December 2013 THIRD-QUARTER GDP GROWTH STRONGER THAN EXPECTED AS HEADWINDS DISSIPATE, GLOBAL ECONOMY S PROSPECTS BRIGHTEN

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1 December 213 THIRD-QUARTER GDP GROWTH STRONGER THAN EXPECTED AS HEADWINDS DISSIPATE, GLOBAL ECONOMY S PROSPECTS BRIGHTEN PROVINCIAL GROWTH DISPARITY TO NARROW IN 214

2 Volume 38, Number 12 December 213 IN BRIEF HIGHLIGHTS THIS MONTH RBC ECONOMICS RESEARCH CRAIG WRIGHT SENIOR VICE PRESIDENT & CHIEF ECONOMIST DAWN DESJARDINS ASSISTANT CHIEF ECONOMIST Financial Markets & Financial System PAUL FERLEY ASSISTANT CHIEF ECONOMIST Macroeconomics ROBERT HOGUE SENIOR ECONOMIST Regional Economies LAURA COOPER ECONOMIST Public Policy NATHAN JANZEN ECONOMIST Macroeconomics 2 THIRD-QUARTER GDP GROWTH STRONGER THAN EXPECTED Third-quarter 213 annualized GDP growth in Canada rebounded to 2.7%. 5 AS HEADWINDS DISSIPATE, GLOBAL ECONOMY S PROSPECTS BRIGHTEN The global economy accelerated in the third quarter of 213 with October and November reports suggesting that the momentum was maintained in the final quarter of the year. This was surprising given that the US government injected another dose of policy uncertainty into the global landscape when it failed to reach an agreement on spending resulting in a partial shutdown in government services and reviving concerns about that country s credit rating. 9 PROVINCIAL GROWTH DISPARITY TO NARROW IN 214 A striking feature of provincial economic performances in both 212 and 213 has been the wide disparity among the various regions of Canada. JOSH NYE ECONOMIST Financial Markets and Microeconomics DAVID ONYETT-JEFFRIES ECONOMIST North American Financial System EDITOR Pattie Moran rbceconomicsresearch@rbc.com SUBSCRIPTION INFORMATION rbceconomicsresearch@rbc.com ECONOSCOPE is published and produced monthly by RBC Economics Research. Address all correspondence to the Editor, RBC Economics Research, RBC, 9th Floor, South Tower, 2 Bay Street, Toronto, Ontario, M5J 2J5. Royal Bank of Canada. The material contained in Econoscope 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 obtained from sources considered to be reliable. Royal Bank of Canada makes no representation or warranty, express or implied, with respect 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. Econoscope is indexed in the Canadian Business Index available online in the Canadian Business & Current Affairs Database. Registered trade-mark of Royal Bank of Canada Printed on recycled and recyclable paper. Visit our web site...at and Get your issues delivered by ... by sending your request along with your address to rbceconomicsresearch@rbc.com.

