building trust. driving confidence. · If ICBC were to maintain Basic capital at the proposed capital management target of 150% MCT today, the capital maintenance provision for policy

February 20, 2014

British Columbia Utilities Commission Sixth Floor 900 Howe Street Vancouver, BC V6Z 2N3

building trust. driving confidence.

Attention: Ms. Erica Hamilton, Commission Secretary and Director

Re: Filing of ICBC's 2013 Revenue Requirements Application Undertakings

Dear Ms. Hamilton:

Enclosed are responses to eight information requests that were outstanding after the conclusion of the Oral Hearing (February 6 to February 14, 2014) on lCBC's 2013 Revenue Requirements Application. The remaining outstanding responses will be filed shortly. lCBC anticipates filing two further requests confidentially in the second week of March, after approval by ICBC's Board of Directors of 2013 financial information.

Yours truly,

LlJA .. tJune Elder Manager, Corporate Regulatory Affairs

Cc: Registered Intervenors Geri Prior, B.Comm, FCA, Chief Financial Officer, ICBC

Attachments

151 West Esplanade I North Vancouver I British Columbia I V7M 3H9 I 604-661-2800 I [email protected]

ICBC Filing re: Revenue Requirements Application for the 2013 Policy Year

Insurance Corporation of British Columbia Page 1 of 4

February 2014

INSURANCE CORPORATION OF BRITISH COLUMBIA UNDERTAKING

HEARING DATE

February 11, 2014

TRANSCRIPT REFERENCE

Volume 4, page 581, line 21 to page 582, line 8

ICBC REFERENCE

2013 RR BCUC.UT.1

REQUESTOR: BCUC

QUESTION

Provide an update to the table in the response to information request 2013.1 RR

BCUC.24.1.1-2, Attachment A – Bodily Injury Basic Frequency as at August 31 of Each

Accident Year to show the reported claim counts, number of annual policies, and 12-month

frequency by accident year for all the years shown in Attachment A.

RESPONSE

Please see the following table for an update to the response to information request 2013.1

RR BCUC.24.1-1.2, Attachment A – Bodily Injury Basic Frequency as at August 31 of Each

Accident Year, based on data as of December 31, 2013. ICBC would like to clarify that the

information in the response to information request 2013.1 RR BCUC.24.1-1.2, Attachment

A, and the information presented in the table below correspond to the total of Personal and

Commercial lines of business. In the oral hearing (Transcript Volume 4: page 571 lines 24

to 26, page 572 lines 1 to 4, and page 578 lines 8 to 11), the focus of the discussion leading

up to this requested undertaking was on the Personal line of business only.



February 2014

Accident

Year

Reported

Claims Count

@ 12 months

Number of

Policies

@ 12 months

BI Frequency

@ 12 months

BI Frequency

@ 8 months

(1) (2) (3) = (1)/(2)

(from 2013.1 RR

BCUC.24.1-1.2)

2003 42,054 2,428,000 1.73% 1.08%

2004 40,967 2,483,114 1.65% 1.02%

2005 40,180 2,546,426 1.58% 0.98%

2006 40,405 2,618,440 1.54% 0.96%

2007 40,036 2,691,568 1.49% 0.93%

2008 37,747 2,755,422 1.37% 0.85%

2009 36,373 2,775,791 1.31% 0.79%

2010 38,097 2,820,399 1.35% 0.83%

2011 39,125 2,853,488 1.37% 0.85%

2012 39,639 2,893,578 1.37% 0.86%

2013 38,171 2,938,711 1.30% 0.82%

As discussed in the Transcript Volume 5 from page 665, line 12 to page 670, line 26, the

reported bodily injury (BI) claim count for accident year 2013 as of December 31, 2013 is

affected by the recent Claims operational changes (including changes in the processing of

injury claims at the first notice of loss), which began in the early part of 2013 and which

have caused a noticeable delay in the recording of BI claims. Most BI claims are associated

with a property damage (PD) claim, and the recent Claims operational changes are not

affecting the recording of PD claims.

