CANADIAN NOVEMBER GDP CONTINUES TO INCREASE MARKET OPTIMISM BEING TESTED CANADA S ECONOMY EXITS 2013 ON FIRM NOTE

February 2014 CANADIAN NOVEMBER GDP CONTINUES TO INCREASE MARKET OPTIMISM BEING TESTED CANADA S ECONOMY EXITS 2013 ON FIRM NOTE MONEY MARKET VOLATILITY TO PROMPT ECB RATE CUT

Volume 38, Number 2 February 2014 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 JOSH NYE ECONOMIST Financial Markets and Microeconomics 2 CANADIAN NOVEMBER GDP CONTINUES TO INCREASE With the November GDP increase slightly stronger than we had assumed, we are now monitoring the fourth-quarter 2013 growth rate strengthening marginally to 3.0%. 5 MARKET OPTIMISM BEING TESTED January provided a jolt to financial markets with some data reports erring on the weaker side of expectations compounded by concerns about developments in a few of the emerging economies. 7 CANADA S ECONOMY EXITS 2013 ON FIRM NOTE The data released in the past month, on balance, were strong enough to support an upgrade to our forecast for real GDP growth in the fourth quarter to 3.0% at an annualized rate from 2.6% previously. 8 MONEY MARKET VOLATILITY TO PROMPT ECB RATE CUT Recent survey-based indicators point to the euro area recovery continuing to gain a modest degree of momentum. 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, 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. Visit our web site...at www.rbc.com/economics/ and www.rbc.com/economie/ Get your issues delivered by email... by sending your request along with your email address to rbceconomicsresearch@rbc.com.

PAUL FERLEY, DAWN DESJARDINS, JOSH NYE CURRENT TRENDS NOVEMBER GDP CONTINUES TO INCREASE HIGHLIGHTS With the November GDP increase slightly stronger than we had assumed, we are now monitoring the fourthquarter 2013 growth rate strengthening marginally to 3.0%. Despite the disappointing gains in payrolls in January 2014 and December 2013, the average increase during the last four months is a relatively solid 175,000. The sharp rise in volume of November retail sales builds further onto the 0.2% gain in October. A third consecutive monthly decline brought housing starts to their lowest level since April 2013. The December trade numbers are consistent with net exports continuing to be a drag on growth in the fourth quarter of 2013. LATEST AVAILABLE: NOVEMBER Real GDP % change, month-over-month 0.8 RELEASE DATE: JANUARY 31, 2014 0.6 November 2013 gross domestic product 0.4 (GDP) rose 0.2% following a 0.3% gain 0.2 in October. Goods-producing industries 0.0 rose 0.4% despite manufacturing activity declining 0.5% with strong offsetting -0.2-0.4 increases in utilities (2.1%) and mining -0.6 (1.7%). The service-producing side of -0.8 the economy rose 0.2% with a 0.6% -1.0 decline in wholesale trade offset by gains -1.2 in most other components including a -1.4 0.8% gain in retail trade. The slowing -1.6 2009 2010 2011 2012 2013 in November GDP was not unexpected Source: Statistics Canada after very strong increases in October and September of 0.3%. There is the risk of a more pronounced slowing in December for which inclement weather in the final two weekends before Christmas may even result in activity declining marginally in the month. The earlier solid gains, however, bode well for fourth-quarter 2013 annualized GDP growth being maintained at an above-potential rate following the 2.7% recorded in the third quarter. We expect inflation to drift higher going forward, driven by still-anchored expectations around the Bank s 2% target. Unemployment Rate % of labour force 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 2007 2008 2009 2010 2011 2012 2013 2014 Source: Statistics Canada LABOUR MARKET RECOVERED 29,400 JOBS IN JANUARY FOLLOWING DECEMBER S 44,000 DROP LATEST AVAILABLE: JANUARY RELEASE DATE: FEBRUARY 7, 2014 Canadian employment increased by 29,400 in January 2014. The unemployment rate fell to 7.0% in January from 7.2% in December 2013. Employment gains were concentrated in service-producing sectors, which rose 25,800, and were augmented by 3,600 more jobs in goods-producing industries. Full-time employment, which fell by 56,000 in December, rebounded in January with 50,500 jobs created. Parttime employment was scaled back with 21,100 jobs cut in the month. After grow- 2 ECONOSCOPE, ROYAL BANK OF CANADA

