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HEADWINDS FOR CANADA, TAILWINDS FOR US

December 5, 2012

Dr. Sherry Cooper Executive Vice President & Chief Economist, BMO Financial Group

© BMO Financial Group www.bmocm.com/economics

Global Outlook

Global Growth Stronger Next Year

Tailwinds for US in 2013US Grows 2.3%...With Upside PotentialCanada Grows 1.8%

Risks:US Fiscal CliffEuropean Debt CrisisCanadian Household DebtOil Patch SlowdownChina Hard Landing

10 11 12 13 14Global GDP 5.1 3.8 3.0 3.5 3.8

(ann % chng)


Real GDP

07 08 09 10 11 12 13 14

-9

-6

-3

0

3

6

11 12 13 14CanadaUS

2.61.8

2.02.2

1.82.3

2.33.2

US recessionCanadian recession

“2% is the New 3%”

Modest Economic Growth Ahead(q/q % chng : ar)

forecast

CanadaUS

Charts 1-2


Obama Wins Big!

Grand Fiscal Deal

Coming

FINALLY!


Source: OMB

Fiscal TighteningUnited States (% of GDP)

3-Year Change in Federal Budget Balance

50 60 70 80 90 00 10-10

-8

-6

-4

-2

0

2

4

Charts 3-4


Source: CBPP analysis on Congressional Budget Office Estimates

Public Debt – United States (% of GDP)

Why Did US Debt Ratio Rise?

01 03 05 07 09 11 13 15 17 190

20

40

60

80

100

Bush-Era Tax Cuts

Wars in Iraq and Afghanistan

Economic DownturnTARP, Fannie, FreddieRecovery Measures

Other Debt

Projected Debt under Current

Policies

Debt without These Factors


Government Debt Concerns

Net Government Debt

Canada Germany Spain France UK Portugal Ireland US Italy Japan Greece

0

25

50

75

100

125

150

23

45

23

4633

54

13

54

90 95 91

3552 54

6674 81 82 85

96

134 134

(% of GDP)

[2008, 2012]

US “Fiscal Cliff”, Major US Budget Deal in 2013Source: OECD Economic Outlook, May 2012

Markets Focus on Spain

2012

2008

Charts 5-6


North America Outperforms

Fiscal Austerity Weighs on Europe, 2013 Recovery

Real GDP – G7 (y/y % chng)

2013

US

Canada

UK

Germany

France

Japan

Italy

-2 0 2 4 6

2.3

1.8

1.3

0.9

0.8

0.2

-0.3

2014

US

Canada

Germany

UK

France

Japan

Italy

0 2 4 6 8

3.2

2.3

1.7

1.5

1.4

1.3

0.7

2012

US

Canada

Japan

Germany

France

UK

Italy

-4 -2 0 2 4

2.2

2.0

1.5

0.9

0.1

-0.1

-2.1

Source: [2012-14] BMO Capital Markets forecasts


Emerging Economies Continue to Lead...But Clearly Slowing

Real GDP

China India Asia Latin Brazil US Canada Euro Area Japan

-2

0

2

4

6

8

10

12

(ann % chng)

13 14

Ranked by 2013 Source: [2012-14] BMO Capital Markets forecasts

Japan & India) (excl Brazil)(excl China, America

Emerging Markets Account for Three-quarters of Global Growth –

Record!Developing

11 12 13 14WorldEmerging MarketsG7

3.86.21.4

3.04.41.4

3.55.11.5

3.85.12.3

Developed

Charts 7-8


11 12 13 14ChinaIndiaBrazil

9.36.52.7

7.74.01.2

8.35.53.5

8.55.53.7

Industrial Production (y/y % chng)

Easing Monetary and Fiscal Policy

Brazil

07 09 11 13

-20

-15

-10

-5

0

5

10

15

20China

07 09 11 13

-20

-15

-10

-5

0

5

10

15

20India

07 09 11 13

-20

-15

-10

-5

0

5

10

15

20

Emerging Economies’ Manufacturing Activity Cools

Real GDP

China Cuts Rates, Following India

and Brazil


Oil and Loonie Still Mix

97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 140

25

50

75

100

125

150

60

70

80

90

100

110

120

WTI Crude Oil(lhs)

C$(US¢ : rhs)

forecast

WTI Crude Oil = (US$/bbl) Canadian Dollar = (US¢/C$)

C$ Parity

(as of December 4, 2012)

$88.50

100.61¢

Charts 9-10


Trade Balances: Diverging Paths

US Trade Deficit Improving

United States(US$ blns)

04 05 06 07 08 09 10 11 12

-70

-60

-50

-40

-30

-20

Canada(C$ blns)

04 05 06 07 08 09 10 11 12

-3

0

3

6

9

Trade Balance

Record Low-$2.5 bln

Record High$7.7 bln

-$1.3 bln


Canadian Consumers Tighten Belts

Canadian:DeleveragingHousing Cools

US Pent-up Demand... Not in Canada

Charts 11-12


Consumer Confidence

Retail Sales(y/y % chng : 3-mnth ma)

