The Economic & Financial Outlook Craig Alexander Senior Vice President & Chief Economist March 14 NO BOOM, BUT GLOBAL ECONOMY TO GAIN A STEP 6 5 Annual contribution to world GDP growth, % 4 3 1-1 - Developing Economies Advanced Economies -3 4 6 8 1 1 14F Source: IMF. by TD Economics as at December 13. The Economic & Financial Outlook 1 TD Economics, March 14
EMERGING ECONOMIES TO STABILIZE, ADVANCED ECONOMIES TO IMPROVE GDP Growth, YoY % Chg. 1 8 % chg, y/y 6 4 - -4 Advanced Economies Developing Economics -6 4 6 8 1 1 14 Source: IMF. by TD Economics as at December 13. U.S. ECONOMIC GROWTH POISED TO ACCELERATE 6 4 Real GDP, annualized quarter/quarter % change Recession - -4-6 -8 Y/Y % Chg. (Q4/Q4 % growth) 13E 1.9% (.7) 14F.9% (.8) 15F 3.1% (3.) -1 8 9 1 11 1 13 14 15 Last data point Q4, 13. by TD Economics as of February 14. Source: Bureau of Economic Analysis. The Economic & Financial Outlook TD Economics, March 14
STRONG FUNDAMENTALS SUPPORT HOUSING DEMAND,5 Housing starts (units, s); change in households (s) Fcst., 1,5 1, 5 Demographic adjusted households + depreciation Housing starts 198 1985 199 1995 5 1 15 Source: U.S. Census Bureau, TD Economics. as of February 14. FED TAPERING IS HERE, BUT TIGHTENING OF POLICY A LONG WAY OFF Federal Reserve balance sheet, $U.S. (Trillions) 4.5 Mortgage backed securities 4. Treasury securities 3.5 Agency securities Fcst. 3. Liquidity programs & other assets.5. 1.5 1..5. 7 8 9 1 11 1 13 14 Source: Federal Reserve Board, TD Economics The Economic & Financial Outlook 3 TD Economics, March 14
RATES WILL RISE BUT REMAIN EXTREMELY LOW Yield at end-of-period, % 6 Current 13 14 Equilibrium Yield End Of April 5 4 3 1 Fed funds rate 3-month -year 5-year 1-year 3-year Source: TD Economics. as of February 1, 14. GROWTH TO PICK UP IN CANADA, BUT NO BOOM ON THE HORIZON 8 6 4 Real GDP, Annualized Q/Q % Chg. Recession - -4-6 Y/Y % Chg. 13E: 1.7% 14F:.3% 15F:.4% -8-1 8 9 1 11 1 13 14 15 Source: Statistics Canada, Haver Analytics. by TD Economics as of December 13. The Economic & Financial Outlook 4 TD Economics, March 14
CANADA IS COUNTING ON STRONGER EXPORTS 15 1 Real Exports, Y/Y% Chg. 5-5 -1-15 - 4 6 8 1 1 14 Source: Statistics Canada/Haver Analytics. by TD Economics as of December 13. DECLINE IN LOONIE TO PERSIST, BUT STABILIZATION TO FOLLOW IN 15 1.1 US$/C$ 1..9.8.7.6 4 6 8 1 1 14 Source: Bank of Canada; by TD Economics as of January 14. The Economic & Financial Outlook 5 TD Economics, March 14
BUSINESS INVESTMENT TO STRENGTHEN IN LOCKSTEP 6.5 Business Investment as a Percentage of Real GDP 6. 5.5 5. 4.5 4. 3.5 Machinery & Equipment Nonresidential Structures 3. 5 6 7 8 9 1 11 1 13 Source: Statistics Canada. by TD Economics as at December 13. CANADIANS ARE BECOMING MORE FRUGAL 18 16 14 1 1 % Y/Y % Chg. Household Debt-to-Income Ratio (lhs) Household Debt Growth (rhs) Fcst* 14 1 1 8 8 6 4 6 4 1991 1993 1995 1997 1999 1 3 5 7 9 11 13 Source: Statistics Canada. by TD Economics as of December 13. The Economic & Financial Outlook 6 TD Economics, March 14