ing at an above-potential pace in the second half of 2013, the economy s growth rate is likely to slow in the first quarter of 2014 as transitory factors weigh in; however, this will likely prove to be temporary with a reacceleration expected thereafter. Against this backdrop, we look for the January jobs recovery to continue. Retail Sales % change, month-over-month 3.0 2.0 NOVEMBER RETAIL SALES REBOUND LATEST AVAILABLE: NOVEMBER RELEASE DATE: JANUARY 23, 2014 Nominal retail sales in November 2013 rose 0.6%, which more than reversed the 0.1% decline in October. The nominal increase in November was helped by a 1.0% jump in motor vehicle sales and a price-related increase in gasoline station receipts of 1.0%. Excluding the volatile motor vehicle and gasoline station components, sales rose 0.3%, thereby adding to the 0.8% gain in October. The increase in so called core sales was helped by a 6.4% surge in sales at electronic and appliance stores along with a 1.8% gain in furniture stores and a 1.1% rise in sales at clothing stores. These increases helped to offset declines in sales at building material stores (1.5%) and food stores (1.1%). On a volumes basis, retail sales rose 0.8%. With indications of higher gasoline prices, this suggested indications of price discounting going into the Christmas sales period and competitive pressure among food retailers. 1.0 0.0-1.0-2.0-3.0 2009 2010 2011 2012 2013 Source: Statistics Canada HOUSING STARTS CONTINUED TO MODERATE IN JANUARY LATEST AVAILABLE: JANUARY RELEASE DATE: FEBRUARY 10, 2014 Housing starts declined for a third consecutive month, falling by 3.7% to 180,200 annualized units in January 2014 (see Housing Starts chart on page 4). The decline in overall housing starts reflected lower urban multiples (-6.0%) and rural starts (-12.0%) while urban singles provided some offset with a 3.4% increase. Starts declined fairly substantially in Atlantic Canada (-24.9%), Quebec (-21.2%), and British Columbia (-16.9%) while both Ontario (9.3%) and the Prairies (10.3%) saw increases in January. A third consecutive monthly decline brought housing starts to their lowest level since April 2013, although bad weather in January 2014 and December 2013 may have weighed on readings in those months. With building permits having once again outpaced starts in the fourth quarter of 2013, there is scope for homebuilding to strengthen in the near term; however, we expect modestly higher interest rates as 2014 progresses will weigh on housing affordability and lead to some moderation in residential building activity going forward. We forecast housing ECONOMY AT A GLANCE % change from: Latest Previous Year month month ago Real GDP Nov 0.2 2.6 Industrial production Nov 0.7 2.6 Employment Jan 0.2 0.8 Unemployment rate* Jan 7.0 7.0 Manufacturing Production Nov -0.5 0.4 Employment Jan -0.4-1.2 Shipments Dec -0.9 2.7 New orders Dec 4.5 4.9 Inventories Dec -0.3 3.4 Retail sales Nov 0.6 3.1 Car sales Nov -1.7 5.1 Housing starts (000s)* Jan 180.2 155.3 Exports Dec 0.9 2.9 Imports Dec 1.2 7.1 Trade balance ($billlions)* Dec -1.7 0.0 Consumer prices Dec -0.2 1.2 * 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

Housing Starts Thousands 300 280 260 240 220 200 180 160 140 120 100 06 07 08 09 10 11 12 13 14 Source: Canadian Mortgage and Housing Corporation Merchandise Trade C$ billions, annualized 550 500 450 400 350 Imports Exports 300 2007 2008 2009 2010 2011 2012 2013 Source: Statistics Canada Consumer Price Index % change, year-over-year 5 4 3 2 1 0-1 -2 05 06 07 08 09 10 11 12 13 Source: Statistics Canada starts of 182,000 in 2014, down only slightly from the 187,000 units in 2013 although well below the 195,000 average seen in the second half of last year. DECEMBER TRADE DEFICIT DEEPENS LATEST AVAILABLE: DECEMBER RELEASE DATE: FEBRUARY 6, 2014 The December 2013 merchandise trade deficit widened to $1.66 billion from a downwardly revised $1.55 billion shortfall in November. The deterioration reflected imports rising $0.48 billion with a $0.36 billion