3 DAWN DESJARDINS, PAUL FERLEY, NATHAN JANZEN CURRENT TRENDS THIRD-QUARTER GDP GROWTH STRONGER THAN EXPECTED HIGHLIGHTS The bounce in GDP growth in the third quarter is encouraging. Canadian employment continued the recent trend of steady gains with a 21, increase in November, while the unemployment rate was unchanged at 6.9%. Most of the increase in retail sales in September was the result of a jump in sales at motor vehicle dealerships. New home construction moderated in November to cool the brisk pace of new home construction with the sixmonth trend rate of starts declining for the first time since June. Although export volumes declined in October, this followed two consecutive months of respectable growth to leave the measure still 2.9% above its year-ago level. Canada s inflation rates continued to gyrate around the bottom end of the Bank s 1% to 3% target band. LATEST AVAILABLE: SEPTEMBER Real GDP % change, month-over-month.8 RELEASE DATE: NOVEMBER 29, Third-quarter 213 annualized gross.4 domestic product (GDP) growth in.2 Canada rebounded to 2.7% from a downwardly revised gain in the second quarter. -.2 of 1.6% (previously 1.7%). Final domestic demand rose an annualized 1.8% in the quarter, which was down from a 2.2% -.8 increase in the second quarter. The gain -1. in final domestic demand reflected gains -1.2 in consumer spending (2.2%), residential -1.4 investment (2.4%), and non-residential investment (2.2%) tempered by a.4% Source: Statistics Canada rise in government spending. Inventories contributed 1.2 percentage points to growth fully reversing a 1.2 percentage point subtraction in the second quarter. Net exports subtracted from growth by.2 percentage point with exports down 2.% although almost fully offset by imports dropping 1.4%. Stronger growth implies an earlier closure of the output gap and a reason to advance expectations of a return to tightening mode by the Bank of Canada. Our forecast assumes that the overnight rate will remain unchanged during 214. September 213 GDP rose a stronger than expected.3% and matched the.3% increase in August. Unemployment Rate % of labour force Source: Statistics Canada CANADIAN EMPLOYMENT ROSE 21,6 IN NOVEMBER LATEST AVAILABLE: NOVEMBER RELEASE DATE: DECEMBER 6, 213 Canadian employment rose 21,6 in November 213, slightly faster than market expectations of a 12, gain. The overall increase in employment was led by service-producing jobs rising 15,7 with goods-producing firms adding 5,9. The unemployment rate remained unchanged at 6.9%. November marked the third consecutive month of relatively stable employment gains with the three-month average increase at 15,6. At 6.9%, the 2 ECONOSCOPE, ROYAL BANK OF CANADA

4 unemployment rate indicates that there is still some slack in the labour market, which is also evident in the sluggish pace of wage gains. Retail Sales % change, month-over-month 3. RETAIL SALES JUMPED IN SEPTEMBER LATEST AVAILABLE: SEPTEMBER RELEASE DATE: NOVEMBER 22, 213 Canadian retail sales rose 1.% in September 213 following a.1% (was.2%) increase in August and a.5% gain in July. Most of the increase in September was the result of a 4.7% jump in sales at motor vehicle dealerships. Sales at gasoline stations (.8%), furniture stores (.5%), and building material stores (.8%) all rose, but offset was provided by lower sales at clothing (-.6%), food (-.3%), and electronics (-1.1%) stores. Excluding the effect of prices, the volume of sales rose 1.% following unrevised.2% and.4% increases in August and July, respectively. Three consecutive monthly gains in the volume of retail sales left the measure up an annualized 2.4% in the third quarter of 213 as a whole. That, however, is still down from a sizeable 6.3% surge in the second quarter and still is consistent with our monitoring that overall consumer spending growth, which includes spending on services not captured in the monthly retail report, slowed to slightly below a 2% rate in the third quarter following a 3.8% jump in the second quarter Source: Statistics Canada HOUSING STARTS EASE IN NOVEMBER LATEST AVAILABLE: NOVEMBER RELEASE DATE: DECEMBER 9, 213 Housing starts decreased by 3.% to an annualized pace of 192,2 in November 213 (see Housing Starts chart on page 4). The decline in overall housing starts reflected decreased activity among urban starts (-3.4%) as a pullback in the urban single-unit starts component (-3.1%) was met by a similar-sized drop in the multiple-unit starts component (-3.5%). Rural starts eked out a.2% gain to provide some offset. Weakness was concentrated in Ontario (-16.6%) and in Atlantic Canada (-24.8%). In contrast, strength in the multiples component drove overall solid increases in British Columbia (12.5%) and the Prairies (9.1%) while Quebec recorded a modest.8% gain. After hitting a recent peak of 198,2 annualized units in October, new home construction moderated in November to cool the brisk pace of new home construction with the six-month trend rate of starts declining for the first time since June. While persistently elevated residential building permits provide some scope for the brisk pace of new home construction to re-emerge in the near term, overall hous- ECONOMY AT A GLANCE % change from: Latest Previous Year month month ago Real GDP Sep Industrial production Sep Employment Nov.1 1. Unemployment rate* Nov Manufacturing Production Sep Employment Nov Shipments Sep.6 1. New orders Sep Inventories Sep Retail sales Sep Car sales Sep Housing starts (s)* Nov Exports Oct Imports Oct Trade balance ($billlions)* Oct Consumer prices Oct * Levels are shown for the latest period and the same period a year earlier. Source: Statistics Canada, RBC Economics Research ECONOSCOPE, ROYAL BANK OF CANADA 3

