The Q2 decline followed an upwardly revised 2.5% increase in Q1 (2.4% previously) and was generally in line with market expectations of a 1.5% drop.

October 2016 C Q2 GDP 1.6% L - - C Q3 UK Q3 C US S 2016

Volume 40, Number 10 October 2016 RBC ECONOMICS RESEARCH CRAIG WRIGHT SENIOR VICE PRESIDENT & CHIEF ECONOMIST DAWN DESJARDINS VICE PRESIDENT & DEPUTY CHIEF ECONOMIST Financial Markets & Financial System PAUL FERLEY ASSISTANT CHIEF ECONOMIST Macroeconomics ROBERT HOGUE SENIOR ECONOMIST Regional Economies NATHAN JANZEN SENIOR ECONOMIST Macroeconomics LAURA COOPER ECONOMIST Public Policy JOSH NYE ECONOMIST Financial Markets and Macroeconomics GERARD WALSH ECONOMIST Sector Analysis and Provincial Economies EDITOR Brian Waterman rbceconomicsresearch@rbc.com SUBSCRIPTION INFORMATION rbceconomicsresearch@rbc.com IN BRIEF H 2 C Q2 GDP 1.6% The Q2 decline followed an upwardly revised 2.5% increase in Q1 (2.4% previously) and was generally in line with market expectations of a 1.5% drop. 5 L - - If there has been a unifying theme from central banks lately, it s that low rates are here to stay. 8 C Q3 The Canadian economy s ongoing recovery from a wildfire-related second-quarter slowdown was evident with July GDP rising 0.5% to build on June s 0.6% gain. 10 UK Q3 Economic activity in the UK appears to have held up in the third quarter, defying expectations that uncertainty generated by the Brexit vote would lead to a sharp slowdown. 13 C US J 2016 Canadian auto sales dipped 0.5% from a year ago in September, a third consecutive year-on-year decline, according to industry reports. 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, NATHAN JANZEN, JOSH NYE CURRENT TRENDS C Q2 GDP 1.6% HIGHLIGHTS The Q2 decline followed an upwardly revised 2.5% increase in Q1 (2.4% previously) and was generally in line with market expecta ons of a 1.5% drop. The 67k increase in September employment was the strongest since 2012 and built on August s 26k job gain, marking the first me in nearly a year that employment rose in consecu ve months. The August decline in retail sales followed a 0.2% drop in July (previously reported as 0.1%) and was weaker than the 0.3% increase expected going into the report. Housing starts jumped to an annualized 221k rate in September from 184k in August, the strongest pace in a year and well in excess of market expecta ons for a more modest increase to 191k. The trade deficit narrowed to $1.9 billion in August and from $2.2 billion in July. Real GDP % change, month-over-month 0.8 LATEST AVAILABLE: JUNE RELEASE DATE: AUGUST 31, 2016 The Q2 decline followed an upwardly 0.6 0.4 revised 2.5% increase in Q1 (2.4% previously) and was generally in line with market expectations of a 1.5% drop. 0.2 0.0-0.2-0.4-0.6 The separately released June GDP rose a stronger-than-expected 0.6% that fully reversed the 0.6% plunge in May. A sizeable decline in Q2 GDP was generally expected going into the report based on earlier indications that the Alberta -0.8 2012 2013 2014 2015 2016 wildfires, and attendant shutdowns of oil sands production, sent May GDP down Source: Sta s cs Canada sharply. On a quarterly expenditure basis the shutdowns weighed on energy exports in the quarter contributing to overall exports sinking an annualized 16.7%. With imports rising 1.1%, net exports subtracted a sizeable 5.9 percentage points from the Q2 annualized GDP growth rate. The shutdowns likely also limited the bounceback in inventories that still managed to contribute to 2.1 percentage points to Q2 growth. Prior to Q2, inventories subtracted an average of 1.4 ppt for the past four quarters. Year-over-year CPI growth inched up to 1.3% in September from 1.1% in August (but below the 1.5% expected ahead of the report). Unemployment Rate % of labour force 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 2009 2010 2011 2012 2013 2014 2015 2016 Source: Sta s cs Canada C S LATEST AVAILABLE: SEPTEMBER RELEASE DATE: OCTOBER 7, 2016 The 67k increase was the strongest since 2012 and built on August s 26k job gain, marking the first time in nearly a year that employment rose in consecutive months. The unemployment rate was unchanged at 7.0% in September as labour force participation rose. The increase in employment, which was well in excess of market expectations for a 7.5k gain, was broadbased but led by a strong increase in the services sector (+55.5k). Regionally, employment growth was concentrated in Quebec (+38k), Ontario (+16k) and 2 ECONOSCOPE, ROYAL BANK OF CANADA

