World trade rises 5.3% in Q1 2010

June 2010 TABLE OF CONTENTS World trade rises 5.3% in Q1 2010 1 Highlights 2 The Canadian economy 2 The U.S. economy 3 Oil prices tumble after US jobs report 4 Flight to quality hits Canadian dollar 4 CFIB Business Barometer Index 4 Key indicators Canada 5 World trade rises 5.3% in Q1 2010 World trade volume rose by 3.5% in March and is up 5.3% during the first quarter of 2010, according to the CPB Netherlands Bureau for Economic Policy Analysis. Trade volumes increased worldwide, with the notable exception of Japanese imports. Both exports and imports of the Euro area surged in March, with world trade now 4% below the peak level reached in April 2008 and 21% above the trough reached in May 2009. For several months now, momentum has been consistently highest in emerging Asia and Latin America, while in the Euro area it has been relatively low. Imports into emerging Asia were already 13% higher than their April 2008 peak. More encouragingly, world industrial production grew by 0.2% in March 2010, and is up by 10.9% from last year, the highest such annual rate in CPB s series (which starts in 1991). World production continues to grow in all regions, emerging Asia excepted. In March industrial production was 1.9% below the peak level reached in March 2008, and it has risen by an accumulated 12% from the March 2009 trough. World merchandise trade, volume (seasonally adjusted) Level index, three months moving average, 2000=100 BDC s Monthly Economic Letter is produced by the Strategy and Enterprise Risk Management department and is based on a variety of public sources of economic data. Reliance on and use of this information is the reader's responsibility. Copyright 2010 Business Development Bank of Canada 1 888 INFO BDC www.bdc.ca 160 140 120 100 80 99 00 01 02 03 04 05 06 07 08 09 10 Source: CPB Netherlands Bureau for Economic Policy Analysis PAGE 1 BDC S MONTHLY ECONOMIC LETTER JUNE 2010

Canada Canada adds another 25,000 jobs in May Bank of Canada hikes overnight rate to 0.5% Real GDP surges 6.1% in Q1 Corporate profits rise 4.8% in Q1 Retail sales rise 2.1% in March Manufacturing shipments edge up 0.1% in February Trade surplus narrows to $254 million in March United States Census hiring boosts U.S. payrolls in May Manufacturing index edges down to 59.7 in May Retail sales rise 1.6% in March Durable goods orders rise 2.4% in April Housing starts rise 5.8%% to 672,000 units in April The Canadian economy Canada adds another 25,000 jobs in May The Canadian economy added 25,000 jobs in May, following a surge of 108,700 jobs in April. The unemployment rate remained unchanged at 8.1%. Beneath the headline figure, the breakdown was strong. A gain of 67,000 full-time jobs more than offset the loss of 43,000 part-time jobs. More importantly, a gain of 43,000 private sector jobs was posted. The service sector created 32,000 jobs, led by transportation and warehousing (+26,100). The goods producing sector declined by 7,700 jobs as manufacturing gained a modest 3,000 jobs but natural gas posted large losses (-10,700). At the provincial level, half the provinces recorded net gains, led by Ontario (18,000) and Alberta (15,000) while employment slipped in B.C. (-10,000) and Quebec (-5,000). With private sector employment now growing by almost 6% in Q2, and the wage bill up a strong 6.4%, domestic demand will continue adding to real GDP growth in the second quarter. Bank of Canada hikes overnight rate to 0.5% As widely expected, the Bank of Canada hiked its overnight rate by 25 basis points, to 0.5%. The Bank also re-established the normal operating band of 50 basis points for the overnight rate. Despite the economic concerns stemming from Europe, the Bank opted to begin its tightening campaign against a backdrop of strong momentum in emerging Asia, the consolidation of the U.S. economic recovery, and very strong domestic growth in Canada. While recognizing that the current level of interest rates still leaves considerable monetary stimulus in place, the Bank warned that further reductions in monetary stimulus would need to be carefully weighted against domestic and global economic developments. With this latest