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1-800-613-0205 www.bmocm.com/economics
PARTLY CLOUDY: CHANCE OF SHOWERS
September 23, 2010
Dr. Sherry Cooper Executive Vice President & Chief Economist, BMO Financial Group
Partly Cloudy: Chance of ShowersDr. Sherry Cooper Executive Vice President and Chief Economist, BMO Financial Group
© BMO Financial Group www.bmocm.com/economics
Global Recovery Cooling
Sovereign Debt Risks Trigger Fiscal Restraint
US Jobs Crisis
Second-half Slowdown
Emerging Countries Dominate Growth
Page 1-2
© BMO Financial Group www.bmocm.com/economics
Momentum Slows
Economic Recovery in North America
December ’07 December ’08
07 08 09 10 11
-9
-6
-3
0
3
6
07 08 09 10 11
-9
-6
-3
0
3
6
Real GDP
07 08 09 10 11
-9
-6
-3
0
3
6
US recessionUS recession
V-shaped
08 09 10 11CanadaUS
0.50.0
-2.5-2.6
3.02.6
2.52.2
(q/q % chng : ar)
Canadian recession forecast
Canada
US2.0%
1.6%
No Double Dip
© BMO Financial Group www.bmocm.com/economics
Economic Downturn Less Severe in CanadaPeak to Trough (% chng)
Employment
Germany Canada UK Japan France US-7
-6
-5
-4
-3
-2
-1
0
-0.4
-2.4 -2.5-3.3 -3.5
-6.1
Page 3-4
© BMO Financial Group www.bmocm.com/economics
US Jobless Rates Will Fall, But Gradually
SpainIrelandGreecePortugalFranceBelgiumFinlandSwedenGermanyIsraelJapanAustraliaUKNorway
20.313.611.010.810.08.98.38.26.96.25.25.14.53.3
04 05 06 07 08 09 10 11
4
5
6
7
8
9
10
11
Canada
US
forecast
33-year Low
9.6%
5.9%
4.4%
Lagging Indicator8.1%
US Job Creation Slow
Unemployment Rate (percent)
© BMO Financial Group www.bmocm.com/economics
United States (2007:Q4 = 100)
US Profits Have Recovered, Jobs Have Not
07:4 08:1 09:1 10:160
70
80
90
100
110
120
Payrolls
Corporate Profits
Page 5-6
© BMO Financial Group www.bmocm.com/economics
Global Deflation Risk
Core Inflation Higher in Canada
United States
07 08 09 10 11
-3
0
3
6
Consumer Price Index (y/y % chng)
Core
Total
Canada
07 08 09 10 11
-3
0
3
6
Core
Total
forecast
1.1%1.7%
[Total]1.6%[Core]
0.9% ...and Falling
© BMO Financial Group www.bmocm.com/economics
CurrentSpread31 bps
10-year Bonds
07 08 09 10 11
0
1
2
3
4
5
6
Bond Yields Will Rise... EventuallyBoC Tightens
Fed Still Easy... Monetary Policy Tightens in Canada First
Fixed Mortgage Rate
07 08 09 10 11
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0Overnight Rate
05 07 09 11
0
1
2
3
4
5
6
(% : as of September 22, 2010)
US forecast
Canada
0% - 0.25%USCanada 1.00%
3.50%
2.55%
’10)(Year-end
US
Canada 2.80%
US(30-yr)
Canada (5-yr)
Canada 4.82%US 4.37%
[Current]Canada 2.87%US 2.56%
[Current]
3.50%
’11)(Year-end
Page 7-8
© BMO Financial Group www.bmocm.com/economics
US Conundrum
Fiscal Stimulus
vs
Budget Deficits
During Election Season
© BMO Financial Group www.bmocm.com/economics
Canada
France
US
Germany
UK
Italy
Japan
-8 -6 -4 -2 0
-2.5
-2.5
-2.6
-4.7
-4.9
-5.1
-5.2
Germany
Canada
Japan
US
UK
France
Italy
0 2 4 6 8
3.1
3.0
2.9
2.6
1.6
1.5
1.1
Canada
US
Germany
UK
France
Japan
Italy
0 2 4 6 8
2.5
2.2
2.2
2.2
1.9
1.7
1.6
Real GDP – G7 (y/y % chng)
G7 Recovers... Barely for Some
2009 2010 2011
Europe to Suffer Big Fiscal Drag in 2011Source: [2010-11] BMO Capital Markets forecasts