Knowing that the above BI claims data for accident year 2013 as at 12 months has been

affected as described above, it is appropriate under accepted actuarial practice to estimate

accident year 2013 BI frequency by adjusting the reported claim counts before applying the

loss development technique. To not make an adjustment for the impact of the delay and

apply in straightforward fashion the loss development technique, would produce an estimate

of the 2013 BI frequency that has a downward bias and hence it would not be a best

estimate under accepted actuarial practice. In estimating the incurred claim counts and

incurred claims for the purpose of the year-end 2013 financial statements, ICBC’s actuaries

determined the 2013 accident year BI frequency as the product of the accident year 2013



February 2014

PD frequency and a selected BI to PD ratio. The restated BI frequency at 12 months for

accident year 2013 is 1.35%. The rationale for this approach is as follows:

PD claims are not impacted by recent Claims operational changes, and there is a

high degree of confidence in the estimate of 2013 accident year PD frequency.

Most BI claims are associated with a PD claim, and the BI to PD ratio has been stable

since the end of the recession.

The 2013 PD claims reflect the favourable effect of 2013 being a drier than average

year, so that the estimate of 2013 accident year BI claims frequency will reflect a

similar favourable effect.

The BI to PD ratio for accident years 2004 to 2012 and the estimate for 2013 are shown

below in Figure 1. ICBC has used the historical three year average (2010 to 2012) for the

selected BI to PD ratio.

Figure 1 Incurred BI to PD Ratio as of December 2013



February 2014

Please see the response to undertaking 2013 RR BCUC.UT.3 for ICBC’s updated estimate of

incurred BI frequency for accident year 2013 as of December 31, 2013.

It should be noted that, with the implementation of its new claims management system,

ICBC expects that there will be further disruptions in the claims recording patterns in the

future.



February 2014


HEARING DATE

February 12, 2014



ICBC REFERENCE

2013 RR BCUC.UT.5

REQUESTOR: BCUC

QUESTION

Rerun the asset decline scenario excluding the 2008 and 2009 years in the asset decline

volatility determination.

RESPONSE

Although ICBC has provided the requested information, excluding two years in the asset

decline volatility determination is misleading and should not be used.

ICBC has analyzed the historical economic data in order to understand the true probability

distribution of asset returns. ICBC has used that information to construct the scenarios that

are best unbiased estimates of 10% probability scenarios and that conform with accepted

actuarial practice. The equity yield forecasts used in ICBC’s original 2013 Basic dynamic

capital adequacy testing (DCAT) analysis were verified using the GEMS software from

Conning, the 2013 winner of the Best Economic Scenario Generation Software awarded by

Insurance Risk, a leading industry source of news, opinion and analysis for insurance risk

managers. 1

1http://www.conning.com/uploadedFiles/About_Conning/Industry_Articles/Insurance%20Risk%20Awards%20Article%20Final.pdf.



February 2014

There are three problems with removing the two years that exhibit higher than average

volatility over the 80-year historical period. First, the requested exercise is removing the

very phenomenon that ICBC is trying to measure. The exclusion of relevant data in this

manner (which might fairly be termed “cherry picking”) is not appropriate by any standard

for a risk analysis of this nature. Second, using the results of the undertaking would not be

consistent with accepted actuarial practice, as they are biased low. Third, market

uncertainty centered on the strength of the global economic recovery and the impacts of

extraordinary monetary policies continue to linger.

With all of those provisos, the table below compares the results of ICBC’s original asset

decline scenario for the 2013 Basic DCAT analysis with the results for the asset decline

scenario if the recession years of 2008 and 2009 were removed from the analysis.

Indicated MCT Target

Solvency Management

2013 Analysis 133% 153%

2013 Analysis excl. 2008-2009 128% 147%



February 2014


HEARING DATE

February 12, 2014


Volume 5, page 700, line 16 to 24

ICBC REFERENCE

2013 RR BCUC.UT.6

REQUESTOR: BCUC

QUESTION

If ICBC were to maintain the Basic capital level at 150% MCT today, what is the capital

maintenance provision?