5 Housing Starts Thousands Source: Canadian Mortgage and Housing Corporation Merchandise Trade C$ billions, annualized Imports Exports Source: Statistics Canada Consumer Price Index % change, year-over-year ing starts have averaged 187,6 annualized units year to date, which is a 13.4% moderation compared to the same period last year. We anticipate that starts will clock in at a total of 188, this year, which would be well below the 215, overall pace in 212, and will further decline to 18, in 214. TRADE BALANCE SWINGS TO SURPLUS IN OCTOBER LATEST AVAILABLE: OCTOBER RELEASE DATE: DECEMBER 4, 213 The merchandise trade deficit swung to a $.1 billion surplus in October from a revised $.3 billion (was $.4 billion) deficit in September. The improvement in the net balance in October resulted despite a $.1 billion dip in exports with imports falling $.5 billion. Exports of refined petroleum products, motor vehicles, metal and non-metallic minerals, and aircraft all declined sharply in October; however, those declines were almost fully offset by gains elsewhere including an 11.8% jump in food exports. Much of the drop in imports was concentrated in a price-led 8.5% drop in energy imports although motor vehicle imports also declined along with industrial machinery and equipment, and electronic equipment. On a volumes (fisher formula) basis, exports fell.6% in October following a revised.6% (was 1.9%) increase in September but an upwardly revised 2.3% (was 1.6%) increase in August. Import volumes were unchanged after a 1.2% decline in September (was a.5% drop). With weakness in imports concentrated in falling prices, the real trade deficit actually widened slightly in October despite the nominal improvement. CONSUMER PRICE INFLATION RATE FELL IN OCTOBER LATEST AVAILABLE: OCTOBER RELEASE DATE: NOVEMBER 22, 213 Canada s headline consumer price index fell.2% on a not seasonally adjusted basis in October 213. On a year-over-year basis, the inflation rate dropped to.7% from 1.1%. The Bank of Canada s core measure increased.2% on an unadjusted basis in the month. The year-over-year rate slipped to 1.2%. Canada s inflation rates continued to gyrate around the bottom end of the Bank s 1% to 3% target band with both the headline and core measures falling below the third-quarter 213 averages of 1.2% and 1.3%, respectively, in October. The combination of excess capacity in the economy and one-off factors has kept Canada s core inflation rate below the Bank s 2% target for 16 successive months Source: Statistics Canada 4 ECONOSCOPE, ROYAL BANK OF CANADA