rise in exports providing some offset. The rise in imports was largely the result of a $0.7 billion rise in the energy component with the increase in exports being more broadly based. On a volumes basis (using 2007 chained dollars), imports rose 0.4% although this outstripped a 0.2% gain in exports, thereby resulting in the real trade deficit rising to $1.3 billion from $1.2 billion in November. The December trade numbers are consistent with net exports continuing to be a drag on growth in the fourth quarter of 2013. The restraint is likely to deepen and subtract 1.0 percentage points from the annualized fourth-quarter 2013 GDP growth rate relative to the 0.2 percentage point subtraction in the third quarter. This restraint is expected to be more than offset by inventories, including farm inventories rising at even a faster pace, resulting in a strengthening in fourth-quarter 2013 GDP growth to 3.0% from 2.7% in the third quarter. CONSUMER PRICE INFLATION RATES ROSE ALTHOUGH STILL INDICATED LIMITED PRICE PRESSURE AT END OF 2013 LATEST AVAILABLE: DECEMBER RELEASE DATE: JANUARY 24, 2014 Canada s headline consumer price index fell 0.2% on a not seasonally adjusted basis in December 2013. On a year-over-year basis, the inflation rate rose to 1.2% from 0.9% in November. The Bank of Canada s core measure dipped 0.4% on an unadjusted basis in the month. The year-over-year core rate rose to 1.3% from 1.1% in November. The Bank of Canada put great emphasis on the downside risks to inflation in the statement accompanying its recent rate decision. Although this report showed an uptick in the year-over-year rates, it will do little to allay the Bank s concerns given that in the course of the fourth quarter of 2013, the headline rate averaged just 0.9% while the core rate ran at 1.2%. We expect inflation to drift higher going forward, driven by still-anchored expectations around the Bank s 2% target, an improving demand backdrop, and to a lesser extent, increases in imported goods prices given the weakening in the Canadian dollar. 4 ECONOSCOPE, ROYAL BANK OF CANADA

DAWN DESJARDINS FINANCIAL MARKETS MARKET OPTIMISM BEING TESTED January provided a jolt to financial markets with some data reports erring on the weaker side of expectations compounded by concerns about developments in a few of the emerging economies. The net result was that investors sold equities, and the MSCI world index posted its largest one-month drop since May 2012. The Emerging Markets Stock Index fell for the third consecutive month, losing 6.6% in January 2014, while the G-7 market indices were down 3.8%. The flight from equities to fixed income saw government bond yields tumble, with the 10-year US Treasury yield recording a 37 basis points decline, 10-year Government of Canada yield falling 43 basis points, and the euro-area benchmark yield down 28 basis points in January. In part, the turnaround in financial markets reflected worries that the strengthening in the global economy s growth momentum in the second half of 2013 stalled following a batch of somewhat weaker than expected data. These concerns were heightened by volatility in some of the emerging economies due to reduced capital inflows, tightening in monetary conditions, and political uncertainty all of which increased the downside risks to the growth outlook. HIGHLIGHTS Financial market volatility ramped up in January. Wave of not so strong data and concerns about emerging market turbulence spreading caused investors to run to the safety of bonds. The US data have been mixed but still support our view that the pickup in growth will be sustained. Stronger growth and continued Fed tapering set up the drop in yields in January to be reversed. DATA GYRATIONS ARE NOT A PRECURSOR TO GLOBAL GROWTH SLOWDOWN The purchasing managers surveys provide the most current snapshot of momentum in the manufacturing and service sectors. The slow drip of results of these surveys in the latter part of January and early February showed mixed results with US and China s manufacturing sector activity slipping while euro-area companies reported increased activity in both manufacturing and services. Canada s manufacturing