move, the Bank of Canada is the first among its G7 peers to increase rates after the global financial crisis. In spite of this, the tone of the policy statement appeared rather cautious and the future path of interest rates is far from certain owing to substantial global uncertainty. Real GDP surges 6.1% in Q1 Canadian real GDP surged 6.1% in the first quarter, the largest quarterly increase in over a decade. The gains were broadbased, led by domestic demand (+4.7%). Consumer spending 6% 4% 2% 0% -2% -4% -6% (+4.4%) and residential investment (+23.6%) contributed the most to economic growth. Business investment grew by 0.9%, led by a 7.6% gain in investment in machinery and equipment. Non-residential investments edged up 0.9% but this sector has yet to recover. Exports rose 12%, a third increase in a row. Imports surged 14.1% after increasing 12.4% in Q4 2009. Inventories contributed roughly 2.4 percentage points to growth in Q1. The strength underpinning this report is undeniable. Real GDP is only 0.4% from its pre-recession peak and domestic demand is already above it. Looking ahead, the momentum will continue, allowing the Canadian economy to expand further in Q2. Real GDP growth and domestic demand % change (annualized) The best performance in real GDP since Q4 1999 Real GDP 6.1% Domestic demand 4.7% -8% 99 00 01 02 03 04 05 06 07 08 09 10 Source: NBF Economy & Strategy Corporate profits rise 4.8% in Q1 Canadian corporate profits rose 4.8% in the first quarter, a third consecutive increase in a row. The gains are widespread, as profits in 11 of 16 sectors are above their level of the third quarter 2008. Manufacturing is one of these sectors, with profit margins in Canada s factory sector surging by 5.7% in Q1.In fact, the aggregate performance of non-financials excluding energy, which account for 64% of corporate Canada s operating profits in Q1, is now only 2% away from their pre-recession peak. This is a clear indication that the global demand for Canadian goods more than offset the negative impact of the strong loonie in Q1. Retail sales rise 2.1% in March Retail sales rose 2.1% in March, the fourth consecutive increase. This was the strongest monthly gain since mid-2003, bringing retail sales 1.5% past their pre-recession peak. Stripping out inflation, real retail sales were up an equally impressive 2.2%, suggesting that the strength was entirely driven by consumer demand and not related to prices. Looking at details of the report, roughly 36% of the increase came from motor vehicles & parts (+3.6%), with new car sales at their highest in two years. Excluding motor vehicles and parts, retail sales increased 1.7%, with the largest contributors being building materials, garden equipment and supplies dealers (+6.6%), clothing and clothing accessories (+4.4%) and sporting goods, hobby, book and music stores (+3.1%). On a regional basis, sales rose in all provinces in March, with Newfoundland & Labrador (+3.1%), Quebec (+2.8%), Ontario (+2.7%) and PEI (+2.7%) leading the pack. Looking ahead, the surge in volume sales through the first three months of 2010 puts real GDP on PAGE 2 BDC S MONTHLY ECONOMIC LETTER JUNE 2010

track to grow close to 5% in Q1, and with strong employment gains, momentum should carry forward in Q2. Manufacturing shipments increase by 1.2% in March Manufacturing shipments rose 1.2% in March to $44.5 billion. Gains were reported in 12 of 21 industries, representing twothirds of total sales. The largest contributors to the gain were food manufacturers (+3.5%) and motor vehicles and parts manufacturers, which reported gains of 3.6% and 2.7% respectively. The primary metals subsector, which has been one of the major drivers of growth in the sector, also posted a 1.9% gain in March. In terms of the forward looking indicators, both unfilled and new orders declined slightly by 0.8% and 0.4%, respectively, while the inventory-to-shipments ratio dropped by a further 0.3 points to 1.32. The I/S ratio has moved below prerecession territory and reflects the fact that much of the inventory pressure on manufacturers has been relieved and is a very positive sign for the sector. This development, coupled with the