6 CRAIG WRIGHT, DAWN DESJARDINS, PAUL FERLEY, NATHAN JANZEN ECONOMIC AND FINANCIAL MARKETS OUTLOOK AS HEADWINDS DISSIPATE, GLOBAL ECONOMY S PROSPECTS BRIGHTEN Taking it all in stride. The global economy accelerated in the third quarter of 213 with October and November reports suggesting that the momentum was maintained in the final quarter of the year. This was surprising given that the US government injected another dose of policy uncertainty into the global landscape when it failed to reach an agreement on spending, thereby resulting in a partial shutdown in government services and reviving concerns about that country s credit rating. These developments roiled financial markets, although only temporarily, as a 2.2% drop in the MSCI world stock index in the first nine days of October was more than fully reversed in the latter part of the month. Central banks keep calm. Central banks worked to inject calm into markets with the US Federal Reserve delaying the start of the tapering of its securities purchase program, the Bank of Canada removing its tightening bias, and the European Central Bank cutting the policy rate. In all, central bank actions signalled that policy will remain extraordinarily accommodative until the pace of expansion accelerates sufficiently to exhaust spare capacity in the global economy and halt the downward pressure being exerted on inflation. The strengthening in economic activity in the second half of the year is keeping the global economy on track to expand by 2.9% in 213. Furthermore, it provides a strong hand-off to 214 that together with a lessening in contractionary fiscal policy measures sets up for a firming in the global growth rate to 3.6%. US government hiccup won t derail economy. The US economy posted a solid 3.6% annualized gain in the third quarter. The economy maintained its momentum in the fourth quarter. Stronger than expected gains in non-farm payroll employment in October and November suggested that the hit to US firms confidence was less than feared. The bipartisan budget deal reached on December 1 still needs to be voted on by the Congress and passed by the Administration. We anticipate the deal will pass because lawmakers will not want to jeopardize the US credit rating or cause a downturn in the economy due to another shutdown. This sentiment is also expected to contribute to the raising of the debt ceiling in 214. Underpinnings for growth pickup in place. Outside of concerns about government budget issues, conditions are ripe for the US economy to pick up its pace in 214. Household net worth hit an all-time high in the first half of 213. Delinquency rates fell to the lowest since mid-28. Financial asset values hit a new high in the second quarter. Households equity in real estate rose to 5%, recovering from the recession-driven drop to 37%. Employment gains are running close to 2, on a three-month trend basis, and the unemployment rate slipped to 7.% in November. Fed exercises caution and delays tapering. In September, the Federal Reserve decided to delay tapering the size of its monthly purchase program. Residual World GDP Growth % change Source: International Monetary Fund, RBC Economics Research US Real GDP Growth Quarter-over-quarter annualized % change Annual Growth Rates 12 13f 14f 15f Real GDP Source: Bureau of Economics Analysis, RBC Eco. Research Change in Total Nonfarm Employment 3 month moving average, SA, s of persons Source: Bureau of Labor Statistics, RBC Economics Research ECONOSCOPE, ROYAL BANK OF CANADA 5

7 Interest Rates: US % 1-Year Bond Yield 1 Fed Funds Rate Source: Federal Reserve, RBC Economics Research US Existing Home Sales SAAR, thousands of units Source: Natl. Association of Realtors, RBC Eco. Research US Consumer Spending Growth Year-over-year, % change Source: Bureau of Economics Analysis, RBC Eco. Research uncertainty about the next round of fiscal policy negotiations in Washington and the changing of the Chairmanship at the Fed early next year make it likely that the Fed will wait until late in the first quarter of 214 before initializing the process. A subsequent tightening in monetary policy via increases in the federal funds target range will be slower to materialize given that the Fed s stated thresholds of an unemployment rate closer to 6.5% and inflation closer to 2.% are unlikely to be achieved until the middle of 215. Housing market recovery underway. Year-to-date sales are 1% higher than 212 s average pace. The stock of homes available for sale fell to the lowest level since 25. Housing affordability was squeezed as mortgage rates jumped in August; however, even after accounting for the increase in borrowing costs, houses were more affordable than they were over the previous decade. After two years of very strong increases, demand for mortgages, according to the Senior Loan Officer survey, weakened in the fourth quarter in reaction to the rise in mortgage rates. This easing in demand is likely to prove temporary as strengthening labour markets and rising personal incomes more than compensate for the mild increase in mortgage costs. Consumers in position to spend. Given the large role that the consumer plays in the US economy, acceleration in spending activity sets up for a better year for overall growth. The easing in lending standards, low interest rates, improved balance sheets, and strengthening labour market conditions should support a solid increase in consumption of both goods and services in 214. Businesses stayed on the sidelines, getting ready to put money to work. After tightening modestly during the summer, financial conditions eased again in September and October. Business balance sheets remain healthy with liquid balances well above their historic norms and companies reporting an elevated return on assets. Against this backdrop, the impediment to investment does not seem to reflect financial constraints but rather lingering uncertainty about the fiscal outlook. Underlying our US forecast is the assumption that Washington will be able to negotiate successfully a package of spending and tax changes that would rein in the deficit and prevent a US credit-rating downgrade. The US government deficit fell to 6.8% of GDP in 212 from 1% in 21 and fell to 4.1% in 213. Onward ho! The US economy s growth rate likely slowed in the final quarter of 213 due to the 16-day partial government shutdown, unwinding of recent inventory build and runoff effect on confidence. We assume that the next round of negotiations will transpire with much less disruption and sets up for a resumption of the upward trend in US growth, continued employment gains, and an eventual rise in inflation. 6 ECONOSCOPE, ROYAL BANK OF CANADA