RESPONSE

If ICBC were to maintain Basic capital at the proposed capital management target of 150%

MCT today, the capital maintenance provision for policy year 2013 would be $76.9 million,

which is an additional $10 million above and beyond the current amount required to

maintain Basic capital at 130% MCT. This additional amount would gradually be brought in

over 10 years at an annual rate impact of about 0.05 percentage points (or $1 million per

annum) for a total 10-year rate impact of 0.5 percentage points. The capital maintenance

provision can be calculated by multiplying the proposed capital management target of 150%

MCT by the 2013 capital required of $1.1 billion by the growth in capital required of 4.6%

(please see the 2013 Revenue Requirements Application, Chapter 3, Exhibit G.2 for

reference to these values).



February 2014


HEARING DATE

February 12, 2014



ICBC REFERENCE

2013 RR BCUC.UT.7

REQUESTOR: BCUC

QUESTION

Provide MCT ratios and possibly capital modeling approaches for Manitoba Public Insurance

and Saskatchewan General Insurance (subject to whether ICBC can provide references and

if it is publicly available). Add any disclaimers about how the products offered are different

and the regulatory environments are different.

RESPONSE

Included as Attachment A to this undertaking response are e-mail communications with

Saskatchewan Government Insurance (SGI) and Manitoba Public Insurance (MPI) providing

information on the capital management of their respective Basic insurance businesses. It

should be emphasized that capital requirements are specific to the risk profile of a company,

and ICBC operating under a full tort jurisdiction would have a different risk profile than

insurers such as SGI and MPI that have products with scheduled benefits. Also, irrespective

of what occurs in other provinces with respect to capital requirements for the Basic

insurance, ICBC and the Commission must operate within the legal regulatory framework

established in legislation of the province of BC. In addition to the response to information



February 2014

request 2013.1 RR BCUC.69.5 referenced in Transcript Volume 5, page 773, line 12, this

topic was further addressed in the responses to the following information requests:

2013.1 RR BCUC.69.1, 2013.1 RR BCUC.69.2, 2013.1 RR BCUC.69.3, 2013.1 RR

BCUC.69.4, and 2013.1 RR BCUC.69.6.

2013.1 RR BCUC.88.1 and 2013.1 RR BCUC.88.2.

2013.1 RR RL.6.4.

ICBC Undertaking Response

Insurance Corporation of British Columbia

February 2014

2013 RR BCUC.UT.7 – Attachment A – Communications from Saskatchewan Government Insurance and Manitoba Public

Insurance regarding Capital Management of Basic Insurance

From: Chris McCulloch [mailto:[email protected]]

Sent: Thursday, February 13, 2014 12:09 PM

To: Minogue, Camille

Subject: SAF Capital Policy

Hi Camile,

As per our phone conversation, here is a brief description of the Saskatchewan Auto Fund's capital

management policy. All this information is public and can be shared with the commissioner that you

spoke of. This information is also available online at the rate application that we've just filed this week

with our regulator: http://www.saskratereview.ca/images/docs/sgi-2014/sgi-auto-fund-2014-rate-

proposal-finaL.pdf. See pages 5-6 for the overview on the new capital management policy. You can also

read our full capital management policy in our minimum filing requirements document:

http://www.saskratereview.ca/images/docs/sgi-2014/2014-saf-minimum-filing-requirements-

website.pdf. See page 540 of the file (no built-in page numbers, sorry!)

The Auto Fund uses the Minimum Capital Test (MCT) to measure and track capital adequacy. The results

of our most recent Dynamic Capital Adequacy Testing (DCAT) model revealed that we would need an

MCT ratio of nearly 100% prior to a 1-in-100 event (the worst plausible adverse scenario modelled) in

order to remain solvent with positive capital following the event. As a result, we are proposing to

change our MCT target to 100%.

We are also changing the approach used to maintain capital at this appropriate level. The former policy

triggered a surcharge or rebate when the MCT ratio moved outside of a target range. The new policy

applies a percentage amount to the proposed rates in each rating year so that we expect to move 1/5th

of the way toward our target MCT ratio of 100%. This could be an increase to the proposed rates to

recover capital (as is the case in our current application), or it could be a decrease to the proposed rates

to release capital. We know this is similar to what ICBC currently uses. Our former policy caused too

much volatility in the rates charged to customers, and back-testing this new method that always moves

us 1/5th of the way toward the target reduced that volatility.