10 11 12

2

4

6

8

10

Spending Growth Slows

Consumer Confidence

07 08 09 10 11 12

20

40

60

80

100

120

Canada

USCanada

US


06 07 08 09 10 11 12 13 144

5

6

7

8

9

10

4.4%

33-year Low5.9%

7.8% at Obama Inauguration

(Jan ’09) 7.9%

7.4%

10.0%

8.7%

TorontoOntario

8.6% 8.3%

SpainGreecePortugalIrelandItalyFranceFinlandUKSwedenBelgiumAustraliaIsraelGermanyJapanNorway

26.225.416.314.711.110.77.97.87.77.55.45.45.44.23.0

Unemployment Rate (percent)

Jobless Rates: Record Gap Narrows

US Participation Rate at 30-year Low

forecast

Canada

US

Charts 13-14


Total Liabilities(ratio to personal income)

95 98 01 04 07 10

0.6

0.9

1.2

1.5

1.8

Households

US Household Balance Sheets Improve

Net Worth(% of disposable income)

95 98 01 04 07 10

450

500

550

600

650

700

750

Canada

US

Record High

Thanks to Deleveraging, Stock Market Rally and Housing RecoveryHouseholds include nonprofit organizations and unincorporated businesses

Record High

Canada

US


Best Affordability in At Least 41 YearsInventories = (nsa) include new and existing homes available for sale, and homes in foreclosure

US Housing Improves

Sales and Inventories(mlns)

03 05 07 09 11 13

2

3

4

5

6

7

8

Homes – United States

Sales

Price Indices(y/y % chng)

03 05 07 09 11 13

-20

-10

0

10

20

FHFAS&P/

Case-Shiller

CoreLogic

AverageZillow

Inventories3.9%

Charts 15-16


Home Prices(y/y % chng)

05 07 09 11-10

-5

0

5

10

15

US Turning the CornerHouse Prices = Canada: Teranet Composite 11 US: FHFA House Price Index

Housing Starts(000s : ar)

05 07 09 11 13400

800

1,200

1,600

2,000

2,400

2,800

40

80

120

160

200

240

280

Existing Home Sales(mlns : ar)

05 07 09 11 133

4

5

6

7

8

0.2

0.3

0.4

0.5

0.6

Canada(rhs)

US(lhs)

US(lhs)

Canada(rhs)

Canadian Housing Momentum Fades

Canada

Crossover

US


07 09 11 13

-20

-10

0

10

20

30

40

Montreal

3.3%

07 09 11 13

-20

-10

0

10

20

30

40

07 09 11 13

-20

-10

0

10

20

30

40

Average House Price – Canada (y/y % chng)

Canadian Prices Cooling

Vancouver

TorontoCanada

Credit Crisis & Recovery

-4.0%

5.3%0.0%

Calgary

5.0%

Price-to-Income Ratios CanadaVancouverTorontoCalgary

20115

1074

20013543

Toronto: Detached Homes Outperform Condos

Charts 17-18


Financial Markets

Interest Rates: Low for Long

Loonie Stays Strong

Canadian Stocks Underperform


No Changein

BoC Policy

Mark Carney Leaving BoC

Charts 19-20


BoC On Hold

Overnight Rate

07 08 09 10 11 12 13 14

0

1

2

3

4

5

6Open-ended Fed Quantitative Easing

(% : as of December 4, 2012)

US

Canada

forecast

Record Lows

Fed Commits to Low Rates Until Mid-2015

1.00%

0% - 0.25%


Current Spread9 bps

10-year Bonds

09 10 11 12 13 14

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Fixed Mortgage Rate

09 10 11 12 13 14

3.0

3.5

4.0

4.5

5.0

5.5

6.0

4.17%Canada3.32%US

5.40%

Flight to Safety

Long Yields Extremely Low(% : as of December 4, 2012)

US(30-yr)

Canada(5-yr)

forecast

1.71%Canada1.62%US

US

Canada2.90%

’14)(Year-end

3.20%

2.20%

4.65%

2.00%

’13)(Year-end 3.55%

(Year-end’13)

4.40%

’14)(Year-end

Charts 21-22


US Outperforms

TSX

07 08 09 10 11 126000

8000

10000

12000

14000

16000S&P 500

07 08 09 10 11 12

600

800

1000

1200

1400

1600DAX

07 08 09 10 11 123000

4000

5000

6000

7000

8000

9000

May 2,2011

(as of December 4, 2012)

October 9, 2007

-56.8%March 6, 2009

July 16, 2007

-54.8%March 9, 2009

September 14,2012 April 5,

2011

March 9, 2009

June 18, 2008

-49.8%

Loss10.1%

8.3%Loss 19.5%

Loss


Opportunities:Emerging Economy DemandForeign Investment InflowsCanadian Banks StrongFiscal Position Strong

Canadian Economy: Challenges & Opportunities

Output Gap Closing

Challenges:Global Government DebtStrong C$High Household DebtWeak ProductivityDeclining US Energy Imports

Charts 23-24

headwinds for canada, tailwinds for us...1-800-613-0205 headwinds for canada, tailwinds for us...

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