8 Canada s economy rallied back in second half of 213. Canada s economy emerged from June s slump with real GDP growing at a 2.7% annualized pace in the third quarter. The rebound was a product of a solid gain in consumption plus a modest pick up in business investment. Furthermore, it occurred despite a.2 percentage point hit to growth from net exports. October reports point to the economy s momentum being sustained in the fourth quarter. Housing starts, motor vehicle sales, the manufacturing PMI, and employment posted solid gains in the month, and the unemployment rate held at 6.9%. After accounting for the flow through from the hit to confidence from the US government ruckus in early October, we still expect the economy to post another above-potential growth rate in the final quarter of 213. On net, 213 marked another year of mediocre growth with real GDP estimated to increase by 1.7% in large part due to the weak performance of the export sector. The slow and subpar recovery in the US economy and sector-specific issues (increased US natural gas production leading to lower demand for Canadian product) accounted for the bulk of Canada s export sector under performance. Exports to provide jolt to Canada s economy in 214. Looking ahead to 214, a persistent strengthening in US growth is likely to translate into firmer demand for Canadian exports. Additional support is expected to come from a weakening in the Canadian dollar during the course of 214. With the supports for another round of Canadian dollar appreciation falling away and the US economy poised to enter a stronger growth phase, we estimate that the exchange rate will move from US$.95 year-end 213 to US$.92 by year-end 214. External demand to support business investment. We expect Canadian export growth in 214 to outpace imports, thereby resulting in the trade sector adding the most to the economy s annual growth rate in more than a decade. Balance sheets of Canadian non-financial corporations continue to be cash heavy with almost 12% of total assets in liquid balances. Profits slipped in 212 and the first half of 213 although inched up in the third quarter. Financial conditions continue to be amenable to investment. Business loan growth continues to run at an elevated rate. Our expectation that demand for Canadian exports will firm in 214 is forecasted to coincide with a rebound in investment activity in these sectors following the weak 213. Don t count the consumer out! Canada s debt-to-income ratio hit an all-time high in the second quarter. Furthermore, growth in asset values and net worth was outpaced by that of credit on a percentage basis in the quarter, thereby resulting in the household credit market debt-to-asset and net worth ratios rising for the first time in a year. The pace of household credit growth eased in the third quarter while household net worth and income grew. Canada s labour market has been resilient with 148, jobs created so far in 213 and the unemployment rate falling to a cycle low of 6.9%. US Real GDP Growth Composition Percentage points Consumer Government Residential Non-res. Net trade Inventories spending spending investment investment Source: Bureau of Economics Analysis, RBC Eco. Research Canada's Real GDP Growth Quarter-over-quarter % change, annualized rate Annual Growth Rates 12 13f 14f 15f Real GDP Source: Statistics Canada, RBC Economics Research s Canadian Exports and US activity Index 29 = BoC US Activity Index Canada Exports Source: Stats Canada, BEA, Bank of Cda, RBC Eco Research forecasts ECONOSCOPE, ROYAL BANK OF CANADA 7