Alberta (+13k). Even with the increase in September, employment in Alberta has fallen by an average of 2.4k per month this year, with the unemployment rate of 8.5% nearly two percentage points higher than a year ago. C A 0.1% LATEST AVAILABLE: AUGUST RELEASE DATE: OCTOBER 21, 2016 The August decline in retail sales followed a 0.2% drop in July (previously reported as 0.1%) and was weaker than the 0.3% increase expected going into the report. Excluding the impact of prices, the volume of retail sales fell 0.3% following a 0.2% increase in July. A main source of downward pressure in August was a 0.5% decline in sales at motor vehicle dealerships. However, preliminary unit sales numbers for September suggest that this decline will be fully reversed. The decline in core sales was led by a sizeable 0.9% drop in the general merchandise store component following a 0.5% jump in July. Retail Sales % change, month-over-month 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0 2012 2013 2014 2015 2016 Source: Sta s cs Canada C S LATEST AVAILABLE: SEPTEMBER RELEASE DATE: OCTOBER 11, 2016 Housing starts jumped to an annualized 221k rate in September from 184k in August, the strongest pace in a year and well in excess of market expectations for a more modest increase to 191k (see Housing Starts chart on page 4). The gain was broad-based with starts in both urban and rural centres rising 20% from the previous month. The increase in urban starts was driven by both singles and multiples, with the former (and more stable) component rising 14% to the strongest pace since July 2014. The 22% increase in multi-unit starts almost fully retraced declines over the prior two months and left the Q3 pace little changed from Q2. C A LATEST AVAILABLE: AUGUST RELEASE DATE: OCTOBER 5, 2016 The trade deficit narrowed to $1.9 billion in August and from $2.2 billion in July (see Merchandise Trade chart on page 4). Exports inched up 0.6% but following an outsized (and upwardly revised) 4.6% jump in July. The export gain in part reflected a 4.4% rise in energy exports that likely reflects continued recovery of wildfirerelated disruptions to oil production earlier in the summer. Nominal exports excluding the energy sector were unchanged but that was ECONOMY AT A GLANCE % change from: Latest Previous Year month month ago Real GDP Jul 0.5 1.3 Industrial produc on Jul 1.7-0.7 Employment Sep 0.4 0.8 Unemployment rate* Sep 7.0 7.1 Manufacturing Produc on Jul 0.4 0.9 Employment Sep 0.4-0.7 Shipments Aug 0.9-1.0 New orders Aug -0.9-3.2 Inventories Aug -0.5-3.2 Retail sales Aug -0.1 1.6 Car sales Aug 0.9-2.2 Housing starts (000s)* Sep 219.3 233.3 Exports Aug 0.6-2.5 Imports Aug 0.0-3.3 Trade balance ($billlions)* Aug -1.9-2.4 Consumer prices Sep 0.1 1.3 * Levels are shown for the latest period and the same period a year earlier. Source: Sta s cs Canada, RBC Economics Research ECONOSCOPE, ROYAL BANK OF CANADA 3

Housing Starts Thousands 300 280 260 240 220 200 180 160 140 120 100 08 09 10 11 12 13 14 15 16 Source: Canadian Mortgage and Housing Corpora on Merchandise Trade C$billions, annualized 600 despite a 5.8% pullback in motor vehicle exports that Statistics Canada noted may have been related to atypical shutdowns at Canadian auto plants in August and a 16.2% drop in the volatile aerospace component. C CPI S LATEST AVAILABLE: SEPTEMBER RELEASE DATE: OCTOBER 21, 2016 Year-over-year CPI growth inched up to 1.3% in September from 1.1% in August (but below the 1.5% expected ahead of the report). Core price growth held steady at 1.8% year-over-year, unchanged from August but down from 2.1% in July. Much of the downside surprise on headline CPI inflation came from a second consecutive sizeable drop in the volatile vegetable component (a non-core component) that was larger than what is seasonally normal. The year-over-year rate of increase in the headline CPI still rose reflecting a 0.8% gain in gasoline prices from August that was in sharp contrast to the 8% decline in September a year ago. 550 500 450 400 350 Exports Imports 300 2010 2011 2012 2013 2014 2015 2016 Source: Sta s cs Canada Consumer Price Index % change, year-over-year 5 4 3 2 1 0-1 -2 08 09 10 11 12 13 14 15 16 Source: Sta s cs Canada 4 ECONOSCOPE, ROYAL BANK OF CANADA