EXISTING HOME SALES BOUNCING BACK FROM POLICY TIGHTENING Canadian Existing Home Sales Monthly, SA, 's of units 5 45 4 35 3 5 Indicates Mortgage Rule Tightening 1 3 5 7 9 11 13 Source: Canadian Real Estate Association VANCOUVER HOME SALES REBOUNDING, BUT STILL NOT TOO HOT Vancouver Existing Home Sales Monthly, SA, 's of units 4.5 4. 3.5 3..5 15 Year Avg.. 1.5 1..5 Indicates Mortgage Rule Tightening. 1 3 5 7 9 11 13 Source: Canadian Real Estate Association. As at January 14. The Economic & Financial Outlook 7 TD Economics, March 14
MARKET IS FAIRLY BALANCED RELATIVE TO REST OF CANADA Sales-to-Listing Ratio 1..9.8.7.6 Seller's Market Toronto Vancouver Canada.5.4 Balanced Market.3..1 Buyer's Market. 5 7 9 11 13 Source: Canadian Real Estate Association. As at January 14. PRICE PRESSURES MOUNTING, BUT REFLECTS SHIFT IN PREFERENCES, INCLUDING VANCOUVER Year-over-Year % Chg. 5 MLS Home price Index Average Existing Home Price 15 1 5-5 -1-15 6 7 9 1 1 13 Source: CREA, Haver Analytics. As at Q4, 13. The Economic & Financial Outlook 8 TD Economics, March 14
TREND IS MOST OBVIOUS IN VANCOUVER Greater Vancouver Existing Home Prices, Year-over-Year % Chg. 3 5 MLS Home price Index Average Existing Home Price 15 1 5-5 -1-15 6 7 9 1 1 13 Source: CREA, Haver Analytics. As at Q4, 13. SOME HOUSING METRICS ARE FLASHING WARNING SIGNALS Canadian Home Price-to-Rent Ratio 3. I.5. National Toronto Vancouver 1.5 1..5. -.5-1. -1.5 -. 1988 199 199 1994 1996 1998 4 6 8 1 1 Source: Statistics Canada, CREA. As of January 14. The Economic & Financial Outlook 9 TD Economics, March 14
OVERVALUATION LIKELY MORE MILD THAN FEARED Avg. Existing Home Prices to Personal Disposable Income, % 5% 4% 3% Historical Average 8% Overvalued % 1% 199 199 1994 1997 1999 1 4 6 8 11 13 Source: Canadian Real Estate Association, Statistics Canada. As at Q4, 13. VANCOUVER HOME PRICES STILL LOFTIEST IN CANADA Average Existing Home Prices-to-Average Household Income, % 14. 1. 1. National Ex. Toronto and Vancouver Vancouver Toronto 8. 6. 4... 199 199 1994 1997 1999 1 4 6 8 11 13 Source: Canadian Real Estate Association, Statistics Canada. As at Q4, 13. The Economic & Financial Outlook 1 TD Economics, March 14
AND MOST SENSITIVE TO RISING INTEREST RATES Vancouver Mortgage Payment as % of Avg Household Income* 8 7 6 5 4 3 1 199 199 1994 1996 1998 4 6 8 1 1 14 Source: Canadian Real Estate Association, Statistics Canada. As of February 14. *Assuming average home price, 5% downpayment, 5-year amortization and 5-year fixed effective rate. LOW INTEREST RATES KEEP HOUSING AFFORDABLE ELSEWHERE Mortgage Payments as a % of Households Income* 45 4 35 3 Historical Average 5 15 1 5 Posted Rate (5.34%) (1% Overvalued) Effective Rate (3.9%) (6% Undervalued) 7% Threshold (5% Overvalued) 199 199 1994 1997 1999 1 4 6 8 11 13 Source: CREA, Statistics Canada. *Assuming average home price, 5% downpayment, 5 year amortization. As at January 14. The Economic & Financial Outlook 11 TD Economics, March 14
EXCESS SUPPLY BUILDING. Greater Vancouver Units Newly Completed and Unabsorbed, Units 6, 5, 4, 3,, 1, 199 1994 1996 1998 4 6 8 1 1 14 Source: Canadian Mortgage and Housing Corporation. As at January 14. BUT BUILDERS ARE MODERATING NEW HOME CONSTRUCTION B.C. Housing Starts, 's of units 45 4 35 Vancouver Rest of B.C. 3 5 15 1 5 3 6 9 1 15F Source: CMHC, by TD Economics as at January 14. The Economic & Financial Outlook 1 TD Economics, March 14