9 Canadian Dollar US$/C$ 1.1 Parity 1. With the persistent increase in employment, wage gains averaged 2.% so far in 213. Real wage gains will continue to fuel consumer spending with motor vehicle sales expected to maintain their recent rapid pace. The combination of income growth and improving balance sheets is forecasted to be sufficient to support consumption of 2.5% in 214, which would be up from 2.2% this year End of period rates 12 13f 14f US$/C$ Source: Bank of Canada, RBC Economics Research s Interest Rates: Canada % 1-Year Bond Yield BoC Overnight Rate Source: Bank of Canada, RBC Economics Research s Canadian Real GDP Growth Composition Percentage points Consumer Government Residential Non-res. Net trade Inventories spending spending investment investment Source: Statistics Canada, RBC Economics Research Housing market s balancing act. After the sharp run up in home sales from March to September, activity faltered in October as affordability conditions deteriorated mildly. Demand and supply conditions tightened slightly in the fall, and price increases accelerated. The cooling in market activity in October likely represented a turning point after a rush by some homebuyers to lock-in low mortgage rates buoyed activity. We expect home sales to stabilize near current levels, although some further modest pullback may occur in the months ahead as payback for sales that may have been advanced during the rush to lock-in lower rates. Overall, we expect affordability in Canada s housing market to continue to deteriorate in 214 as longer-term interest rates gradually increase. Bank of Canada frets about inflation outlook. The Bank of Canada maintained the policy rate at 1.% in 213 but removed its tightening bias in October on the back of worries about the persistently low level of inflation. By December, the Bank s concern about the inflation backdrop was heightened by the headline inflation rate dipping to.7% in October. With that said, the Bank still viewed the overall risks to the outlook as balanced and anticipated that the economy would reach its productive capacity on schedule in late 215. We expect the Bank to maintain the policy rate at 1.% throughout 214 while awaiting confirmation that growth in the domestic economy is being augmented by a recovery in exports. Until that time, policy stimulus will be needed to support domestic demand. As indicated, we believe that the US economy is on the cusp of a period of stronger growth that will stimulate demand for Canadian exports to be aided by a weaker Canadian dollar. While we expect no change in the Bank of Canada s overnight policy rate in 214, longer-term interest rates are likely to rise in line with the gradual, upward shift in US Treasury yields. Canada s economy to make headway in reducing output gap in 214. The combination of firm consumer spending and accelerating export demand will support business investment in 214 as capacity levels become stressed. This sets up for a widespread increase in economic activity, further tightening in labour market conditions, and an eventual pickup in inflation toward the Bank of Canada s 2% target. Our forecast for real GDP growth of 2.6% in 214 and 2.7% in 215 means that much of the output gap will be eliminated by the third quarter of 215, thereby resulting in the inflation rate rising to the 2% target. The Bank of Canada will remain on the sidelines until this occurs, meaning 214 will be another year of historically low interest rates. 8 ECONOSCOPE, ROYAL BANK OF CANADA

10 PAUL FERLEY, ROBERT HOGUE, LAURA COOPER PROVINCIAL OUTLOOK PROVINCIAL GROWTH DISPARITY TO NARROW IN 214 STRONGER US ECONOMY TO BENEFIT UNDER-PERFORMING PROVINCES DISPROPORTIONATELY A striking feature of provincial economic performances in both 212 and 213 has been the wide disparity among the various regions of Canada. The Prairie Provinces powered ahead, thanks to their resource sectors while the lack of similar catalysts held back most other provinces. Such wide differences in outcomes restrained overall growth in Canada to just 1.7% in both years. We believe that a healthier and progressively stronger US economy will help reduce the disparity starting in 214 and contribute to stronger overall growth nationally. Rising US demand for Canadian-made building materials, motor vehicles, and other transportation equipment, machinery, industrial equipment, and a host of other goods and services will stimulate exports from some provinces disproportionately: namely, Ontario, British Columbia, and Quebec. We project growth in these provinces to accelerate noticeably in 214 (to 2.6%, 2.4%, and 1.8%, respectively). Nova Scotia is expected to show a faster rate of growth (2.1%), reflecting the ramping up of production at a new offshore natural gas facility. WHICH WILL RAISE GROWTH TO A HIGHER PLANE IN CANADA The improvement in underperforming provincial economies will be reflected in Canada s real GDP growth rising to a rate of 2.6% in 214. Of the leading provinces in 213, we expect only Alberta to grow faster in 214 (at 3.9%) than it will in 213 (3.3%). We project growth to be steady in Manitoba (at 2.3%) and moderate in Saskatchewan (to 2.1%). We expect the pace in Newfoundland and Labrador to slow (to 1.5%) from an unsustainable 6.% in 213.We expect slight improvement in New Brunswick (to 1.%) and Prince Edward Island (to 1.4%). REAL GDP GROWTH N.&L. ALTA. ALTA. SASK. ONT. ONT. ALTA. CANADA B.C. MAN. B.C. CANADA CANADA MAN. MAN. ONT. SASK. SASK. P.E.I. N.S. N.S. B.C. QUE. N.&L. N.S. N.&L. QUE. QUE. P.E.I. N.B. N.B. 213 N.B. 214 P.E.I. 215 % Source: Statistics Canada, RBC Economics Research HIGHLIGHTS We project Canada s national economy to expand at the faster rate of 2.6% in 214 compared to the 1.7% recorded in both 212 and 213. The acceleration will result from a narrowing of the substantial growth disparity among the provinces in 212 and 213, rather than a broad-based pickup in the pace. Specifically, it will be renewed vigour in underperforming provinces such as Ontario, British Columbia, and to a lesser extent, Nova Scotia, and Quebec that will drive up growth in the country in 214. The growth leaders since 21 the Prairie Provinces are expected to continue to show brisk activity; however, they will contribute little to the quickening of the pace, with Alberta the only one among them forecasted to accelerate somewhat. The general theme remains that the western part of the country is Canada s main engine of the expansion; starting in 214, however, the dividing line will shift between Ontario and Quebec. Generally speaking, we expect mostly similar outcomes relative to 214 in terms of real GDP growth Alberta still leading the pack and most of the Atlantic Provinces still trailing. ECONOSCOPE, ROYAL BANK OF CANADA 9