JOSH NYE FINANCIAL MARKETS L - - If there has been a unifying theme from central banks lately, it s that low rates are here to stay. The Bank of Canada dedicated two recent speeches to lower-for-longer, emphasizing that businesses, savers and policymakers need to adapt to a low interest rate environment. Don t expect rates to rise in Japan anytime soon the Bank of Japan (BoJ) announced they would target 10-year government bond yields at close to current levels (i.e., near zero percent). They also upped their forward guidance, committing to buying assets until inflation stabilizes above two percent. The European Central Bank (ECB) is also expected to continue expanding its balance sheet, with a review of its quantitative easing program likely to yield changes that will allow purchases to continue beyond March 2017. Even the Fed, while attempting to warm markets to the idea of another rate hike, marked down their estimate of the neutral fed funds rate (again) and plotted a course for an even more gradual withdrawal of stimulus. There was a modest selloff in government bonds in the first half of September as investors grew concerned that central banks were becoming less willing to ease policy, but the BoJ s commitment to keep rates low and the Fed s dovish projections took some of the pressure off and yields crept lower by the end of the month. Global equities, as measured by the MSCI World Index, were also little changed by the end of September after a mid-month dip. Improving, or at least steady, growth prospects likely helped, with indications that the US economy is picking up after a slow start to the year while the immediate impact of the Brexit vote on the UK economy has been less severe than feared. The IMF s latest projections left global growth unchanged this year and next the first time they haven t marked down their forecast in more than a year. HIGHLIGHTS US Q2 growth was revised modestly higher but ac vity over the first half of the year s ll disappointed. Recent data has been mixed but we con nue to expect growth picked up strongly in Q3. The Fed s policy statement seemed to be gearing toward a December rate hike, but the Commi ee s projec ons were interpreted dovishly. Our forecast con nues to assume the Fed won t raise rates un l next year. U US US second-quarter GDP growth was revised up to 1.4% (annualized) in the third estimate, led by slightly better business investment growth (+1% rather than the previously estimated 0.9% decline). While that represents a welcome end to back-to-back declines in the prior two quarters (the worst streak since the recession), the increase is hardly inspiring and was led by a sizeable jump in intellectual property investment, with business investment in structures and equipment & software declining. Relative to the first estimate of 1.2% growth, the upward revision was modest although it continues a trend seen over the last year when GDP has consistently been marked higher in subsequent estimates by an average of 0.5 percentage points between the first and third readings. That s something to keep in mind when the advance third-quarter growth numbers are released on October 28th. ECONOSCOPE, ROYAL BANK OF CANADA 5

US Real GDP Quarter-over-quarter % change, annualized rate 6 Forecast 4 2 0-2 -4 14 15 16f 17f Real GDP 2.4 2.6 1.6 2.3-6 09 10 11 12 13 14 15 16 17 Source: Bureau of Economics Analysis, RBC Economics Research Q3 We expect the Q3 release will show the US economy rebounded with a solid 3% gain in the third quarter following the disappointing 1.1% pace of growth in the first half of the year. Activity will continue to be led by the consumer, although August s softer reports on retail sales and personal spending led us to mark down our estimate for PCE growth to just less than 3%. While that would represent a slowdown from the prior quarter s pace (which was the second best gain since the recession), there is little to indicate household spending is losing momentum with consumer confidence rising to a cycle high in September and job growth continuing at a healthy clip. Data on business investment continue to be mixed with another decline in capital goods shipments in August. However, it appears some of the weakness was external, and another rise in orders for capital goods provides some hope for the recent trend of declines to begin reversing. Construction spending edged lower in August but did little to dent earlier gains; coupled with signs of a turnaround in energy sector investment (rig counts increased on a quarterly basis for the first time since oil prices began to collapse in 2014), we expect business investment in structures picked up in the third quarter. We also look for the slowdown in inventory investment to change course (a considerable source of weakness for more than a year) while net exports will likely add to growth. F S The Fed s September meeting seemed to provide something for everyone balancing a hawkish policy statement with more dovish economic projections and the market reaction was ultimately fairly muted. The Committee acknowledged indications that growth is picking up after a slow first half of the year, and job growth was seen as solid even with the unemployment rate holding steady in recent months. The case for a rate hike was seen as having strengthened (as Chair Yellen noted in her Jackson Hole speech) and risks to the outlook were characterized as roughly balanced for the first time this year. However, the Committee elected to wait for further evidence of progress toward its objectives before raising rates again, albeit with three voters dissenting in favour of an immediate rate hike. The updated dot plot showed most members continue to expect a rate increase will be appropriate this year, although market odds for a December hike barely budged at close to 50/50 immediately following the meeting. Other changes gave the Fed s projections a dovish tilt. Committee members now expect two rate hikes will be appropriate next year (down from three previously) while the estimate of the longer run neutral fed funds rate was marked down once again to slightly below 3%. With the Committee eyeing a very gradual withdrawal of 6 ECONOSCOPE, ROYAL BANK OF CANADA

stimulus, the fed funds rate isn t projected to hit the neutral mark over their forecast horizon (i.e., by the end of 2019). The lower-for-longer narrative was further reinforced with the Fed marking down its estimate for longer run GDP growth to 1.8% from 2.0% previously. We think there is downside risk even to the Fed s lowered dot plot. While the Committee is clearly trying to steer markets toward a December rate hike, the Fed has previously shown sensitivity to global and financial market developments, and there are plenty of potential risks on the horizon (the US election, money market reform, stress in the banking sector, political risk in Europe) that could derail plans for a hike later this year. 7 6 5 4 3 2 1 Fed Funds Rate % Forecast 0 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Federal Reserve Board, RBC Economics Research ECONOSCOPE, ROYAL BANK OF CANADA 7