HIGHER RATES TO EASE MARKET 16 %, Canadian Interest Rates 14 1 1 5-year Government Bond Yield 5-year Effective Mortgage Rate Fcst. 8 6 4 199 1994 1998 6 1 14 Source: Statistics Canada, Bank of Canada CMHC. by TD Economics as of January 14 SOFT LANDING LOOKS TO BE IN THE CARDS FOR B.C. REAL ESTATE Units (B.C.) 3, Y/Y % Chg. 3 5, Fcst., 1 15, 1, -1 5, Existing Home Sales (lhs) - Existing Home Prices (rhs) 4 6 8 1 1 14-3 Source: CREA; by TD Economics as of January 14. The Economic & Financial Outlook 13 TD Economics, March 14
SOME CONVERGENCE IN GROWTH PROFILES ACROSS PROVINCES IN 14-15 Alberta Sask. Average Annual % Change in Real GDP B.C. N.S. Ontario 13E Avg. 14-15F Québec Manitoba N.B. P.E.I. N. & L.. 1.. 3. 4. 5. 6. by TD Economics as at December 13. B.C. ECONOMY EXPECTED TO PICK UP Real GDP, annual % Chg. (B.C.) 4 3.3 3.7.3.5 1 1.1 1.5 1.3-1 - -3 -.5 8 9 1 11 1 13E 14F 15F Source: Statistics Canada, Haver Analytics by TD Economics as of January 14. The Economic & Financial Outlook 14 TD Economics, March 14
B.C. GOVERNMENT RETURNS TO BLACK INK % of GDP, (B.C.) % of GDP 5 Budget Balance (RHS) Net Debt (LHS) 3 1 15-1 - 1 99-1- 3-4 5-6 7-8 9-1 11-1 13-14f -3 Source: 1 Federal Fiscal Reference Tables, 1-13 Public Accounts and 14 Government Budgets and Fiscal Updates. As at February 14. B.C. LABOUR MARKET PERFORMANCE Unemployment Rate % 9. Job Creation Unemployment Rate Job Creation (s) 1 8. 7. 6. 5. 4. 3 5 7 9 11 13 15 8 6 4 - -4-6 by TD Economics as of January 14. Source: Haver Analytics and TD Economics. The Economic & Financial Outlook 15 TD Economics, March 14
SOLID COMMERCIAL DEVELOPMENT, SUPPORTED BY LOW VACANCY RATES B.C. Nonresidential Building Permits, Mil of C$ 4,5 4, 3,5 3, Institutional and Government Commercial Industrial,5, 1,5 1, 5 1 3 4 5 6 7 8 9 1 11 1 13 Source: Statistics Canada. As at January 14. REGIONAL OFFICE VACANCY RATES Metro Vancouver Total Suburb Total Downtown Langley Richmond Surrey New Westminister Burnaby North Shore Broadway Corridor % 5% 1% 15% % 5% %, Vacancy Rate Source: Colliers International, figures as of Q4, 13. The Economic & Financial Outlook 16 TD Economics, March 14
INTEREST RATES TO REMAIN LOW 7 6 % US Federal Funds Target Rate Bank of Canada Overnight Rate 5 4 3 1 4 6 8 1 1 14 Source: Bank of Canada/Haver Analytics. by TD Economics as of December 13. BOND YIELDS TO RISE, BUT REMAIN WELL BELOW NORMAL 6. 5. Yield on Canadian Bonds, % End of 14 Equilibrium Yield Current End of April 13 4. 3.. 1.. overnight target 3-month -year 5-year 1-year 3-year Source: Bloomberg, TD Economics. As at February 4, 14. The Economic & Financial Outlook 17 TD Economics, March 14
PROFIT GROWTH & CONTINUED LOW BOND YIELDS SUPPORTIVE TO EQUITIES S&P 5 Index, 1941-43 = 1 1,9 S&P 5 (lhs) 1,7 S&P/TSX Index, 1975 = 1 17, S&P/TSX (rhs) 15, 1,5 13, 1,3 1,1 11, 9 9, 7 7, 7 8 9 1 11 1 13 14 Source: Bloomberg. As at February 14, 14. TD Economics www.td.com/economics This report is provided by TD Economics for customers of TD Bank Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered. The Economic & Financial Outlook 18 TD Economics, March 14