PRINCE EDWARD ISLAND Real GDP growth in Prince Edward Island is forecast to run at around 1.% over the forecast period, extending the province s recent period of steady and modest gains. However, this conceals a shift from domestic spending to more export oriented growth and tourism. The tourism sector is heading into 21 off a banner year in 214. The government reports that record levels of visitors and spending were recorded this year. The contribution to growth from the public sector will be limited. The recent fiscal update showed the deficit for fiscal had widened by an estimated $ million to $44.7 million. Despite the weaker starting point, the government's target of a budgetary balance for fiscal remains. Expenditure restraint will be heavily relied upon to achieve this target. PRINCE EDWARD ISLAND - TD ECONOMICS' FORECASTS E 214F 21F 216F Real GDP Nominal GDP Employment Unemployment rate (%) Consumer Price Index Retail trade Housing starts Existing home sales Avg. existing home price E, F: Estimate, by TD Economics as of December 214. P.E.I.: LABOUR MARKET PERFORMANCE Job creation (s) % Source: Haver Analytics. by TD Economics as of December 214. % Growth P.E.I.: HOUSING MARKET 24 = Source: Haver Analytics. by TD Economics as of December 214. P.E.I.: FISCAL BALANCE AND NET DEBT f Source: 213 Federal Fiscal Reference Tables and 214 Government Budgets.

14 NEWFOUNDLAND AND LABRADOR After a surge in 213, real GDP gains in Newfoundland and Labrador are expected to be relatively minimal over the forecast period. The sharp drop in oil prices combined with a leveling off in capital spending are the main culprits behind the slowdown. The steep drop in oil prices is expected to weigh on incomes. Already, the government has acknowledged the challenges that lay ahead. The recent fiscal update showed the deficit for fiscal had widened by an estimated $378 million (to $916 million), reflecting a $792 million downgrade to the royalty revenue forecast. As a result, Minister Wiseman acknowledged that it is premature to project when the province would reach a budgetary balance. In its 214 Budget, the government had aimed to balance its books by fiscal The near term outlook for the mining sector remains downbeat. Lower iron ore prices have hampered output, with production suspended at the Wabush and Labrador Iron Mines. What s more, activity tied to the Alderon Kami mine has been delayed as financing plans still need to be finalized. NFLD AND LABRADOR - TD ECONOMICS' FORECASTS E 214F 21F 216F Real GDP Nominal GDP Employment Unemployment rate (%) Consumer Price Index Retail trade Housing starts Existing home sales Avg. existing home price E, F: Estimate, by TD Economics as of December 214. NFLD & LABRADOR: LABOUR MARKET PERFORMANCE NFLD & LABRADOR: HOUSING MARKET NFLD & LABRADOR: FISCAL BALANCE AND NET DEBT Job creation (s) % % Growth 24 = Source: Haver Analytics. by TD Economics as of December Source: Haver Analytics. by TD Economics as of December f Source: 213 Federal Fiscal Reference Tables and 214 Government Budgets.

www.td.com/economics @CraigA_TD This report is provided by TD Economics for customers of TD Bank Group. It is for information purposes only and may not be appropriate for other purposes.

15 This report is provided by TD Economics for customers of TD Bank Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

OBSERVATION. TD Economics PROVINCIAL BUDGETS OVERVIEW OVERALL SHORTFALL GRINDING LOWER BUT A MIXED SHOWING REGIONALLY

OBSERVATION. TD Economics PROVINCIAL BUDGETS OVERVIEW OVERALL SHORTFALL GRINDING LOWER BUT A MIXED SHOWING REGIONALLY OBSERVATION TD Economics PROVINCIAL BUDGETS OVERVIEW OVERALL SHORTFALL GRINDING LOWER BUT A MIXED SHOWING REGIONALLY Highlights At an estimated $22.1 billion (1.3% of GDP) in fiscal 2011-12, Canada s combined