index fell to an eight-month low. With that said, the JP Morgan composite purchasing managers index that aggregates all the regional results posted a small increase in January remaining firmly rooted above the 50-mark that separates expansion from contraction in activity. US DATA BALANCE OF REPORTS SHOW ECONOMY IS IN GOOD SHAPE January reports on the US economy ranged from a strong 3.2% annualized gain in real GDP output in the fourth quarter of 2013 to disappointing labour reports in December 2013 and January 2014. In between, the mix showed strengthening activity in the service sector, a pop in consumer confidence, but slowing housing sales and manufacturing activity. The details of these reports indicated that some of the weakening reflected a hit to activity from inclement weather in December and January. Looking through the volatility, we see little to challenge our expectation that the US economy is headed for a stronger year of growth in 2014. INVENTORY CORRECTION MEANS SLOWER GROWTH IN Q1 Part of the strong growth story in the second half of 2013 was that inventory building added 2.1 percentage points to the economy s growth rate. The other part of the ECONOSCOPE, ROYAL BANK OF CANADA 5

-2-4 -6-8 US Real GDP Quarter-over-quarter annualized % change Forecast -10 2007 2008 2009 2010 2011 2012 2013 2015 Source: Bureau of Economics Analysis, RBC Eco. Research 7 6 5 4 3 2 1 6 4 2 0 Fed Funds Rate % Annual Growth Rates 12 13f 14f 15f Real GDP 2.8 1.9 2.9 3.1 Forecast 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: Federal Reserve Board, RBC Economics Research growth story reflected strengthening final domestic demand, with consumer spending accelerating at the fastest pace in three years in the fourth quarter. The strength in consumer spending more than compensated for a sharp drop in government spending due to the 16-day partial government shutdown that occurred in October. Looking ahead at the first quarter of 2014, the inventory build-up in 2013 is likely to start to be unwound as businesses meet increased sales with stock on hand. This correction is estimated to trim the economy s growth rate by just over a percentage point in the first quarter. Growth will also be affected by adverse weather conditions, thereby limiting economic activity as signalled by both manufacturers and service providers in the Institute for Supply Management (ISM) reports for January. Reflecting these factors, we lowered our forecast for real GDP growth in the first quarter to 2.0% at an annualized rate from 2.3% previously. US ECONOMY TO PICK UP ITS PACE AGAIN IN Q2 In large part, the factors that are expected to weigh on growth in the first quarter will prove transitory. The combination of low interest rates and lessening fiscal and political uncertainty will fuel stronger consumer spending and business investment, resulting in the economy running at an above-potential pace for the remainder of the year. The runoff from the pickup in demand will be a graduated increase in the pace of job creation accompanied by a decline in the unemployment rate. The follow-through to inflation will be slower given that even with the economy growing at an abovepotential clip, the output gap that was generated during the recession remains large. Furthermore, the prospect that energy prices will ease slightly during 2014 suggests that the headline consumer price index (CPI) inflation rate will only inch upward. FED TO KEEP NOSE TO THE GRINDSTONE The handoff of the role of Chair of the Federal Reserve to Janet Yellen on February 1, 2014 does not, in our view, change the course for monetary policy in the near term. Our assessment is that the improvement in economic conditions will persist, that the labour market is headed for another decent year of growth, and that the unemployment rate will continue to fall, thereby setting up for the Fed to taper the amount of securities purchased further at upcoming meetings. This process will likely put modest upward pressure on longer-term yields. Unlike the labour market, inflation pressures will continue to run well below the Fed s objective of 2.0%. Given the significant amount of excess capacity in the economy, it is likely that inflation will remain below the Fed s target until late 2015; at which time, policymakers will begin the process of tightening monetary policy by raising the fed funds target band. 6 ECONOSCOPE, ROYAL BANK OF CANADA