11 FORECAST DETAIL CANADA RBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS = Annual Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED Household consumption Durables Semi-Durables Non-durables Services Government expenditures Residential investment Business investment Non-residential structures Machinery & equipment Final domestic demand Exports Imports Inventories (change in $b) Real gross domestic product OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED Business and labour Productivity Pre-tax corporate profits Unemployment rate (%)* Inflation Headline CPI Core CPI External trade Current account balance ($b) % of GDP Housing starts (s)* Motor vehicle sales (mill., saar)* INTEREST AND EXCHANGE RATES %, END OF PERIOD Overnight Three-month Two-year Five-year year year Canadian dollar * Quarterly averages, level Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts December ECONOSCOPE, ROYAL BANK OF CANADA

12 FORECAST DETAIL UNITED STATES RBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS = Annual Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED Consumer spending Durables Non-durables Services Government spending Residential investment Business investment Non-residential structures Non-residential equipment Intellectual property Final domestic demand Exports Imports Inventories (change in $b) Real gross domestic product OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED Business and labour Productivity Pre-tax corporate profits Unemployment rate (%)* Inflation Headline CPI Core CPI External trade Current account balance ($b) % of GDP Housing starts (s)* Motor vehicle sales (mill., saar)* INTEREST RATES %, END OF PERIOD Fed funds Three-month Two-year Five-year year year Yield curve (1s-2s) * Quarterly averages, level Source: U.S. Bureau of Economic Analysis, RBC Economics Research forecasts December 213 ECONOSCOPE, ROYAL BANK OF CANADA 11

13 CURRENT TRENDS CURRENT ECONOMIC INDICATORS CANADA - US COMPARISONS FROM FROM YEAR- LATEST FROM FROM YEAR- LATEST PRECEDING YEAR TO- MONTH PRECEDING YEAR TO- MONTH MONTH AGO DATE MONTH AGO DATE BUSINESS Industrial production Sep Oct. Mfg. inventory - shipments (level) Sep Oct. New orders in manufacturing Sep Oct. Business loans - Banks Oct Oct. Index of stock prices Nov Nov. HOUSEHOLDS Retail sales Sep Nov. Auto sales Oct Nov. Total consumer credit Sep Oct. Housing starts Nov Sep. Employment Nov Nov. PRICES Consumer price index Oct Oct. Producer price index Oct Nov. INTEREST RATES Policy rate Nov Nov. 9-day commercial paper rates Nov Nov. Government bond (1 years) Nov Nov. Seasonally adjusted % changes unless otherwise indicated. Interest rates are levels. 1 The U.S. series is an index. 2 Canada = S&P/TSX; United States = S&P 5 3 Excludes credit unions and caisses populaires. 4 Canada s producer price index is not seasonally adjusted. December ECONOSCOPE, ROYAL BANK OF CANADA

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