Page 9-10
© BMO Financial Group www.bmocm.com/economics
Emerging Markets Lead
Real GDP
China India Brazil Asia Latin Canada Japan US Europe-6
-3
0
3
6
9
12
08 09 10 11World 3.0 -0.6 4.2 3.7
(ann % chng)
10 1109
China’s Growth SlowsRanked by 2010 Source: [2010-11] BMO Capital Markets forecasts
Japan & India) (excl Brazil)(excl China, America
© BMO Financial Group www.bmocm.com/economics
(as of September 22, 2010)
US Dollar Still on a Downtrend
Broad Trade-weighted US$
00 02 04 06 08 10
90
100
110
120
130
140February 27,
2002 Peakforecast
July 15, 2008 Trough
March 9,2009
2010Y-T-D
Peak toPresent
Feb ’02
% Chng (vs US$)
Japanese YenAustralian $Swiss FrancMexican PesoCanadian $Chinese YuanTrade-weighted US$UK PoundEuro
59.385.373.1-28.056.123.7-21.810.655.0
10.06.54.93.62.22.00.2-3.1-6.5
Sovereign Risks
Page 11-12
© BMO Financial Group www.bmocm.com/economics
Canada and Europe: Separate Ways
Canadian Dollar(US$ per currency)
05 06 07 08 09 10 11
0.7
0.8
0.9
1.0
1.1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
(as of September 22, 2010)
China Eases Currency Peg
C$ Parity
C$(lhs)
Euro(rhs)
C$ Range
97.06¢
[Current]1.339
First Change SinceJuly 15, 2008
US$ Trough
Chinese Yuan(yuan/US$ : inverted scale)
05 06 07 08 09 10 11
8.5
8.0
7.5
7.0
6.5
6.0
forecast
© BMO Financial Group www.bmocm.com/economics
Consumers Wary
Increase Savings
Hiring Sluggish in US
Retail Sales Stumble
Canadian Housing Softens
Page 13-14
© BMO Financial Group www.bmocm.com/economics
Consumer Confidence Up From Lows
Consumer Confidence Index – Conference Board
07 08 09 10
20
40
60
80
100
120
Record Low
...But Wobbly
Canada
US
© BMO Financial Group www.bmocm.com/economics
HouseholdResidential Equity
95 00 05 1030
40
50
60
70
80
Delinquent Residential Mortgages = > 90 Days in Arrears
DelinquentResidential Mortgages
(% of total mortgages)
95 00 05 100
1
2
3
4
5
Net Worth(% of disposable income)
90 95 00 05 10400
450
500
550
600
650
Canadian Households in Better Shape
Canada
US US
Canada
US
Subprime Malaise
Record Highs
Canada
(% of value ofresidential property)
Page 15-16
© BMO Financial Group www.bmocm.com/economics
Canadians Over-leveraged?(ratio to personal disposable income)
Household credit and mortgages plus unincorporated business mortgages
Household Liabilities
95 97 99 01 03 05 07 090.8
1.0
1.2
1.4
1.6
Canada
US
© BMO Financial Group www.bmocm.com/economics
US Housing Slump
Canadian Housing Slowing
Housing AffordabilityIndex
03 05 07 09
80
100
120
140
160
180
200
Existing Home Prices(1995:Q1 = 100)
03 05 07 09
125
150
175
200
225
250
Housing Starts(000s : ar)
03 05 07 09
500
1,000
1,500
2,000
2,500
3,000
50
100
150
200
250
300
Existing Home Sales(mlns : ar)
03 05 07 09
3
4
5
6
7
8
0.2
0.3
0.4
0.5
0.6Canada(rhs)
US(lhs)
US(lhs)
Canada(rhs)
US
Canada
Change from Peak
-27.3%
US
Canada
Page 17-18
© BMO Financial Group www.bmocm.com/economics
US Commercial Real Estate Still Weak
High Vacancies
Values Rise A Bit From Lows
Construction-loan Deterioration
Canadian Commercial Real Estate Activity Strong
© BMO Financial Group www.bmocm.com/economics
Vacancy/Availability Rates = (percent) Price Indexes = (2000:Q1 = 100)