In addition, we now apply a separate percentage amount to the proposed rates in excess of the break

even level as part of our capital policy to account for the fact that as claims liabilities and investment

assets grow, so too does the capital required to maintain them. With this amount, we can expect capital

available to grow directly in proportion with the growth in capital required, maintaining a constant MCT

ratio.

Just let me know if you have any questions.

Chris McCulloch, FCAS FCIA

Manager, Auto Fund Reserving & Pricing

Saskatchewan Government Insurance

1321 Kenaston Blvd.

Winnipeg, Manitoba

(204) 925-9208

This e-mail and any files transmitted with it are confidential and intended solely for the use of the

individual or entity to whom they are addressed. If you are not the named addressee, please notify the

sender immediately by e-mail if you have received this e-mail by mistake and delete this e-mail from

your system. If you are not the intended recipient you are notified that using, disclosing, copying or

distributing the contents of this information is strictly prohibited.

From: [email protected] [mailto:[email protected]]

Sent: Thursday, February 13, 2014 1:00 PM

To: Minogue, Camille

Subject: MPI Capital Requirements

Hi Camille,

Further to our conversation, I can confirm that the Manitoba Public Utilities Board (PUB) has long been

setting MPI’s Basic minimum and maximum capital levels using a percentage of premium method,

rather than employing industry standard stress testing methods (i.e. the Minimum Capital Test, Dynamic

Capital Adequacy Testing (DCAT)). The current PUB methodology uses a minimum and maximum capital

range based on 10% to 20% of net written premiums.

MPI is not aware of any other jurisdiction in which the percentage of premium approach is currently

used to determine the capital requirements for a property and casualty insurer. MPI has long had

concerns with this approach because the targets produced by this method are not directly related to the

key risks faced by the Basic product. To-date, I or my predecessor have not been able to certify that the

Basic program has satisfactory financial condition because the existing capital targets have been too low

to address the risk posed.

Over the past several years MPI has filed DCAT analyses with its General Rate Application urging the PUB

to adopt this approach. For comparison purposes, we have also consistently cited that ICBC and SGI use

industry standard stress testing methods (MCT) to protect the financial position of their Basic product.

We are currently working closing with the PUB advisors and interested parties to develop a DCAT-based

approach to determining our minimum capital requirements that would also conform with actuarial

standards of practice.

I confirm that you can file this email if it helps clarify the position of MPI with the British Columbia

Utilities Commission.

Luke Johnston

Chief Actuary and Executive Director of Pricing and Economics

Manitoba Public Insurance

(204) 985-8770 ext 8050



February 2014


HEARING DATE

February 12, 2014


Volume 5, page 776, line 2 to 15

ICBC REFERENCE

2013 RR BCUC.UT.8

REQUESTOR: BCUC

QUESTION

Outline four or five realistic scenarios how circumstances could unfold to go from an MCT of

165% to an MCT of 150% after the customer renewal credit (CRC) is activated and indicate

the time frame.

RESPONSE

The purpose of the proposed 15 percentage point margin for a CRC is that there is enough

capital to absorb normal volatility after a CRC is triggered that would cause the MCT to fall

below the proposed capital management target of 150%. The following four scenarios

provide circumstances that could cause the MCT level to drop by 15 percentage points

within one year’s time.

1) Unfavourable loss cost forecast variance resulting in a 7% increase to the Basic loss

cost trend (could be due to an unexpected increase in frequency, severity, or both).

2) A legislative change impacting Basic insurance claims cost by at least $150 million,

e.g., a change in the statutory discount rates used to calculate present value

settlement amounts for future wage loss and future care awards. As discussed in the

Application, Chapter 3, Exhibit E.0, page 8, the statutory discount rates are under



February 2014

review by the Chief Justice of the BC Supreme Court and a change is currently under

consideration for implementation in 2014. Such a change would impact unresolved

claims from current and prior years, as well as claims in future years.

3) A 10% drop in the market value of ICBC’s equity portfolio.