JOSH NYE FINANCIAL MARKETS C Q3 HIGHLIGHTS Another solid increase in monthly GDP points to an above-3% gain in Q3. The latest Business Outlook Survey showed a more posi ve view of future sales, investment and employment. The Bank dedicated several speeches to lower-for-longer interest rates and highlighted policy measures that can boost poten al growth. Macropruden al regula on gives the Bank more room to manoeuvre, but we expect rates will be held steady this year and next. The Canadian economy s ongoing recovery from a wildfire-related second-quarter slowdown was evident with July GDP rising 0.5% to build on June s 0.6% gain. The increase was led by a further rebound in oil and gas extraction, which returned close to first-quarter levels, while another increase in manufacturing output and an above-trend gain in services also helped sustain momentum. The pickup in activity lends further support to our forecast for a 3.7% annualized increase in third-quarter GDP that would retrace the second quarter s 1.6% decline. A good portion of that gain is set to come from net trade with energy exports having rebounded following the production outages while non-energy exports are set to make up for some of the previous quarter s weakness. Consumer spending is expected to continue making a solid contribution to GDP growth, although the boost from Child Care Benefit payments will likely be more apparent in coming quarters with cheques having been distributed late in July. The Bank of Canada s Autumn Business Outlook Survey had a slightly more optimistic tone than in previous reports, with indications that activity in the resources sector may be bottoming out while conditions continue to gradually pick up in the non-resources economy. Stronger employment and investment intentions were also encouraging, although both remain somewhat subdued relative to history. The overall tone of a modestly improving outlook and gradual rotation in demand supports our forecast for growth to be sustained at a slightly above-trend pace beyond the expected third-quarter bounce. B C - - After a quiet summer, Bank of Canada policymakers were out in force in September with speeches featuring a central theme: lower-for-longer. Senior Deputy Governor Wilkins outlined the financial stability risks that come along with slow potential growth and low interest rates mainly greater stress on household balance sheets, reach for yield and pressure on banks margins. Governor Poloz followed with a speech on how consumers and businesses can adjust to a low interest rate environment. He noted that some of the recent weakness in business investment could be explained by companies being slow to adjust their expectations to structurally lower returns. He also highlighted non-monetary policy initiatives such as infrastructure investment and trade liberalization that have the potential to boost productivity and compensate for a demographic-driven slowdown in potential growth. Another talk by Poloz on the impact of greater trade integration emphasized the need for flexible inflation targeting as interest rates and the currency may have to adjust more significantly to economic shocks than under low integration. In the current context, his message seemed to be that monetary policy will have to stay accommodative for a longer period as trade integration makes the economy s transition more difficult. 8 ECONOSCOPE, ROYAL BANK OF CANADA

October saw the first fruits of the federal government s deep dive into housing with Finance Minister Morneau announcing measures to set more uniform standards for insured mortgages, improve tax fairness and spread the government s exposure to the housing market. We see the stricter qualifications for some insured mortgages (including the popular five-year fixed rate option) as likely to have the most impact, tempering sales activity across all of Canada s markets not just in Vancouver and Toronto. Macroprudential regulation arguably gives the Bank of Canada more freedom to lower interest rates and stimulate the economy without exacerbating risks from household imbalances. However, their narrative on lower-for-longer seems to be that we need a more balanced mix of policies to boost growth and enhance productivity longer term. While the Bank has signaled that it could mark down its growth forecast in October, with the economy likely to reach full capacity later than previously assumed, we see the Governing Council holding interest rates steady and allowing some time for other policy levers (fiscal stimulus, and particularly infrastructure investment) to shore up growth. Canada Real GDP Quarter-over-quarter % change, annualized rate 8 Forecast 6 4 2 0-2 -4-6 -8 14 15 16f 17f -10 Real GDP 2.5 1.1 1.3 1.8 09 10 11 12 13 14 15 16 17 Source: Sta s cs Canada, RBC Economics Research forecasts Bank of Canada Overnight Rate % 7 Forecast 6 5 4 3 2 1 0 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Bank of Canada, RBC Economics Research forecasts ECONOSCOPE, ROYAL BANK OF CANADA 9

