Highlights This Month

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1 September 2018 CANADIAN Q2 GDP GROWTH BOUNCES HIGHER GLOBAL ECONOMY LOSING ALTITUDE THOUGH REMAINS ON POSITIVE GROWTH PATH SOME PROVINCES NOW FACE THE DOWNSIDE OF TIGHT LABOUR MARKETS

2 Volume 42, Number 9 September 2018 RBC ECONOMICS RESEARCH Craig Wright SENIOR VICE PRESIDENT & CHIEF ECONOMIST Dawn Desjardins VICE PRESIDENT & DEPUTY CHIEF ECONOMIST Paul Ferley ASSISTANT CHIEF ECONOMIST MACROECONOMICS Robert Hogue SENIOR ECONOMIST REGIONAL ECONOMIES Nathan Janzen SENIOR ECONOMIST MACROECONOMICS Josh Nye SENIOR ECONOMIST FINANCIAL MARKETS & MACROE- CONOMICS Joseph Allegritti RESEARCH ASSOCIATE Rannella Billy-Ochieng ECONOMIST IN BRIEF Highlights This Month 2 CANADIAN Q2 GDP GROWTH BOUNCES HIGHER Canadian Q2/18 GDP growth rose to 2.9% from 1.4% in Q1, backed by a jump in exports and strengthening in consumer spending. 6 GLOBAL ECONOMY LOSING ALTITUDE THOUGH REMAINS ON POSITIVE GROWTH PATH With policy uncertainty high and unemployment rates running below their pre-recession averages, the risk is rising that the peak in global growth is behind us. 10 SOME PROVINCES NOW FACE THE DOWNSIDE OF TIGHT LABOUR MARKETS As baby boomers reach retirement age in greater numbers, these labour issues are poised to get worse. Ramya Muthukumaran ECONOMIST Andrew Agopsowicz SENIOR ECONOMIST EDITOR Adrianna Pineda 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, 200 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.

3 CURRENT TRENDS Paul Ferley, Dawn Desjardins, Nathan Janzen, Josh Nye HIGHLIGHTS Canadian Q2/18 GDP growth rose to 2.9% from 1.4% in Q1. CANADIAN Q2 GDP GROWTH BOUNCES HIGHER LATEST AVAILABLE: JUNE RELEASE DATE: AUGUST 30, 2018 Canadian Q2/18 GDP growth rose to 2.9% from 1.4% in Q1. The Q2 gain was marginally below market expectations of a 3.1% increase though slightly above the Bank of Canada s forecasted 2.8% gain. Q2 GDP strength largely reflected both exports rising an annualized 12.3% after increasing only 2.4% in Q2 along with a strengthening in consumer spending growth to 2.6% from 1.0% in Q1. The bounce in consumer spending contributed to domestic demand rising 2.1% from a 1.7% Q1 increase with the gain restrained by residential and business investment rising 1.1% and 1.9%, respectively. The strengthening largely reflected a rebound in exports along with some strengthening in consumer spending. Both areas had been negatively impacted by adverse winter weather in the first quarter with these pressures easing in Q2. The wage measures in the GDP report, along with the separate May SEPH employment earnings numbers, point to the Bank of Canada s wage-common measure rising 2.4% in Q2 little changed from the increase in the first quarter. Employment fell 52k in August to retrace most of a 54k increase in July. The 0.2% dip in headline retail sales a 0.3% decline excluding the impact of prices retraced little of a big 2.2% jump in May. August housing starts unexpectedly dropped 2.3% in the month to an annualized 201.0k from 205.8k in July. The July trade deficit unexpectedly shrank to $0.1 billion from $0.7 billion in June. Canadian inflation report for July came in much stronger than expected with the year-over-year rate unexpectedly jumping to 3.0% rather than expectations for an unchanged 2.5%. Real GDP % change, month-over-month Source: Statistics Canada