inventory rebuilding south of the border, should support Canadian factory sales in the months to come. Trade surplus narrows to $254 million in March Canada s merchandise trade surplus narrowed to $254 million in March after posting a $1.2 billion surplus in February. The value of total exports fell by 0.8% due to falling energy prices, while exports after adjusting for price-effects rose by a robust 2.3%. On the other hand, imports grew by 2% and 5.3% in nominal and real terms, respectively. More encouragingly, the 9.5% annualized increase in volume imports of machinery & equipment in Q1 is an indication of improved business investments in that category, something that should help to improve business productivity in Canada. Looking ahead, demand for Canadian goods should increase with an improving U.S. economy, further bolstering the trade sector. The U.S. economy Census hiring boosts U.S. payrolls in May U.S. non-farm payrolls came in below expectations, rising by 431,000 in May. Most of the gains were due to temporary Census 2010 hiring, which added 411,000 jobs to the total. The unemployment rate fell to 9.7% on a fall of the participation rate. Private sector payrolls were only up 41,000 in May, the weakest showing in four months. Nevertheless, the threemonth moving average is currently running at 140,000, and full-time employment has been increasing at a monthly pace of 300,000 since the start of the year (even after excluding Census employment, it was still up 214,000 in May). Looking ahead, the earnings backdrop remains favourable for a pickup in private-sector job creation in the coming months. Also, the wage bill is currently expanding at a 5% annual clip in Q2, the strongest showing since early 2007. This will continue to support consumption in Q2, providing further momentum to the ongoing recovery. 8% 4% 0% -4% Private sector wage bill and personal consumption expenditures (q/q, annual rate) Consumption Wage bill -8% 90 92 94 96 98 00 02 04 06 08 10 Source: NBF Economy & Strategy Manufacturing index edges down to 59.4 in May Economic activity in the U.S. manufacturing sector expanded in May for the tenth consecutive month. The ISM index edged down to 59.7 from 60.4, but remained well above the key 50 threshold indicating expanding economic activity. Gains were widespread, with 16 of 18 industries reporting growth in May. Leading indicators were still positive with New Orders and Backlog of Orders registering 65.7 and 59.5 respectively. All other key sub-indexes, except for inventories, showed growth during the month of May. Overall, the report confirmed that manufacturing continues to move ahead and has not lost much in the way of momentum. With employment growth picking up, manufacturing activity will see further gains in the months ahead. Durable goods orders rise 2.9% in April Durable goods orders rose 2.9% in April, the seventh consecutive monthly increase. Excluding transportation, orders declined by 1.0%. Non-defense capital goods orders excluding aircraft posted a 2.4% decline, and total capital goods orders are up 7.4% during April, due to a sharp increase in civilian aircraft orders. Nonetheless, non-defense capital goods orders excluding aircraft had grown very strongly during the first quarter, averaging 12.4% year-over-year growth. These core capital goods orders are a good proxy for investment spending, and although April s figure is weaker, it should not be discouraging given the recent momentum. Retail sales rise 0.4% in April Retail sales rose 0.4% in April following an upwardly revised March figure (to 2.1% from 1.6%). Excluding automobiles, sales were also up 0.4%. The bulk of the gains in retail sales in April came from a massive 6.9% gain in building materials, which followed a near 8% gain in the previous month. This strength is due to the pickup in home sales, which have rebounded 18% from the trough last year. Auto sales edged up 0.5% in April, in spite of a strong 6.7% increase in March. Looking ahead, with a visible improvement in the jobs market, momentum in consumer spending into the second quarter will remain very strong. PAGE 3 BDC S MONTHLY ECONOMIC LETTER JUNE 2010