4) An upward shift in the bond yield of 150 basis points, which causes the value of

ICBC’s bond portfolio to decline (61% of ICBC’s portfolio is invested in bonds).

Should either item 3) or 4) occur, the 15 percentage point drop in MCT level would be the

result of a decline in the market value of assets as reflected in the MCT ratio, as further

discussed in the response to the information request 2013.1 RR BCUC.57.3.



February 2014


HEARING DATE

February 14, 2014



ICBC REFERENCE

2013 RR BCUC.UT.9

REQUESTOR: BCUC

QUESTION

Please provide updated forecasts of the New Money Rate and the Yield on Basic Equity

based on the multi-dealer surveys as of December 2013. Also provide the calculation of

how the rate indication would increase based on the updated numbers.

RESPONSE

The updated New Money Rate using the multi-dealer surveys as of December 2013 is

3.58%,1 while the updated Yield on Basic Equity based on the most recent information is

4.31%. The updated New Money Rate is lower than that provided in the Application

(3.75%) with an unfavourable impact of 0.5 percentage points on the rate indication. The

updated Yield on Basic Equity is higher than that provided in the Application (4.25%), with a

slightly favourable impact on the rate indication.

The calculation of the updated New Money Rate is provided in Attachment A – Calculation of

New Money Rate as of December 2013. The calculation of the updated Yield on Basic Equity

is provided in Attachment B – Calculation of Yield on Basic Equity as of December 2013.

Also please see Attachment C – Forecasts from Multi-Dealer Survey as of December 2013.

1 The New Money Rate of 3.58% is revised from 3.56% provided during the Oral Hearing as indicated in the Transcript Volume 7, page 1111, line 11.



February 2014

2013 RR BCUC.UT.9 – Attachment A – Calculation of New Money Rate as of December 2013



February 2014

Attachment A

Calculation of New Money Rate as of December 2013

Please see Attachment C – Forecasts from Multi-Dealer Survey as of December 2013.

Quarterly Forecasts for 2-Year Government of Canada Bond Yields (%) from

updated Financial Forecasts (Note: 2013 Q4 actuals are from Bloomberg)

Contributor Q4/2013 Q1/2014 Q2/2014

Scotiabank 1.13 1.05 1.15

Bank of Montreal 1.13 1.15 1.25

National Bank 1.13 1.19 1.29

TD Bank 1.13 1.15 1.25

RBC 1.13 1.20 1.30

Laurentian Bank of Canada 1.13 1.10 1.10

Quarterly Forecasts for 5-Year Government of Canada Bond Yields (%) from

updated Financial Forecasts (Note: 2013 Q4 actuals are from Bloomberg)





TD Bank 1.82 1.95 2.05

RBC 1.82 1.95 2.15




February 2014

3-Year Government of Canada Bond Yields (%) Interpolated from 2-year and

5-year Government of Canada Bond Yields above (Note: 2013 Q4 actuals are from

Bloomberg)





TD Bank 1.26 1.42 1.52

RBC 1.26 1.45 1.58


Average for quarter 1.26 1.38 1.49

Overall 3-year bond yield Sum of averages for quarters/3 =

4.18/3 = 1.39

Annual Forecasts for Canadian CPI from updated Financial Forecasts

Contributor Q2/2014

Scotiabank 1.10

Bank of Montreal 1.30

National Bank 1.32

TD Bank 1.50

RBC 1.60

Laurentian Bank of Canada 1.10

Average 1.32



February 2014

Calculation of the New Money Rate for the 2013 Policy Year as of December 2013

Weighting Formula for Yield Yields

72% x

Forecast 3-year Government of Canada

bond yield calculated from multi-dealer

survey

1.39%

+ 22% x

Risk-free rate of 3.8% + 6.4%

(note that the multi-dealer survey’s risk-

free rate was 3.3% which is lower than

the floor of 3.8%)