4 CANADIAN LABOUR MARKET IMPROVE- MENT TOOK A BREATHER IN AUGUST LATEST AVAILABLE: AUGUST RELEASE DATE: SEPTEMBER 7, 2018 Employment fell 52k in August to retrace most of a 54k increase in July. Sectors of strength in July (like education hiring) were generally not areas of weakness in August. The unemployment rate ticked up to 6.0% from the 5.8% in July that matched a more-than 4-decade low. Wage growth for permanent workers slowed to 2.6% from 3.0% in July. Unemployment rate % of labour force Source: Statistics Canada CANADIAN RETAIL SALES GIVE BACK LITTLE OF MAY GAIN IN JUNE LATEST AVAILABLE: JUNE RELEASE DATE: AUGUST 22, 2018 The 0.2% dip in headline retail sales a 0.3% decline excluding the impact of prices retraced little of a big 2.2% jump in May. Sales of motor vehicles and parts edged down 0.7% on a monthly basis but sale volumes in the sector were still up almost 2% from year-ago levels that were already historically very high. Sales posted a 0.3% increase in June excluding autos and a price-led 2% drop at gasoline stations. That built on a 1.1% jump in May. Sale volumes in Q2 as a whole still bounced back 3.7% at an annualized rate after falling almost 5% in Q1. Including spending on services not captured in the retail report, underlying consumer spending growth trends still look respectable, albeit down from the unsustainably strong pace in Retail sales % change, month-over-month Source: Statistics Canada

5 CANADIAN AUGUST HOUSING STARTS MODERATE LATEST AVAILABLE: AUGUST RELEASE DATE: SEPTEMBER 11, 2018 August housing starts unexpectedly dropped 2.3% in the month to an annualized 201.0k from 205.8k in July. Market expectations had been a rebound in August starts to 216.3k largely premised on indications of still very robust housing permits data. August s decline was largely split between urban single -detached units dropping 2.6% to 52.2k while the usually more volatile urban multiples dropped a marginally lesser 2.4% 132.7k. Rural starts averaged 16.1k little changed from July s level. Housing starts Thousands Source: Canadian Mortgage and Housing Corporation CANADA S TRADE DEFICIT NARROWED FURTHER IN JULY LATEST AVAILABLE: JULY RELEASE DATE: SEPTEMBER 5, 2018 The July trade deficit unexpectedly shrank to $0.1 billion from $0.7 billion in June. The July shortfall was the smallest since a small surplus was posted in December Markets expected a $1 billion deficit in July. Exports rose 0.8% in nominal terms but fell 0.8% in volume terms. Import volumes declined 1.6% in volume terms but despite an increase in equipment imports that is a good sign for Q3 Canadian business investment spending. Non-energy export volumes inched lower on a monthover-month basis in July but were still up 4% from a year ago. Merchandise trade C$ billions, annualized Exports Imports Source: Statistics Canada

6 CANADIAN JULY CPI JUMPS SIGNIFICANTLY HIGHER LATEST AVAILABLE: JULY RELEASE DATE: AUGUST 17, 2018 Canadian inflation report for July came in much stronger than expected with the year-over-year rate unexpectedly jumping to 3.0% rather than expectations for an unchanged 2.5%. A lion s share, though not all, of the upward surprise could be attributed to sizeable increases in airfares and travel services. Despite evidence of price pressure emerging in the overall CPI, the Bank of Canada will likely take some comfort from the annual increase in its core measures remaining at 2.0% in July and thus in line with its inflation target. Consumer price index % change, year-over-year Source: Statistics Canada % change from: ECONOMY AT A GLANCE Lastest Previous month month Year ago Real GDP Jun Industrial production Jun Employment Aug Unemployment rate* Aug Manufacturing Production Jun Employment Aug Shipments Jun New orders Jun Inventories Jun Retail sales Jun Car sales Jun Housing starts (000s)* Aug Exports Jul Imports Jul Trade balance ($billlions)* Jul Consumer prices Jul * Levels are shown for the latest period and the same period a year earlier. Source: Statistics Canada, RBC Economics Research