JOSH NYE FINANCIAL MARKETS UK Q3 HIGHLIGHTS The UK economy held up be er than expected immediately a er the Brexit vote but we con nue to expect a slowdown in 2017. The euro area economy is growing steadily but that hasn t been enough to put downward pressure on the unemployment rate in recent months. The drag on Australia s economy from weak capex and declining terms of trade may finally be easing. The New Zealand economy con nues to grow strongly but ac vity is barely outpacing growth in the labour force. Economic activity in the UK appears to have held up in the third quarter, defying expectations that uncertainty generated by the Brexit vote would lead to a sharp slowdown. Purchasing Managers Index (PMI) readings consolidated above the 50 no change mark in September with the composite reading marking an eight-month high after having plummeted in July. The quarterly average is consistent with growth near zero, but the unusual volatility post-referendum gives us reason to discount the surveys. With retail sales and services activity both posting solid gains in July, we have raised our third-quarter growth forecast to 0.3% (non-annualized). While the economy s slowdown has not been as immediate as our forecast assumed, we continue to expect uncertainty about the UK s future access to the EU s Single Market will weigh on business investment and job growth, leaving the economy struggling to expand next year. Prime Minister May announced that the UK government will trigger Article 50 by the end of March 2017, beginning negotiations to leave the EU and making the first half of 2019 the likeliest timing for formal withdrawal. May emphasized the UK s desire to control immigration, which would likely preclude full access to the Single Market (and thus free movement of goods and services). This talk of a hard Brexit put downward pressure on Sterling which fell to a 31-year low against the US dollar. E The euro area composite PMI edged lower in September although the third-quarter average is little changed from earlier this year, suggesting trend-like growth in the quarter. The moderation reflected some loss of momentum in Germany s services sector although France s index continued to pick up after sitting close to the 50 mark for much of the year. Growth is thus looking slightly more broad-based than in the second quarter, although the Italian economy s struggles appear to have extended into the second half of the year. On balance, there is little to suggest an immediate negative impact on the euro area economy following the UK s vote to leave the EU. That said, the economic recovery remains gradual, the declining trend in the unemployment rate has stalled in recent months and inflation is still well below the ECB s target all of which is keeping pressure on the central bank to continue providing stimulus. We await the results of the ECB s review of its asset purchase program, but expect changes later this year that will allow quantitative easing to continue beyond March 2017. And with the program thus far having yielded little improvement in peripheral spreads, policymakers could opt for a more targeted composition of purchases. 10 ECONOSCOPE, ROYAL BANK OF CANADA

RBA Australia s economic outlook has become more constructive as two of the major headwinds to growth declining terms of trade and a pullback in capital spending appear to be easing. However, improvement in the labour market remains gradual with persistent slack keeping wage growth subdued and contributing to weaker momentum in consumer spending. The Reserve Bank of Australia s first meeting under Governor Lowe resulted in a steady rate decision, although the new governor put his stamp on the policy statement with references to slower global growth and inflation, concern that household consumption is slowing, and a more thorough discussion of the labour market all giving the statement a slightly more dovish tone. Nonetheless, the concluding paragraph was unchanged, and unless third-quarter inflation falls well below the RBA s expectation, it appears the cash rate will be held steady for the remainder of 2016 following cuts in May and August. RBNZ S New Zealand GDP posted another solid increase (+0.9% non-annualized) in the second quarter with the year-over-year pace picking up to its strongest since 2014. However, with strong growth in the labour force, recent gains have done little to erode spare capacity in the economy. The increase was concentrated in housing activity, which may slow in the coming quarters amid tighter macroprudential policies, although growth in other sectors was also respectable. As expected, the Reserve Bank of New Zealand held off on easing in September (we had been forecasting a cut prior to release of the solid national accounts data) but maintained a firm easing bias and continued to express discomfort with the currency s strength. We now expect the next rate cut will come in November when the RBNZ refreshes its forecasts and has had a look at third-quarter inflation. 2 1 0-1 -2 Eurozone Real GDP % change, quarter-over-quarter Forecast 14 15 16f 17f Real GDP 1.1 1.9 1.5 1.2-3 09 10 11 12 13 14 15 16 17 Source: Eurostat, RBC Economics Research 6 5 4 3 2 1 0 ECB Refi Rate % Forecast -1 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: ECB, RBC Economics Research ECONOSCOPE, ROYAL BANK OF CANADA 11

