Economic Outlook

Derek Burleton VP & Deputy Chief Economist

TD Economics

May 2017

Key Questions

2

U.S. Economy

1. Can the U.S. economy hit 3% growth? 2. What scope is there for tax reform? 3. Implications for industries on both sides of the border? 4. What's the Fed path look like?

Canadian and Ontario Economies

5. Will Ontario remain at the upper end of growth podium? 6. What are the key Trump-related economic risks? 7. What next for the Bank of Canada?

Global Economy

8. What are the imminent risks to keep an eye on?

U.S. Cyclical Outlook

Ultra High Confidence Readings Not Matched By "Hard Data"

4

46

48

50

52

54

56

58

100

102

104

106

108

110

112

114

116

Jan 15 Jul 15 Jan 16 Jul 16 Jan 17

NFIB Small Business OptimismIndex (lhs)

ISM Manufacturing PMI CompositeIndex (rhs)

Index Level, 2000=100 Index Level

Source: NFIB, Haver Analytics, ISM, TD Economics.

U.S. Growth to Rebound To Above Potential

5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1970s 1980s 1990s 2000-07 2010-16 2017-18F

Annual Avg. Y/Y % Chg. Real GDP

Source: BEA, TD Economics forecast as of March 2017.

6

Participation Rate Suggests Slack Remains In The Labor Market

80

81

82

83

84

85

2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: Federal Reserve Board of Atlanta, BLS, TD Economics

Labor Force Participation Rate: 25-54 years (%)

Average (last expansion), 83%

~1.7 million people

U.S. Not Realizing The Potential Of Female Workforce

7

58

60

62

64

66

68

70

72

74

76

2000 2003 2006 2009 2012 2015

Australia Canada UK

Japan U.S.

Female Labor Force Participation Rate, %

Source: OECD. Participation rate is for ages 15 to 64.

U.S. Corporate Taxes Do Not Reflect International Trend

8

35.0 34.4

27.5 23.4

20.0 15.8 15.0

0

5

10

15

20

25

30

35

40

45

United States France Italy Japan UnitedKingdom

Germany Canada

2016 2000Corporate Tax Rate, %

Source: OECD, TD Economics.

Reality Check: Large Deficits & Slim Senate Majority Limit Policy Options

9

-10

-8

-6

-4

-2

0

2

4

2000 2003 2006 2009 2012 2015 2018 2021 2024 2027

Budget Balance as a % of GDP, CBO Baseline Projection

Source: CBO/Haver Analytics.

Forecast

Canadian Industries That Would Lose Competitiveness From U.S. Border Tax

10

0 10 20 30 40 50 60 70 80 90

Aerospace

Pharmaceutical Products

Paper Products

Aluminium Products

Electrical Equipment

Wood Products

Plastic Products

Machinery

Mineral Substances

Motor Vehicles

2016 Total Exports to US by Industry, Bn. CAD

Source: Statistics Canada, TD Economics.

U.S. Inflation Pressures Not Like The Others

11

0.5

1.0

1.5

2.0

2.5

3.0

2012 2013 2014 2015 2016 2017

UK* EZ* US

Core CPI, Y/Y % Chg.

Source: Haver Analytics, TD Economics. *12-month ma.

Fed Will Stay the Course on Rate Hikes

12

Fed, Mar. 2017

Market, Pre-election

Current Market*

TD Forecast

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Current 2017 2018 2019 Longer Term

Federal Funds Rate, %

Source: Federal Reserve Board, Bloomberg, TD Economics. *OIS curve: April 19, 2017.

13

Canada's Economy Gaining Strength

14

0.0

0.5

1.0

1.5

2.0

2.5

2015 H1 2016 H2 2016 2017 2018

Annualized real GDP growth, Y/Y % chg.

Source: Statistics Canada, Haver Analytics. Forecast by TD Economics as of April 2017.

Forecast

Oil and Construction Industries to Lead Growth Higher

15

0.0 1.0 2.0 3.0 4.0 5.0 6.0

Forestry,…

Utilities

Agriculture

Manufacturing

Services ex. Trade

Retail Trade

Non-energy Mining

Wholesale Trade

Construction

Oil & Gas

2017-18 Average

Source: Statistics Canada, TD Economics.

Output Forecast, Y/Y % Chg.

Economy Still Operating Below Full Capacity

16

0.00

0.50

1.00

1.50

2.00

2.50

3.00

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2005 2007 2009 2011 2013 2015 2017

Output Gap (lhs) Core CPI* (rhs)

Source: Bank of Canada, Statistics Canada, Forecast by TD Economics as at April 2017. * Average of CPI-Trim, CPI-median and CPI-common.