7 ECONOMICS AND FINANCIAL MARKETS OUTLOOK GLOBAL ECONOMY LOSING ALTITUDE THOUGH REMAINS ON POSITIVE GROWTH PATH Craig Wright, Dawn Desjardins, Paul Ferley, Nathan Janzen The global economy has been hitting more patches of turbulence over the past few months. Trade tensions are high, with the US keeping the pressure on two of its With policy uncertainty high and unemployment rates top three trading partners - Canarunning below their pre-recession averages the risk is da and China. Although the US rising that the peak in global growth is behind us. and Mexico came to an agreement on trade in late August, Canada has yet to sign on to a revamped NAFTA, and the White House is threatening auto tariffs if a resolution can t be found. The US is also threatening to put tariffs on $200 billion of Chinese imports. Global trade activity has started to ease with the persistence of these trade frictions opening the door to further slowing ahead. Business activity indicators remain consistent with growth however they have started to turn lower in some countries. In the emerging market economies, indices have fallen in China, Turkey and Russia since the beginning of the year while among advanced economies the Euro-area has turned down. With policy uncertainty high and unemployment rates running below their pre-recession averages the risk is rising that the peak in global growth is behind us. Despite the headwinds, we expect the global economy to post a strong gain in 2018 and to avoid a significant downturn next year. Monetary policy stimulus remains, and some countries have opened the spigot on the fiscal front. The US tax cuts and large infrastructure bill will keep the economy on a firm growth path for the remainder of In 2019, growth is likely to slow modestly as the Federal Reserve continues to retract policy support via interest rate increases and as the lift from fiscal policy fades. In Canada and the Euro-area, our forecast is for growth to be more modest, although both regions will likely expand close to their economy s potential rate. The UK economy will lag its trading partners as Brexit uncertainty dampens activity. US ECONOMY REAPING THE BENEFITS OF POLICY STIMULUS The US economy hit warp speed in the second quarter, with real GDP posting the fastest gain since the middle of Growth is likely to gear down modestly in the second half of the year as Q2 s surge in exports unwinds.

8 Outside of the trade sector, most areas of the US economy are projected to maintain their positive momentum. US consumer spending was volatile in the first half of the year with a weak first quarter followed by a surge in consumption which clocked in at a 3.8% rate in Q2. The combination of a robust labour market, rising asset values and an elevated savings rate will support spending activity in the second half of the year. The economy will likely benefit from healthy consumer spending again in 2019, albeit at a someone slower pace as interest rate increases curb borrowing activity. The key support for the US consumer continues to be a strong labour market. The unemployment rate stands at 3.9%, the lowest since late Demand for workers remains strong and the pool of labour is shrinking, suggesting wages will rise as employers compete for increasingly scarce labour. That said, wage growth to-date has been uncharacteristically slow, raising the prospect that structural changes in the economy are at work. Business investment is on the rise with some industries hitting capacity limits. The US Tax Cuts and Jobs Act spurred businesses to spend to take advantage of the full expensing of equipment purchases while the cuts to the CIT saw after-tax profits rise at a 15½% pace compared to the first half of We estimate that fiscal stimulus will add 0.4ppt and 0.3ppt to the economy s output in 2018 and 2019, respectively. These policy measures will however amplify the rise in the debt-to-gdp ratio. Providing stimulus this late in the cycle with the unemployment rate at its cyclical low is uncommon and creates inflation risks. This raises the possibility that the Fed may need to hike rates at a Real GDP growth: Canada Quarter-over-quarter % change, annualized rate 8 6 Real GDP growth: U.S. Quarter-over-quarter annualized % change Annual Growth Rates Real GDP f f Annual Growth Rates Real GDP f 2019f Forecast: Source: Statistics Canada, RBC Economic Research Source: Bureau of Economics Analysis, RBC Economic Research Forecast: faster clip. Inflation pressures are already showing signs of picking up. The headline CPI rate is close to 3% and although a portion of the increase reflects surging energy prices, the core measure which excludes both energy and food prices, has also accelerated to stand at the highest level since the recession. Government spending is augmenting the positive momentum in consumption and business investment and will likely keep the economy growing at an above-potential rate in the second half of this year. The expansion is likely slow mildly in 2019 with real GDP up 2.4% as the Fed reduces the amount of policy stimulus via interest rate increases. The Fed has arguably achieved its dual mandate with the economy at (or even beyond) full employment and inflation around the 2% target. Our forecast assumes the fed funds target will rise 25 bps each quarter and reach 3.5% by the end of A fed funds rate above 3% implies that policy will turn restrictive for the first time in over a decade. We project ten-year yields will reach 3.75% by the end of next year, close to 100bps above today s level. CANADA S ECONOMY CHUGGING ALONG DESPITE TRADE UNCERTAINTY Canada s economic performance was uneven over the first half of 2018 with Q1 s mild 1.4% gain followed by an outsized 2.9% rise in Q2. We expect the second half will be much the same, with a shutdown at a major oil sands producer in July expected to weigh on the quarter s performance to be followed by a rebound in Q4 as production recovers. On net, the economy is forecast to grow by 2.1% in 2018 and slow just a shade in 2019 to 2%. Despite the uncertain trade backdrop, consumer and business confidence remains high. Canada s trade gap narrowed in the second quarter with exports surging as US buyers got ahead of US import tariffs. Given the tense trade backdrop with tariffs being levied on both sides of the border, exports and imports are forecast to rise at a significantly slower pace going forward. The consumer will continue to underpin the expansion although spending growth will slow markedly from 2017 s 3.5% pace. The persistence of solid job gains is generating modest upward pressure on wages although