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NATHAN JANZEN CURRENT ANALYSIS C US S 2016 C Canadian auto sales dipped 0.5% from a year ago in September, a third consecutive year-on-year decline, according to industry reports. Nonetheless, sales remained at an elevated level. Our estimates suggested that monthly sales (including heavy vehicles) on a seasonally adjusted annualized basis rose to a 1.95 million unit pace from the 1.89 million units in August. On average, sales in Q3 (estimated at 1.92 million units, on average) were slower than the outsized 2.00 million unit average rate in the first half of the year, which is broadly consistent with our view that the earlier rate was too strong to be sustained. With that said, sales remain at a very high level by historical comparison. Although we continue to expect some further slowing into the end of the year, sales remain on pace to exceed 2015 s record 1.94 million unit total with our forecast assuming 1.96 million sales in 2016 that is just slightly below the 1.97 million year-to-date average through September. We expect sales will continue to be supported by underlying improvement in labour markets, backed by stronger economic growth over the second half of this year, and low levels of interest rates. US US light vehicle sales bounced back to a 17.7 million unit seasonally adjusted rate in September (according to US Bureau of Economic Analysis) after slowing to 16.9 million units in August. Year-to-date, sales have averaged 17.3 million units per month which, while historically still strong, is slightly below the record 17.4 million units sold in 2015 as a whole. The slowing in the sales rate year-to-date is consistent with the view that much of the recovery from the 2008/09 recession has run its course and so sales gains will be slower going forward. Nonetheless, the gain in September sales (relative to August) is consistent with our view that there will be some improvement over the second half of this year and into next, reflecting continued improvement in labour markets and persistently low borrowing rates. Our forecast assumes sales will total 17.4 million units in 2016 as a whole. That would match last year s record but would mark the first year that sales have failed to increase since 2009. Canada New Motor Vehicle Sales Millions 2.1 Forecast 2.0 2016 YTD 1.9 1.8 1.7 1.6 1.5 1.4 1.3 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Desrosiers Auto., Global Automakers of Cda, StatsCan, RBC Eco Rsch. US Light Motor Vehicle Unit Sales Millions 20 Forecast 2016 YTD 18 16 14 12 10 8 6 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Source: Bureau of Economic Analysis, RBC Economics Research ECONOSCOPE, ROYAL BANK OF CANADA 13

F C RBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS = Forecast 2015 2016 2017 Annual Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2015 2016 2017 GROWTH IN THE ECONOMY PERIOD OVER PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED Household consumption -0.1 2.3 2.3 1.8 2.4 2.2 1.7 2.2 2.1 2.0 1.8 1.7 2.6 1.9 2.1 2.0 Durables -8.0 5.6 10.2 4.2 4.2-1.8 0.3 2.8 1.5 1.5 1.5 1.0 4.3 2.9 3.3 1.3 Semi-Durables -1.9 5.2 0.9 6.9 6.7-1.9 2.0 2.2 2.5 2.1 1.8 1.8 3.1 2.5 3.1 1.7 Non-durables 2.4-2.8 2.6-1.0 3.2 3.0 2.5 2.2 2.2 2.2 2.0 2.0 2.4 0.8 1.8 2.2 Services 0.8 3.4 0.7 1.9 1.2 3.3 1.7 2.1 2.1 2.0 1.8 1.8 2.3 2.1 2.0 2.1 Government expenditures 4.7 2.8 0.6 0.4 2.7 4.2 2.5 2.0 1.8 1.5 1.5 1.5 0.3 1.7 2.2 2.0 Residential investment 6.6 0.1 2.6 1.8 11.3 1.2-5.7-3.6-0.3-0.5-0.9-0.1 2.5 3.8 2.7-1.6 Business investment -23.2-15.5-11.4-12.5-8.1-1.9-2.7 2.3 2.7 2.8 3.0 3.1 0.0-10.6-7.5 1.7 Non-residential structures -31.7-15.4-14.2-15.3-12.8-4.4-1.5 2.8 2.8 3.0 3.2 3.5-0.4-14.7-9.9 1.9 Machinery & equipment -5.1-15.7-6.7-8.1-0.7 1.9-4.5 1.5 2.5 2.5 2.8 2.5 1.0-2.4-3.8 1.4 Final domestic demand -2.2-0.1 0.3-0.3 1.8 2.2 1.1 2.0 2.1 1.8 1.7 1.7 1.6 0.3 1.1 1.8 Exports 0.9 1.2 9.0-1.5 8.0-16.7 9.0 3.7 3.4 2.6 2.4 2.8 5.3 3.4 0.7 2.4 Imports 0.9-1.8-2.8-7.0 1.6 1.1-1.0 4.7 4.0 3.5 3.4 2.9 1.8 0.3-1.1 3.1 Inventories (change in $b) 14.6 6.8-0.2-5.6-9.0 0.5-1.5 0.0 0.1 1.6 2.7 3.2 9.9 3.9-2.5 1.9 Real gross domestic product -1.0-0.5 2.2 0.5 2.5-1.6 3.7 1.9 1.9 1.8 1.6 1.8 2.5 1.1 1.3 1.8 OTHER INDICATORS YEAR OVER YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED Business and labour Productivity 1.6-0.5-0.6-0.9-0.2 0.4 1.0 1.1 1.1 1.5 0.9 0.9 2.1-0.1 0.6 1.1 Pre-tax corporate profits -12.1-14.2-17.4-19.6-7.6-15.9-5.4 1.1 2.6 15.3 4.0 3.7 7.0-15.8-7.1 6.2 Unemployment rate (%)* 6.8 6.8 7.0 7.0 7.2 6.9 7.0 6.9 6.8 6.8 6.7 6.7 6.9 6.9 7.0 6.8 Inflation Headline CPI 1.1 0.9 1.2 1.3 1.5 1.6 1.3 1.9 2.5 2.7 2.9 2.4 2.0 1.1 1.6 2.6 Core CPI 2.2 2.2 2.2 2.0 2.0 2.1 1.9 2.1 2.2 2.1 2.2 2.1 1.8 2.2 2.0 2.1 External trade Current account balance ($b) -67.9-58.0-61.8-62.8-66.4-79.4-67.2-64.5-63.6-60.5-59.6-55.8-44.9-62.6-69.4-59.9 % of GDP -3.4-2.9-3.1-3.2-3.3-4.0-3.3-3.1-3.1-2.9-2.8-2.6-2.3-3.2-3.4-2.8 Housing starts (000s)* 175 193 213 194 198 198 186 188 186 181 179 178 189 196 192 181 Motor vehicle sales (mill., saar)* 1.84 1.92 1.99 1.99 2.01 1.99 1.92 1.91 1.86 1.86 1.83 1.82 1.89 1.94 1.96 1.84 INTEREST AND EXCHANGE RATES %, END OF PERIOD Overnight 0.75 0.75 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 1.00 0.50 0.50 0.50 Three-month 0.55 0.58 0.43 0.51 0.45 0.48 0.53 0.50 0.50 0.50 0.55 0.60 0.91 0.51 0.50 0.60 Two-year 0.50 0.48 0.52 0.48 0.54 0.52 0.52 0.60 0.60 0.65 0.70 0.80 1.01 0.48 0.60 0.80 Five-year 0.77 0.82 0.80 0.73 0.67 0.57 0.62 0.75 0.80 0.95 1.15 1.35 1.34 0.73 0.75 1.35 10-year 1.36 1.69 1.43 1.40 1.23 1.06 1.00 1.25 1.40 1.60 1.75 1.90 1.79 1.40 1.25 1.90 30-year 1.98 2.31 2.20 2.15 2.00 1.72 1.66 1.90 2.05 2.25 2.45 2.65 2.34 2.15 1.90 2.65 Canadian dollar 1.27 1.25 1.33 1.38 1.30 1.29 1.31 1.33 1.34 1.35 1.34 1.33 1.16 1.38 1.33 1.33 * Quarterly averages, level Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts October 2016 14 ECONOSCOPE, ROYAL BANK OF CANADA