DAWN DESJARDINS FINANCIAL MARKETS CANADA S ECONOMY EXITS 2013 ON FIRM NOTE The data released in the past month, on balance, were strong enough to support an upgrade to our forecast for real GDP growth in the fourth quarter to 3.0% at an annualized rate from 2.6% previously. Similar to the US, a build-up of inventories was a key contributor to the quarterly rise supplemented by a pickup in consumer spending. Unlike the US, Canadian exports contracted and resulted in trade acting as a drag on the growth rate. The near-term forecast profile for Canada s economy is the mirror image of the US, with the combination of adverse weather dampening activity and a likely unwinding of the inventory build set to limit the growth rate in the first quarter. As these transitory factors diminish, the economy will reaccelerate. The net effect of these forecast tweaks will be negligible for the year as a whole, and we still expect real GDP growth to average 2.6% in 2014. INFLATION WORRIES PLAGUING BOC The Bank of Canada took a marginally more upbeat view of the growth outlook in its January Monetary Policy Report and boosted the 2014 growth projection to 2.5% from 2.3%. The Bank lowered its inflation forecast profile and emphasized that the risk of inflation remaining below target had become increasingly important. The Bank maintained the 1% overnight rate. The improvement in the global, and in particular US, outlook lays the groundwork for stronger Canadian growth in 2014 backed by a upgraded forecast for net exports (the Bank doubled its forecast for the contribution from net trade in 2014 in the January update). The Bank acknowledged that the US economy grew at a faster than projected clip in the second half of 2013 and is likely to maintain improved momentum in 2014. This assessment is in line with our view that a stronger US economy will result in the long-awaited strengthening in demand for Canadian exports with the sharp weakening in Canada s dollar against the US dollar providing additional support. CANADIAN DOLLAR WIPE OUT! The sharp deterioration in the Canadian dollar that kicked off in October when the Bank removed its tightening bias built momentum in January. Since October 23, 2013, the Canadian dollar has lost 6.8% against the US dollar with two-thirds of the drop occurring in January alone. The combination of the growing, though limited, expectations that the Bank may cut rates in 2014, stagnant commodity prices, and a recovery in positive sentiment toward the US dollar had a hand in the Canadian dollar s drop. The trend of a steadily weakening Canadian dollar against its US counterpart is likely to remain in place although the pace of decline will slow. Incorporating January s drop into our forecast resulted in a shift lower of our year-end target to C$1.15 from C$1.09 in our previous forecast with the year-end 2015 forecast shifted to C$1.18 from C$1.15. HIGHLIGHTS Canada s economic news points to the economy turning in another abovepotential quarter for growth in late 2013. Transitory factors are likely to dampen the first-quarter 2014 growth rate although the slowing will be quickly reversed. The Bank of Canada upped the 2014 growth forecast, but lowered the inflation projection and emphasized that the downside risks to the inflation outlook have become increasingly important. The Canadian dollar s decline kept coming in January with the rate falling to its lowest level against the US dollar since 2009. Canada's Real GDP Quarter-over-quarter % change, annualized rate 8 Forecast 6 4 2 0-2 -4-6 -8 Annual Growth Rates 12 13f 14f 15f Real GDP 1.7 1.8 2.6 2.7-10 05 06 07 08 09 10 11 12 13 14 Source: Statistics Canada, RBC Economics Research Forecasts ECONOSCOPE, ROYAL BANK OF CANADA 7