Housing starts rise 5.8% to 672,000 units in April U.S. housing starts rose by 5.8% to 672,000 units in April, following an upwardly revised 635,000 units in March. During the month, single-family home construction rose by 10.2% to 593,000 units, while the more volatile multi-family home construction fell by 18.6% to 79,000 units, giving up the bulk of gains seen in March. Despite the gains, housing activity will likely cool in May. The number of permits for new construction issued in April fell 11.5% to 606,000, after posting gains in February and March. The weakness in permit extensions will limit new construction activity next month. Nevertheless, assuming insignificant revisions, residential investment expenditures are most likely to make a positive contribution to real GDP in the second quarter. Oil prices tumble after US jobs report Oil prices tumbled by nearly three dollars following weaker than expected US payrolls data and a stronger US currency. Crude oil prices sank to $71.78 a barrel following the report as fears of a prolonged downturn resurfaced. National small business confidence signaling sustainable growth Following a somewhat gloomy April, CFIB s Business Barometer Index posted a reading of 67.3 about a point above its previous level, and in line with its average since the late summer of 2009. This level of optimism signals that the economy is growing at a subdued, but sustainable annualized rate of about 3%. Small and mid-sized retailers lead the way in optimism, with an index score of 72.8, followed closely by those in the mining, oil and gas sector at 71.2. Less optimistic are business owners in agriculture, construction and hospitality each registering indexes under the 61 level. Optimism levels among businesses in the remaining sectors are clustered around the national average. CFIB Business Barometer Index and GDP QUARTERLY MONTHLY $160 $120 $80 $40 $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Global Insight Flight to quality hits Canadian dollar Despite solid job gains in May, the Canadian dollar dropped sharply as investors broadly fled risky assets in favour of long-term treasury bonds. Ongoing concerns In Europe have weighed heavily on commodity currencies. The loonie is trading at 95.47 US cents. rgdp 3mnth-%ch-SAAR Index (0-100)* Source: Canadian Federation of Independent Business * Index of 50 = equal balance of stronger and weaker business expectations. Note that CFIB s Business Barometer Index has been revised as of May 2009. The Index is based on the same survey, but is now a weighted average of response scores: 100 for stronger performance, 50 for same performance and 0 for weaker performance. $1.10 $1.00 $0.90 $0.80 $0.70 $0.60 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: Global Insight PAGE 4 BDC S MONTHLY ECONOMIC LETTER JUNE 2010

KEY INDICATORS - CANADA Historical 2010 Latest Forecast 2005 2006 2007 2008 2009 Q1 Q2 Q3 Q4 2010 2011 Real GDP (% growth) 3.0 2.9 2.5 0.4-2.6 6.1 Dec. 5.0 3.3 3.0 Machinery and Equipment Expenditures (% growth) 14.1 10.5 4.4 0.5-19.2 7.5-9.2 2.7 6.4 Pre-Tax Corporate Profits (% growth) 10.9 5.1 4.1 5.7-33.2 16.8-14.8 21.9 11.1 Industrial Production (% growth) 1.6 0.2 0.2-4.2-10.0 11.7 8.8 5.4 5.2 Industrial Product Prices (% growth) 1.5 2.3 1.6 4.3-3.4 1.7 2.8 Non-Residential Construction (% growth) 6.8 7.5 6.9-2.7-8.5-5.4-8.5 Housing Starts (' 000 units) 225 227 228 211 149 199 Apr. 202 185 180 Personal Expenditures (% growth) 3.7 4.1 4.6 3.0 0.2 4.4 3.0 2.8 Consumer Price (% growth) 2.2 2.0 2.1 2.4 0.3 2.3 Mar. 1.4 1.9 2.2 Employment (% growth) 1.4 1.9 1.9 1.5 1.3 1.6 Unemployment Rate (%) 6.8 6.3 6.0 6.2 8.3 8.2 May 8.1 8.1 7.7 SMEs Confidence Index (CFIB) 66.4 67.3 67.2 56.1 57.7 68.4 May 66.4 Manufacturers Confidence Index (CFIB) 68.3 66.4 64.5 52.7 56.0 69.7 May 69.9 Credit Conditions (Bank of Canada)* -16.5-9.8 15.0 32.0 8.0-1.3 Mar. -1.0 Sources: Statistics Canada, Consensus Economics and Canadian Federation of Independent Business, Bank of Canada *Business Outlook Survey, balance of opinion on tightened terms and conditions for obtaining financing compared with previous three months. Figures reflect annual averages. PAGE 5 BDC S MONTHLY ECONOMIC LETTER JUNE 2010