9 disposable income growth softened a bit in the first half of In part this reflects a rise in tax payments. Households net worth also dipped slightly, but remains historically elevated and sufficient to sustain consumer spending growth of 2% in The outlook for 2019 is for somewhat softer activity as higher interest rates push up debt service costs. HOUSING MARKET CORRECTION RAN DEEPER AND LONGER THAN WE EXPECTED New stress tests for borrowers and rising interest rates weighed on Canada s housing market in the first part of While the correction proved deeper and lasted longer than we had anticipated, we believe it has largely run its course with sales rising in the three months to July. We expect the recovery in sales activity will continue in the second half of the year, limiting the annual decline to 11.5%. The annual drop masks the divergence in housing market activity across regions with BC and Ontario experiencing more substantive declines while Quebec will likely see sales increase on average this year. The correction in sales activity was accompanied by a decline in listings, resulting in most markets shifting into better balance. This took some of the heat off of prices which as of July were up 2.1% from a year earlier. Prices in Vancouver and Montreal are up while after falling prices in Toronto have levelled off. Our forecast looks for price gains to average just 1.8% this year with little change expected in 2019, a marked 40 MLS Home Price Index Year-over-year % change 16 Household debt service ratio: Canada Debt payments as a % of household disposable income Vancouver Toronto Montreal Composite Forecast Q1/ Source: CREA, TREB, REBGV, RBC Economic Research Source: Statistics Canada, RBC Economic Research slowdown from the close to 10% gains recorded in 2016 and Canadian households remain heavily indebted although the debt -to - income ratio fell 0.8 ppts in Q1 from a year earlier to mark the largest annual decline since While the debt service ratio held steady at 13.9 cents per dollar of PDI, this masked an increase in interest costs with higher rates bumping up the interest portion 10.5% relative to early Further rate increases will put more pressure on service payments given the large stock of debt outstanding. The recent acceleration in wage growth will help slow, though won t stop, an uptick in the debt service ratio meaning households will need to direct an increasing amount of their incomes to make their loan payments. BUSINESSES KEEPING A STIFF UPPER LIP Business investment continued to firm in the first half of 2018 as companies expanded their capacity. Since bottoming in late 2016, investment is up more than 12% and an elevated number of Canadian businesses still report they would have difficulty meeting stronger demand. A significant number also reported labour shortages. The June survey was conducted before the US levied tariffs on Canadian steel and aluminum. While 39% of companies still intended to address supply constraints by upping spending on M&E, the number came down sharply from previous surveys. Uncertainty about NAFTA, US tax cuts, and tariffs likely played some role in the pullback. A resolution on NAFTA could fuel further gains in investment activity while the dissolution of the trade pact could see companies pull back significantly. Canada s headline inflation touched 3% in July in large part due to energy prices as well as an unusually large surge in airfares while the bank s core inflation measures converged at 2%. A growing number of businesses expect inflation will be 2% or higher in the year ahead suggests inflation rates are unlikely to slide below target in a meaningful way. Additional, albeit modest, upward pressure on inflation is being generated by Canada s retaliatory tariffs on US imports.