DAWN DESJARDINS, JOSH NYE FINANCIAL MARKETS MONEY MARKET VOLATILITY TO PROMPT ECB RATE CUT HIGHLIGHTS We expect the ECB will cut the refi rate by 15 bp in March while leaving the deposit rate unchanged at 0%. A second iteration of BoE forward guidance should underpin expectations that the Bank Rate is on hold into 2015. Stronger than expected inflation and signs of policy traction prompted the RBA to move to a neutral bias. Above-trend growth and an expected pickup in inflation put the RBNZ on track to begin tightening in March. Recent survey-based indicators point to the euro area recovery continuing to gain a modest degree of momentum. The euro area composite purchasing managers index (PMI) picked up to its highest level in over two years in January, reflecting a solid improvement in the indices of all four major euro area economies. This indicates some early upside risk to our forecast for growth of 0.3% in the first quarter of 2014. Again, inflation surprised to the downside, moderating to 0.7% year over year in January against market expectations for an increase to 0.9%. Subdued inflation and weak money and credit data continue to highlight the need for further easing. This supports our expectation that the European Central Bank (ECB) will cut the refi rate by 15 basis points to 0.10% in March although the main driver of this action will be recent volatility in money markets, where reduced excess liquidity has caused overnight lending rates to drift upward. The ECB may also take action to inject liquidity, with another longer-term refinancing operation (LTRO), a reduction in required reserves, or ceasing the sterilization of SMP purchases. Furthermore, we expect the ECB will reiterate its forward guidance and easing bias. 2 1 0-1 Eurozone Real GDP Growth % change, quarter-over-quarter Forecast BANK OF ENGLAND: FORWARD GUIDANCE NEEDS TO PROVIDE MORE GUIDANCE The UK economy continued to expand at a solid pace with growth of a non-annualized 0.7% in the fourth quarter of 2013 following 0.8% gains in each of the two previous quarters. Survey-based indicators moderated in January, which was consistent with our expectation that growth will slow to 0.5% in the first quarter of 2014. The unemployment rate continued its rapid decline, falling to 7.1% in November from 7.4% in the previous month, and 7.8% when the Bank of England (BoE) introduced forward guidance in August. Even with the unemployment approaching the BoE s 7.0% threshold much faster than expected, significant slack remains in the labour market that is likely to lead the BoE to modify its framework (with the release of the Inflation Report on February 12) by incorporating a broader range to labour market indicators. Not only would this give the BoE a broader framework on which to assess conditions in the economy but also will likely result in pushing back market expectations for the first rate hike, which have moved forward aggressively in recent months. We expect that the change in guidance will better align with our forecast that the Bank Rate will be held at 0.50% until the fourth quarter of 2015. -2 Annual Growth Rates 12 13f 14f 15f Real GDP -0.6-0.4 1.0 1.2-3 06 07 08 09 10 11 12 13 14 15 Source: Eurostat, RBC Economics Research RESERVE BANK OF AUSTRALIA (RBA) SHIFTS INTO NEUTRAL Recent economic reports prompted the RBA to shift firmly to a neutral bias with the February rate decision noting that the most prudent course is likely to be a period of stability in interest rates. Notable improvement was reported in retail activity as 8 ECONOSCOPE, ROYAL BANK OF CANADA

sales grew at their fastest quarterly pace in almost five years. Furthermore, stronger than expected trade shifted the balance of risks to our 0.7% fourth-quarter 2013 growth forecast to the upside. Other signs of policy traction include continued home price gains and decade-high dwelling approvals, which should result in solid home construction in 2014. Inflation surprised to the upside in the fourth quarter due to greater than expected pass through from a weaker exchange rate and a slight pick up in domestic price pressure. The combination of an improving economic backdrop and stronger than expected inflation sets up for the RBA to stay on the sidelines, and we expect the cash rate to be held at 2.50% into 2015. 