F U S RBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS = Forecast 2015 2016 2017 Annual Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2014 2015 2016 2017 GROWTH IN THE ECONOMY PERIOD OVER PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED Consumer spending 2.4 2.9 2.7 2.3 1.6 4.3 2.8 2.4 2.3 2.1 2.0 2.0 2.9 3.2 2.7 2.4 Durables 4.2 7.6 6.2 4.0-0.6 9.8 10.0 4.5 4.0 3.5 3.1 3.1 6.7 6.9 5.1 4.9 Non-durables 1.9 2.7 3.2 1.2 2.1 5.7 0.0 2.1 2.0 1.9 1.7 1.6 2.6 2.6 2.5 1.9 Services 2.3 2.2 2.0 2.3 1.9 3.0 2.5 2.2 2.1 2.0 1.9 1.9 2.3 2.8 2.3 2.2 Government spending 2.6 3.2 1.9 1.0 1.6-1.7 0.0 1.8 1.5 1.2 1.2 1.0-0.9 1.8 0.8 1.0 Residential investment 13.4 14.8 12.6 11.5 7.8-7.8-4.5 3.1 2.4 2.5 2.1 2.0 3.5 11.7 4.4 0.9 Business investment 1.3 1.6 3.9-3.3-3.4 1.0 2.3 3.2 3.3 3.3 3.5 3.5 6.0 2.1-0.3 3.0 Non-residential structures -12.4-2.7-4.3-15.2 0.1-2.1 5.0 2.0 2.1 2.2 2.2 2.8 10.3-4.4-3.4 2.2 Non-residential equipment 9.3-0.3 9.1-2.6-9.5-3.0 0.0 3.3 3.4 3.4 3.8 3.6 5.4 3.5-2.3 2.6 Intellectual property 0.8 8.0 2.1 4.5 3.8 9.0 3.8 3.9 3.9 3.9 3.8 3.7 3.9 4.8 4.9 4.2 Final domestic demand 2.6 3.2 3.0 1.7 1.2 2.4 2.0 2.4 2.3 2.1 2.0 2.0 2.6 3.1 2.0 2.2 Exports -5.8 2.8-2.8-2.7-0.7 1.8 7.8 0.8 2.0 1.5 1.8 1.1 4.3 0.1 0.4 2.3 Imports 5.6 2.9 1.1 0.7-0.6 0.2 3.0 2.3 4.0 2.5 2.0 2.0 4.4 4.6 0.8 2.7 Inventories (change in $b) 114.4 93.8 70.9 56.9 40.7-9.5 10.0 27.0 39.0 41.0 39.0 39.0 57.7 84.0 17.1 39.5 Real gross domestic product 2.0 2.6 2.0 0.9 0.8 1.4 3.0 2.7 2.3 2.1 2.0 1.9 2.4 2.6 1.6 2.3 OTHER INDICATORS YEAR OVER YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED Business and labour Productivity 1.0 0.9 0.7 0.5 0.1-0.4-0.7 0.3 0.9 1.4 1.3 1.3 0.6 0.8-0.2 1.2 Pre-tax corporate profits 7.5-2.8-4.5-11.2-6.6-4.3-2.9 4.6 1.9 3.1 2.9 2.1 5.9-3.0-2.4 2.5 Unemployment rate (%)* 5.6 5.4 5.2 5.0 4.9 4.9 4.9 4.9 4.8 4.7 4.7 4.7 6.2 5.3 4.9 4.7 Inflation Headline CPI -0.1 0.0 0.1 0.5 1.1 1.1 1.1 1.7 2.4 2.4 2.5 2.3 1.6 0.1 1.2 2.4 Core CPI 1.7 1.8 1.8 2.0 2.2 2.2 2.2 2.2 2.1 2.0 2.0 2.0 1.7 1.8 2.2 2.0 External trade Current account balance ($b) -458-448 -492-454 -527-480 -464-485 -506-522 -529-542 -392-463 -489-525 % of GDP -2.6-2.5-2.7-2.5-2.9-2.6-2.5-2.6-2.7-2.7-2.7-2.8-2.3-2.6-2.6-2.7 Housing starts (000s)* 986 1156 1156 1135 1151 1159 1190 1203 1212 1221 1229 1237 1001 1108 1176 1225 Motor vehicle sales (millions, saar)* 16.9 17.2 17.7 17.9 17.3 17.1 17.5 17.8 17.9 18.0 18.1 18.2 16.5 17.4 17.4 18.1 INTEREST RATES %, END OF PERIOD Fed funds 0.25 0.25 0.25 0.50 0.50 0.50 0.50 0.50 0.50 0.75 0.75 1.00 0.25 0.50 0.50 1.00 Three-month 0.03 0.01 0.00 0.16 0.21 0.26 0.29 0.20 0.15 0.50 0.50 0.75 0.04 0.16 0.20 0.75 Two-year 0.56 0.64 0.64 1.06 0.73 0.58 0.77 0.80 0.90 1.00 1.15 1.25 0.67 1.06 0.80 1.25 Five-year 1.37 1.63 1.37 1.76 1.21 1.01 1.14 1.20 1.30 1.40 1.55 1.65 1.65 1.76 1.20 1.65 10-year 1.94 2.35 2.06 2.27 1.78 1.49 1.60 1.70 1.80 1.90 2.00 2.10 2.17 2.27 1.70 2.10 30-year 2.54 3.11 2.87 3.01 2.61 2.30 2.32 2.40 2.60 2.75 2.85 2.90 2.75 3.01 2.40 2.90 Yield curve (10s-2s) 138 171 142 121 105 91 83 90 90 90 85 85 150 121 90 85 * Quarterly averages, level Source: US Bureau of Economic Analysis, RBC Economics Research forecasts October 2016 ECONOSCOPE, ROYAL BANK OF CANADA 15