10 POLOZ AND TEAM ON HIKING PATH The Bank of Canada raised the overnight rate to 1.50% in July. Another hike is likely in the fourth quarter as the bank works to move the policy rate closer to neutral given limited slack in the economy and core inflation running at the 2% target. The bank will continue to act with caution in order to minimize the pressure being exerted on household balance sheets as debt service costs go up. Further rate increases in the first half of 2019 are forecast to bring the overnight rate to 2.25% by mid-year. Canada s currency is down 4.3% against the US dollar so far this year however it is holding up against the other majors. The effective exchange rate excluding the USD is down just ½%. To be sure, being part of the countries with a rate-hiking central bank has helped Canada s currency versus the other majors. Looking ahead with both the Fed and the BOC likely to continue to bump up the policy rate at a measured pace, the upside for Canada s currency against USD will be limited. Our bullish outlook for oil will provide some support for CAD, although renewed uncertainty about the Trans Mountain Pipeline will lessen the impact. Interest rates: Canada % 7 10 Year bond yield BoC overnight rate Forecast Proposed and implemented US tariffs on Canadian exports 2017 exports to the US of affected products, billions of C$ Softwood lumber Proposed Implemented Newsprint & uncoated paper Large diameter welded pipe (proposed) Steel & aluminum (proposed) Autos & parts Steel & aluminum (exemption lifted) Uranium Source: Bank of Canada, RBC Economic Research 0 January February March April May June July Source: Statistics Canada, Bank of Canada, US Department of Commerce, RBC Economics Research THE COST OF TARIFFS FOR CANADA S ECONOMY To-date the US government has levied tariffs on 5% of Canadian goods exports. Should the Trump Administration follow through with its threat to levy tariffs on Canadian autos and parts it would mean that 20% of Canadian exports would face tariffs when entering the US. Canada retaliated with tariffs on $16.6 billion of imports from the US that will cut into Canadian import demand in the second half of 2018 and will put upward, albeit modest, pressures on prices. Our forecast assumes that the US tariffs and Canada s retaliatory measures to-date will lower the level of GDP by ~0.2 ppts by the end of Should the Trump administration levy 20-25% tariffs on Canada s auto sector, the impact would be more dramatic. Just how much, though, depends on a myriad of factors: how big the tariffs ultimately are, the range of products targeted and any retaliation from the Canadian side along with offsets from Canadian dollar depreciation just to name a few. Tariffs on production and an assumed decline in auto sales activity would generate an estimated 0.5ppt hit to the economy. Adding on sectors indirectly impacted, could more than double the hit to the economy s growth rate.

11 PROVINCIAL OUTLOOK SOME PROVINCES NOW FACE THE DOWNSIDE OF TIGHT LABOUR MARKETS Robert Hogue, Ramya Muthukumaran, Paul Ferley There are more and more reports of labour shortages in certain industries and regions. As baby boomers reach retirement age in greater numbers, these labour issues are poised to get worse. When it comes to the labour market, things haven t been any better for a generation in Canada. This is especially true in BC, Ontario and Quebec where the unemployment rate plummeted to levels that not long ago most analysts thought unachievable in this day and age. But even more telling is how pervasive the tightness is within these three provinces. In Ontario for instance, more than 86% of local economic regions boast an unemployment rate of 6% or lower something unheard of in modern times. In Quebec, the proportion is 75% and it is just slightly lower in BC at 71%. No wonder workers feel pretty upbeat in these provinces despite growing trade uncertainty. Job prospects are good all round and our outlook calls for more of the same in the period ahead. It s a different story for employers. It has become a bigger challenge to attract and retain workers. A rapidly increasing number of positions are now going unfilled. Job vacancies in fact surged in Quebec, BC and other provinces in the past year. There are more and more reports of labour shortages in certain industries and regions. As baby boomers reach retirement age in greater numbers, these labour issues are poised to get worse. We believe that a tight supply of labour is already restraining economic growth in several provinces this year. This is especially the case in British Columbia where one in every 24 jobs (4.2%) was unfilled in the first quarter, which no doubt inhibits the ability of many businesses to pursue growth opportunities. Tight labour supply also play a key role in slowing growth down in Ontario, Quebec and Alberta, albeit to lesser extents. There are signs that BC and Ontario employers are further challenged by accelerating wages (in part due to significant boosts to the minimum wage over the last year) though such pressure is more contained than we d expect in the current circumstances. The absence of wage pressures in Quebec and other provinces as well as nation-