7 6 5 4 3 2 ECB Refi Rate % Forecast RESERVE BANK OF NEW ZEALAND (RBNZ) READY FOR MARCH HIKE Inflation picked up to a stronger than expected 1.6% year-over-year pace in the fourth quarter, with the breakdown showing that the domestic economy was beginning to generate some price pressure and the disinflationary effect of the high exchange rate was starting to wane. Although inflation remains below the RBNZ s 2% midpoint target, we expect solid growth in the second half of 2013 will continue into 2014, thus contributing to further demand-driven price gains. This supports our view that the RBNZ will begin tightening with a 25 basis point hike in March, a move that was hinted at in the January rate announcement. 1 0 03 04 05 06 07 08 09 10 11 12 13 14 15 Source: ECB, RBC Economics Research ECONOSCOPE, ROYAL BANK OF CANADA 9

FORECAST DETAIL CANADA RBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS = Forecast 2013 2014 2015 Annual Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012 2013 2014 2015 GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED Household consumption 1.1 3.6 2.2 2.8 2.6 2.5 2.4 2.3 2.3 2.2 2.2 2.2 1.9 2.2 2.6 2.3 Durables 2.2 12.7-0.6 4.5 3.7 2.4 2.4 2.4 2.4 2.6 2.5 2.5 2.6 3.6 3.3 2.4 Semi-Durables 0.1 1.6 6.3 6.0 2.6 3.2 2.8 2.5 2.5 2.6 2.5 2.5 2.1 2.2 3.7 2.6 Non-durables -0.8 1.5 2.1 2.2 2.6 3.2 2.8 2.5 2.5 2.3 2.3 2.3 0.7 1.6 2.5 2.5 Services 1.9 2.9 2.4 2.2 2.3 2.1 2.2 2.1 2.1 2.1 2.1 2.1 2.2 2.2 2.3 2.1 Government expenditures 0.0 1.7 0.4 0.2 0.4 0.4 0.4 0.4 0.8 0.8 1.0 1.0 1.1 0.8 0.4 0.7 Residential investment -4.4 6.8 2.4-2.5-0.4-1.6-3.4-2.1-0.6 0.6-0.2 0.0 6.1 0.1-0.7-1.0 Business investment 1.4-1.3 2.2 2.1 4.5 7.5 6.9 5.6 4.6 5.0 4.7 4.3 6.2 1.8 4.3 5.3 Non-residential structures 1.9-1.9 2.1 4.5 3.0 8.3 7.2 6.0 4.5 5.1 4.8 4.4 6.9 2.2 4.5 5.5 Machinery & equipment 0.7-0.2 2.5-1.7 6.8 6.3 6.5 4.9 4.7 4.9 4.4 4.2 5.2 1.2 3.9 5.0 Final domestic demand 0.3 2.2 1.8 1.7 2.1 2.3 2.1 1.9 2.0 2.1 2.1 2.0 2.3 1.5 2.0 2.1 Exports 4.8 3.4-2.0-0.3 9.8 8.5 9.1 9.4 8.3 7.8 7.2 6.7 1.5 1.1 5.6 8.3 Imports 2.8 1.4-1.4 2.8 2.3 4.3 5.8 6.3 5.5 5.5 5.5 5.3 3.1 0.9 2.9 5.6 Inventories (change in $b) 10.2 5.4 10.2 20.0 10.1 7.7 6.9 6.6 7.0 7.0 7.0 6.0 6.8 11.5 7.8 6.7 Real gross domestic product 2.3 1.6 2.7 3.0 2.0 3.0 2.8 2.7 2.9 2.8 2.5 2.2 1.7 1.8 2.6 2.7 OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED Business and labour Productivity -0.5 0.4 0.7 1.2 1.5 1.5 1.7 1.5 1.5 1.5 1.5 1.4 0.0 0.4 1.5 1.5 Pre-tax corporate profits -10.2-8.2-1.1 2.9 1.8 8.5 5.0 4.0 6.5 6.4 5.0 4.3-4.9-4.4 4.8 5.6 Unemployment rate (%)* 7.1 7.1 7.1 7.0 6.9 6.8 6.7 6.7 6.6 6.6 6.5 6.5 7.2 7.1 6.8 6.6 Inflation Headline CPI 0.9 0.8 1.1 0.9 1.1 1.5 1.5 1.6 1.8 1.9 1.9 2.0 1.5 0.9 1.4 1.9 Core CPI 1.3 1.2 1.3 1.2 1.2 1.4 1.5 1.8 1.8 1.9 1.9 2.0 1.7 1.3 1.5 1.9 External trade Current account balance ($b) -59.1-63.7-61.9-66.5-49.4-48.2-46.4-45.3-43.6-42.7-42.0-41.3-62.2-62.8-47.3-42.4 % of GDP -3.2-3.4-3.3-3.5-2.6-2.5-2.4-2.3-2.2-2.1-2.0-2.0-3.4-3.3-2.4-2.1 Housing starts (000s)* 170 190 195 195 190 184 178 178 176 176 173 173 215.0 187.4 182.4 174.4 Motor vehicle sales (mill., saar)* 1.71 1.79 1.80 1.78 1.79 1.80 1.80 1.81 1.81 1.82 1.83 1.83 1.7 1.8 1.8 1.8 INTEREST AND EXCHANGE RATES %, END OF PERIOD Overnight 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50 1.75 1.00 1.00 1.00 1.75 Three-month 0.98 1.02 1.00 0.95 1.00 1.05 1.10 1.10 1.10 1.35 1.60 1.85 1.05 0.95 1.10 1.85 Two-year 1.00 1.22 1.20 1.14 1.15 1.30 1.50 1.65 1.85 2.15 2.55 2.70 1.05 1.14 1.65 2.70 Five-year 1.30 1.80 2.00 1.96 1.90 2.15 2.40 2.70 2.80 3.00 3.30 3.50 1.30 1.96 2.70 3.50 10-year 1.88 2.44 2.65 2.77 2.70 3.00 3.20 3.40 3.50 3.65 3.90 4.10 1.75 2.77 3.40 4.10 30-year 2.50 2.90 3.15 3.24 3.25 3.45 3.70 3.90 3.95 4.05 4.20 4.40 2.40 3.24 3.90 4.40 Canadian dollar 1.02 1.05 1.03 1.06 1.09 1.10 1.13 1.15 1.16 1.17 1.17 1.18 0.99 1.06 1.15 1.18 * Quarterly averages, level Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts February 2014 10 ECONOSCOPE, ROYAL BANK OF CANADA