US Commercial Real Estate: Still Shaky
07 08 09 10100
120
140
160
180
200
07 08 09 106
8
10
12
14
16
18
Office Vacancy
Rate
Industrial Availability
Rate
United States
Retail Vacancy Rate
S&P/Case-Shiller Home Price Index
Commercial Real Estate Price Index
17.7%
13.5%
10.6%
Prices Bottoming
Page 19-20
© BMO Financial Group www.bmocm.com/economics
Canadian Commercial Real Estate Deals Rebound in Early 2010
REITs and Private Investors
+22.8% Y-T-D Gain
Rise in Transaction Values
Consistent Strength Across All Major Cities
© BMO Financial Group www.bmocm.com/economics
05 06 07 08 09 100
5
10
15
20
05 06 07 08 09 100
5
10
15
20
Office Vacancy Rate (percent)
Canada in Better Shape than US... Overbuilding Pushes Calgary Vacancy Rate Up
Source: CB Richard Ellis
17.7%
10.1%
Vancouver
Calgary
Toronto
US
Canada
10.1%
15.7%
9.6%
Page 21-22
© BMO Financial Group www.bmocm.com/economics
Toronto: Commercial Real Estate Boom
Coming Soon:Southcore Financial CentreBremner Tower (+ Delta Hotel)18 York
Completed:Telus House, RBC Centre, Bay-Adelaide Centre... 4 mln sq ft
Others Renovate
Banks Take On More Space
© BMO Financial Group www.bmocm.com/economics
Toronto’s Luxury Hotels Continue Construction
Opening Soon:
Ritz-Carlton ... (2010)
Trump Tower ... (2011)
Four Seasons ... (2012)
Shangri-La ... (2012)
Page 23-24
© BMO Financial Group www.bmocm.com/economics
Stocks Volatile Because of Uncertainty
Dividend Yields
TSX
S&P 500 2.0%
2.7%
TSXDJIANasdaqS&P 500
GoCsUS Treasuries
CRB IndexGoldOil
Y-T-D 2010
3.4% 3.0% 2.9% 1.7%
7.2% 11.1%
-1.6% 17.8% -8.4%
-19% -24% -18% -28%
-1% -1%
-41% 0%
-50%
31% 19% 44% 23%
-2% -5%
23% 24% 78%
-35% -34% -41% -38%
13% 15%
-36% 6%
-54%+67.7%
+60.5%
Stocks
Bonds
Commodities
Financial Market Returns – Local Currency (% chng : as of September 22, 2010)
2008 2009 Since Peak
Returns SinceMarch 9, 2009
(local currency)
TSX
S&P 500
© BMO Financial Group www.bmocm.com/economics
TSX Outperforms
Local Currency
02 03 04 05 06 07 08 09 1050
100
150
200
250
300
350
US$-terms
02 03 04 05 06 07 08 09 1050
100
150
200
250
300
350
(January 1, 2002 = 100 : as of September 22, 2010)
S&P 500
TSX
S&P 500
TSX
Page 25-26
© BMO Financial Group www.bmocm.com/economics
REITs Fare Better in CanadaReal Estate Investment Trusts
Local Currency
07 08 09 1020
40
60
80
100
120
140
US$-terms
07 08 09 1020
40
60
80
100
120
140
S&P 500
TSX
S&P 500
TSX
(January 1, 2007 = 100 : as of September 21, 2010)
© BMO Financial Group www.bmocm.com/economics
Global Equities: New Challenges(y-t-d % chng : as of September 22, 2010)
Equity MarketsGermany
TSXDJIA
UKS&P 500
BrazilAustralia
JapanSpainChina
Greece
-35 -30 -25 -20 -15 -10 -5 0 5
4.23.4
3.02.6
1.7-0.4
-4.3-9.3
-11.6-20.1
-31.1
Page 27-28
© BMO Financial Group www.bmocm.com/economics
Challenges to Growth
Fiscal Restraint
Private Deleveraging
Confidence
Jobless US
Canada Subject to Global Downdraft
© BMO Financial Group www.bmocm.com/economics
Opportunities for Canada
Emerging Market Growth
Demand for Food andIndustrial Materials
Canadian Banks Strong
Foreign Demand
Strong Currency
Page 29-30
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