12 ally is in truth quite surprising. Still, it may be just a matter of time before faster wage growth emerges more broadly. GROWTH TO MODERATE IN ALL PROVINCES IN 2018 Tight labour markets are part and parcel of the Canadian economy operating at capacity. To prevent the emergence of excess demand a situation that leads to overheating the Bank of Canada has embarked on an interest rate hiking campaign to moderate GDP growth toward its long-run potential rate. Our view is that rising interest rates will have the desired effect and contribute to overall growth in Canada easing from 3.0% last year to 2.1% in This constitutes a slight upward revision of 0.1 percentage points in 2018 from our June Provincial Outlook report. We expect growth to moderate from 2017 in all provinces. Cooling housing markets and the winding down of major capital projects will be among the restraining factors in some of the provinces. BC and Central Canada are effectively at full employment... Unemployment rate in %, average between January and August Canada = with most local areas having very little spare labour Proportion of economic regions with a jobless rate of 6% or lower in %, 3-month average August 2017 August BC AB SK MB ON QC NB NS PE NL 0 Canada Atlantic Quebec Ontario Prairies BC Source: Statistics Canada, RBC Economic Research Source: Statistics Canada, RBC Economic Research While decelerating, Central Canada is still going quite strong, with consumers at the helm. Quebec s economy maintained solid momentum in the first half of 2018 led by growth in residential construction, service industries and manufacturing. Quebec s merchandise exports are up year to date; however, tariffs on key commodities (including aluminum and softwood lumber) and the threat of further tariffs might put these gains at risk over the remainder of this year. Nonetheless, the economic vigour to date led us to revise our 2018 forecast for Quebec s growth to 2.4% from 2.1% previously. Trade concerns cast an even bigger shadow on Ontario s economy where the threat of tariffs in the auto sector could have a potentially devastating impact. Still, the trade uncertainty so far hasn t really been more than a nuisance. A weaker housing market has been a bigger restraining factor. We project Ontario s economy to grow at a still respectful rate of 2.0%, down from 2.7% in Out west, Alberta is in position to be the growth leader among all provinces for a second straight year. Recovery from the tough recession is continuing with more sectors of the economy contributing. Stronger oil prices are a clearly positive development keeping the recovery on track. That being said, we expect growth to slow significantly to 2.5% from last year s outsized rate of 4.7%. Last year s burst spoke more about how deep the economy fell in 2016 than actual vigour in Capital expenditures in the oil and gas sector have yet to turn around they fell 2% in the first half of Despite growing labour headwinds and a sharp drop in housing market activity, we expect British Columbia s economy to grow at a solid rate of 2.3% this year, though this will be down from 3.7% last year. Strong wage gains and population growth will continue to provide support for household spending in the province. Saskatchewan s economy is still on track to grow slightly above the Canadian average at 2.2% though this was revised downward by 0.2 percentage points in light of recent indications that crop production will be weaker than we previously assumed. The outlook for the province would be even brighter were it not for a disappointing job market where employment remains stalled. Lower crop production expectations also dim Manitoba s growth prospects this year. Recent agricultural reports prompted us to reduce growth by 0.2 percentage points to 1.7%. The winding down of major capital

13 Finally, Atlantic Canada is a mixed bag with PEI emerging as a bright spot once again with a growth of 1.4%. Solid population growth mainly thanks to immigration is fueling substantial activity across several economic sectors on the island including housing and household spending. At the other end of the spectrum, we expect virtually no growth from Newfoundland & Labrador s economy. With major investment projects winding down, employment will continue to fall in the province. A shrinking working-age population will be a restraining factor in New Brunswick where we project growth to be slow at just 0.6% in The pace won t be much faster in Nova Scotia at 0.8%. Slower capital formation resulting from winding down construction investments as well as a letup in residential project investment will result in a sluggish pace. REAL GDP GROWTH AB QC BC SK Canada ON MB PE NS NB NL REAL GDP GROWTH SK NL AB Canada BC ON QC MB PE NS NB

14 FORECAST DETAIL - CANADA RBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS = Forecast 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 (000s)* 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

15 FORECAST DETAIL - UNITED STATES RBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS = Forecast 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 (000s)* Motor vehicle sales (millions, saar)* INTEREST RATES %, END OF PERIOD Fed funds Three-month Two-year Five-year year year Yield curve (10s-2s) *Quarterly averages, level Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts December 2016

16 CANADA - US COMPARISONS CURRENT ECONOMIC INDICATOR Business FROM PRECEDING MONTH FROM YEAR AGO YEAR-TO- DATE LATEST MONTH FROM PRECEDING MONTH FROM YEAR AGO YEAR-TO- DATE Industrial production* Jun Aug. Manufacturing inventory - shipments ratio (level) Jun Jul. New orders in manufacturing Jun Jul. Business loans - Banks Jul Aug. Index of stock prices** Aug Aug. Households Retail sales Jun Aug. Auto sales Jul Aug. Total consumer credit*** Jul Jul. Housing starts Aug Jul. Employment Aug Aug. Prices Consumer price index Jul Aug. Producer price index**** Jul Aug. Interest rates Policy rate Aug Aug. 90-day commercial paper rates Aug Aug. Government bonds - CANADA LATEST MONTH (10 years) Aug Aug. US Seasonally adjusted % changes unless otherw ise indicated. Interest rates are levels. *The U.S. series is an index. **Canada = S&P/TSX; United States = S&P 500 ***Excludes credit unions and caisses populaires ****Canada's producer price index is not seasonally adjusted