FORECAST DETAIL UNITED STATES RBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS = Forecast 2013 2014 2015 Annual Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012 2013 2014 2015 GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED Consumer spending 2.3 1.8 2.0 3.3 2.3 2.5 2.6 2.7 2.9 3.0 2.9 2.7 2.2 2.0 2.5 2.8 Durables 5.8 6.2 7.9 5.9 3.7 6.0 6.0 6.2 6.3 6.5 6.4 6.1 7.7 7.1 5.7 6.3 Non-durables 2.7 1.6 2.9 4.4 2.1 2.3 2.4 2.5 2.8 3.1 2.8 2.5 1.4 2.1 2.7 2.7 Services 1.5 1.2 0.7 2.5 2.2 2.1 2.1 2.2 2.3 2.4 2.3 2.2 1.6 1.2 2.0 2.3 Government spending -4.2-0.4 0.4-4.9 3.7 0.1 0.4 0.4 1.0 1.0 1.3 1.5-1.0-2.2 0.1 0.8 Residential investment 12.5 14.2 10.3-9.8 10.2 18.4 16.6 14.1 11.2 10.1 9.0 7.9 12.9 12.0 8.9 12.1 Business investment -4.6 4.7 4.8 3.8 5.7 9.0 8.0 8.6 8.4 8.4 7.9 7.9 7.3 2.6 6.4 8.3 Non-residential structures -25.7 17.6 13.4-1.3 1.0 10.4 5.8 7.0 6.5 6.5 6.0 6.8 12.7 1.3 5.7 6.7 Non-residential equipment 1.6 3.2 0.2 6.9 8.0 8.3 9.1 9.5 9.4 9.3 8.8 8.4 7.6 2.9 6.8 9.1 Intellectual property 3.8-1.5 5.7 3.2 4.6 4.6 4.6 4.6 4.0 4.0 4.1 4.3 3.4 3.1 4.1 4.3 Final domestic demand 0.5 2.1 2.3 1.4 3.2 3.2 3.2 3.2 3.3 3.3 3.2 3.1 2.4 1.5 2.7 3.2 Exports -1.3 8.0 3.9 11.4 6.5 7.0 8.4 8.4 8.5 9.0 8.2 8.3 3.5 2.8 7.6 8.4 Imports 0.6 6.9 2.4 1.0 5.5 6.3 7.9 7.8 7.5 8.0 8.2 8.2 2.2 1.4 4.9 7.8 Inventories (change in $b) 42.2 56.6 115.7 127.2 80.0 68.0 68.0 74.0 74.0 64.0 63.0 60.4 57.6 85.4 72.5 65.4 Real gross domestic product 1.1 2.5 2.9 3.2 2.0 2.9 3.1 3.3 3.3 3.1 3.0 2.9 2.8 1.9 2.9 3.1 OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED Business and labour Productivity 0.5 0.6 0.9 2.1 2.2 1.8 1.3 1.0 1.2 1.4 1.5 1.5 1.4 1.0 1.6 1.4 Pre-tax corporate profits 2.1 4.5 5.7 5.0 6.9 4.5 3.7 3.7 4.9 5.0 5.0 4.9 7.0 4.3 4.7 4.9 Unemployment rate (%)* 7.7 7.5 7.2 7.0 6.6 6.7 6.6 6.5 6.4 6.3 6.2 6.1 8.1 7.4 6.6 6.3 Inflation Headline CPI 1.7 1.4 1.6 1.2 1.4 1.8 1.6 1.7 1.9 1.9 1.9 2.0 2.1 1.5 1.6 1.9 Core CPI 1.9 1.7 1.7 1.7 1.7 1.8 1.8 1.8 1.9 1.9 1.9 2.0 2.1 1.8 1.8 1.9 External trade Current account balance ($b) -420-386 -379-345 -322-324 -331-335 -337-339 -347-354 -440-383 -328-344 % of GDP -2.5-2.3-2.3-2.0-1.9-1.9-1.9-1.9-1.9-1.9-1.9-1.9-2.7-2.3-1.9-1.9 Housing starts (000s)* 957 869 882 1002 1000 1197 1267 1329 1387 1439 1485 1521 783 928 1198 1458 Motor vehicle sales (mill., saar)* 15.3 15.5 15.7 15.6 15.6 16.0 16.1 16.3 16.4 16.6 16.7 16.9 14.4 15.5 16.0 16.6 INTEREST RATES %, END OF PERIOD Fed funds 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.500 0.125 0.125 0.125 0.500 Three-month 0.07 0.04 0.02 0.07 0.05 0.05 0.05 0.05 0.05 0.05 0.10 0.20 0.09 0.07 0.05 0.20 Two-year 0.25 0.36 0.33 0.38 0.35 0.40 0.60 0.85 1.05 1.30 1.65 2.05 0.25 0.38 0.85 2.05 Five-year 0.77 1.41 1.39 1.75 1.60 1.90 2.10 2.50 2.70 2.90 3.10 3.35 0.70 1.75 2.50 3.35 10-year 1.87 2.52 2.64 3.04 2.85 3.10 3.25 3.60 3.70 3.80 4.00 4.20 1.70 3.04 3.60 4.20 30-year 3.10 3.52 3.69 3.96 3.85 4.00 4.05 4.35 4.45 4.55 4.70 4.90 2.90 3.96 4.35 4.90 Yield curve (10s-2s) 162 216 231 266 250 270 265 275 265 250 235 215 145 266 275 215 * Quarterly averages, level Source: U.S. Bureau of Economic Analysis, RBC Economics Research forecasts February 2014 ECONOSCOPE, ROYAL BANK OF CANADA 11

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 1 0.7 2.6 0.8 Nov. 0.3 3.7 2.6 Dec. Mfg. inventory - shipments (level) 1.4 1.4 1.4 Nov. 1.3 1.3 1.3 Dec. New orders in manufacturing 1.2-2.3-0.6 Nov. -1.5 0.8 2.7 Dec. Business loans - Banks 2.1 14.9 11.9 Dec. 1.2 7.4 9.3 Dec. Index of stock prices 2 0.5 8.0 8.0 Jan. 0.8 23.1 0.0 Jan. HOUSEHOLDS Retail sales 0.6 3.1 2.5 Nov. 0.2 4.1 4.3 Dec. Auto sales -1.7 5.1 3.1 Nov. -5.5-6.7 0.0 Jan. Total consumer credit 3 0.3 1.7 2.3 Nov. 0.6 6.2 6.2 Dec. Housing starts -3.7 16.1 16.1 Jan. -9.8 1.6 18.4 Dec. Employment 0.2 0.8 0.8 Jan. 0.4 1.3 0.0 Jan. PRICES Consumer price index -0.2 1.2 0.9 Dec. 0.3 1.5 1.5 Dec. Producer price index 4-0.3 0.8 0.8 Oct. 0.4 1.2 1.2 Dec. INTEREST RATES Policy rate 1.0 1.0 1.0 Jan. 0.13 0.13 0.13 Jan. 90-day commercial paper rates 1.2 1.2 1.2 Jan. 0.1 0.2 0.1 Jan. Government bonds (10 years) 2.5 1.9 2.5 Jan. 2.9 1.9 2.9 Jan. 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 500 3 Excludes credit unions and caisses populaires. 4 Canada s producer price index is not seasonally adjusted. February 2014 12 ECONOSCOPE, ROYAL BANK OF CANADA

ISSN 0712-2012 Printed in Canada