Output gap, % of GDP

Forecast

Bank of Canada Caught Between A Rock And A Hard Place

17

0.25

0.50

0.75

1.00

1.25

1.50

0.60

0.70

0.80

0.90

1.00

1.10

2012 2013 2014 2015 2016 2017 2018 2019

USD/CAD (lhs)

Overnight Rate (rhs)

USD per CAD %

Source: Bank of Canada, Bloomberg. Forecast by TD Economics as of April 2017.

Forecast

Canadian Bond Yields to Track U.S. Yields Higher

18

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013 2014 2015 2016 2017 2018

Canada 5-yr Gov't Bond Yield

U.S. 5-yr Gov't Bond Yield

%

Source: Haver Analytics, Forecast by TD Economics as of April 2017.

Forecast

Ontario to Remain on the Growth Podium in 2017-18

19

0.0 0.5 1.0 1.5 2.0 2.5 3.0

Atlantic

Saskatchewan

Manitoba

Quebec

Canada

British Columbia

Ontario

Alberta

2017-18 Real GDP , Y/Y % Chg.

Source: Haver Analytics, Statistics Canada. Forecast by TD Economics as at April 2017.

Ontario Forecast Upgraded Since December

20

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2017 2018

December 2016 Forecast March 2017 ForecastReal GDP, Y/Y % Chg.

Source: Forecast by TD Economics.

Ontario Interprovincial Migration Provides Support

21

-20

-15

-10

-5

0

5

10

15

20

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Net Interprovincial Migration (thousands of persons).

Source: Statistics Canada, TD Economics.

Ontario Government to Record a Surplus But Faces a Debt Challenge

22

20

25

30

35

40

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18f

Budget Balance (left scale)

Net Debt (right scale)

% of Nominal GDP % of Nominal GDP

Source: 2017 Federal Fiscal Reference Tables and 2017/2018 Government Budgets & Fiscal Updates.

London Economy Outperformed in 2016

Source: Conference Board of Canada, Statistics Canada, Haver Analytics, TD Economics.

London ON Canada London ON Canada London ON Canada

Avg. 2007-15 0.2 1.3 1.5 -0.1 0.7 0.8 8.0 7.6 7.1

2016 2.7 1.4 2.6 0.2 1.1 0.7 6.9 6.6 7.0

2017 Q1 - - - -0.4 1.4 1.6 6.4 6.3 6.7

Real GDP, Y/Y % Chg.Employment,

Y/Y % Chg.Unemp. Rate (%)

Sources: Conference Board of Canada, Statistics Canada, Haver Analytics, TD Economics.

Indicators

London Economy Is Fairly Diversified, Manufacturing And Non-Commercial Services Sector Play Large Role

24

0%

5%

10%

15%

20%

Canada LondonReal GDP Composition by Industry (2015)

Source: Statistics Canada, Conf. Board, TD Economics.

London's Manufacturing Sector Has Rebounded Moderately Since The Crisis

25

10%

12%

14%

16%

18%

20%

22%

1991 1996 2001 2006 2011 2016

London Ontario

Manufacturing as a share of total Real GDP

Source: Conference Board of Canada, Statistics Canada, TD Economics.

Auto Sector Facing Much Uncertainty

1,000

1,500

2,000

2,500

3,000

3,500

4,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018F

NA Auto Sales (lhs)

Canadian Auto Production (rhs)

Source: WardsAuto.com; Forecast by TD Economics as of December 2016.

Units (000's)

Forecast

Units (000's)

Housing Boom Spilling Over to Areas Outside GTA

20

30

40

50

60

70

80

90

100

2000 2002 2004 2006 2008 2010 2012 2014 2016

Vancouver

Toronto

London & St. Thomas

Source: CREA, TD Economics. As at April 2017.

Existing Home Sales-to-listings ratio (12-mma)

Seller's Territory

Balanced Market

Buyer's Territory

Price Gains Surge

-15

-10

-5

0

5

10

15

20

25

30

2000 2002 2004 2006 2008 2010 2012 2014 2016

GTA

London and St.Thomas

Y/Y % Chg. of Avg. Residential Sale Price*

Source: Canadian Real Estate Association, TD Economics. As at April 2017. *NSA, 3-mma.

Increased Housing Supply Mitigates Rising Demand

29

0

5

10

15

20

25

30

35

40

45

50

London Toronto Ontario

2016 Y/Y % Housing Starts*

Source: CMHC, TD Economics. *Singles

London Homes Still Among The Most Affordable

853

616

309

150

250

350

450

550

650

750

850

2006 2008 2010 2012 2014 2016

GTA

Ontario

London and St. Thomas

Avg. residential sale price in 000's (SA, 3-mma)

Source: Canadian Real Estate Association, TD Economics. As at April 2017.

London Economy To Record Decent Growth

31

-5

-4

-3

-2

-1

0

1

2

3

4

2001 2003 2005 2007 2009 2011 2013 2015 2017

Ontario London

Real GDP, Y/Y % Chg.

Source: Statistics Canada, Conference Board of Canada, TD Economics.

Forecast

32

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