CURRENT TRENDS CURRENT ECONOMIC INDICATORS C - US C B F F Y - L F F Y - L P Y T - M P Y T - M M A D M A D Industrial production 1 1.7-0.7-0.6 Jul. 0.0-1.0-0.5 Sep. Mfg inventory - shipments ratio (level) 1.4 1.4 1.4 Aug. 1.4 1.4 1.4 Aug. New orders in manufacturing -0.9-3.2-4.0 Aug. 0.2-1.6-5.1 Aug. Business loans - Banks -0.3 4.7 8.7 Aug. 0.9 9.1 10.5 Sep. Index of stock prices 2 0.9 10.7-4.2 Sep. -0.9 11.0 3.4 Sep. H Retail sales -0.1 1.6 2.6 Aug. 0.6 2.7 1.8 Sep. Auto sales 0.9-2.2 3.1 Aug. 7.0-8.4-5.5 Sep. Total consumer credit 3 0.4 3.3 2.9 Jul. 0.7 6.3 6.7 Aug. Housing starts 19.1-6.0 2.6 Sep. -9.0-11.9 7.3 Sep. Employment 0.4 0.8 0.8 Sep. 0.2 2.0 1.7 Sep. P Consumer price index 0.1 1.3 1.3 Sep. 0.3 1.5 0.58 Sep. Producer price index 4-0.5-1.3-0.8 Aug. 0.8-0.1-2.6 Sep. I Policy rate 0.5 0.5 0.5 Sep. 0.38 0.13 0.38 Sep. 90-day commercial paper rates 0.8 0.7 0.8 Sep. 0.5 0.2 0.5 Sep. Government bonds (10 years) 1.2 1.6 1.3 Sep. 1.6 2.2 - Sep. 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. October 2016 16 ECONOSCOPE, ROYAL BANK OF CANADA