3.8%

+ 6.4%

= 10.2%

+ 6% x Forecast Canadian inflation from multi-

dealer survey + 4.25%

1.32%

+ 4.25%

= 5.57%

New Money Rate for the 2013 Policy Year 3.58%



February 2014

2013 RR BCUC.UT.9 – Attachment B – Calculation of Yield on Basic Equity as of December 2013



February 2014

Attachment B

Calculation of Yield on Basic Equity as of December 31, 2013

Current

Weightings Formula for Yield Actual Yields

Weighted

Yield

0.8% x Current Money Market Yield

at Cost 0.92% 0.01%

+ 61.0% x Current Canadian Bond

Yield at Market 1.97% 1.20%

+ 10.2% x Current Mortgage Yield at

Cost 4.31% 0.44%

+ 24.0% x

Risk-free rate + 6.4%

(note that the multi-dealer

survey’s risk-free rate was

3.3% which is lower than

the floor of 3.8%)

3.8%+6.4% 2.45%

+ 4.0% x Current Real Estate Yield at

Cost 7.47% 0.30%

- Fees for Managing

Investment Portfolio 0.09%

Yield on Basic Equity for the 2013 Policy Period 4.31%



February 2014

2013 RR BCUC.UT.9 – Attachment C – Forecasts from Multi-Dealer Survey as of December 2013

Global Economics

Global Forecast Update is available on: www.scotiabank.com, Bloomberg at SCOT and Reuters at SM1C

Global Forecast Update

Global Prospects — The Economics of Hope After more than half a decade of disappointment, global economic activity is showing hopeful signs of building momentum. U.S. growth will accelerate during 2014 as fiscal retrenchment diminishes at a time when stronger employment and income gains have put consumers back into a spending mood. Both Canada and Mexico are expected to experience a pick-up in growth next year, benefiting from improved U.S. market conditions and relatively buoyant domestic demand. The Euro zone also has begun to limp out of recession, led by Germany, while U.K. growth is being underpinned by ongoing monetary stimulus and government lending initiatives. While Chinese growth has decelerated and may fall below 7½% in 2014, this gain is expected to be nearly three times the pace of expansion in the U.S. or U.K., and nearly five times the likely outcome in Germany, the Euro zone’s top performer. With foreign exchange reserves exceeding US$3.6 trillion, China has enormous financial resources to support its transition to a more efficient market economy. China’s performance is being supported by increasing economic linkages to other fast-growing Asian and Latin American nations. With income rising dramatically, Chinese households also have become world-class consumers, buying more motor vehicles and spending more on international travel than any other nation. With inflation going nowhere fast and the pick-up in growth ranging from lacklustre to moderate at best, central banks in Europe, the U.S. and Canada will likely keep short-term interest rates near generational lows well into 2015. However, global financial markets will remain prone to sudden bouts of volatility and higher long-term rates as the U.S. Federal Reserve tapers its massive bond buying program. With investors now more positive on U.S. prospects and more cautious about the outlook for many commodity prices, the U.S. currency will remain strong with the Canadian dollar likely fluctuating in the low-to-mid 90¢(US) range. From a Canadian perspective, the competitive benefits of a softening currency and the cyclical recovery of U.S. consumer spending are positive for exporters, particularly for producers of motor vehicles and building materials. U.S. car sales are expected to reach 16 million units next year — the highest level since 2007 — up from a low of only 10.4 million in 2009. With the average age of U.S. motor vehicles now at a record 11.4 years, up from less than 9 years a decade ago, replacement demand should keep sales buoyant beyond mid-decade. Similarly, reduced stress on U.S. household balance sheets and pent-up demand should push U.S. housing starts towards 1.4 million units by mid-decade, up from less than one million units in 2012 and roughly 800 thousand units above the cyclical low reached in 2009. Stronger

January 6, 2014

-2

0

2

4

6

8

10

U.S. Canada Japan Euro zone

2013f

2014f

2015f

2000-07

Annual % change

Global Growth Is Changing Gears: Developed World Gears Up

-2

0

2

4

6

8

10

China India Mexico Brazil

2013f

2014f

2015f

2000-07

Annual % change

China Gears Down

Source: Bloomberg, BEA, Statistics Canada, Eurostat, Scotiabank Economics.

Index

Overview Forecasts

International

Commodities

North America

Provincial

Financial Markets

1-2

3-4

4

5

6

7-8

2

Global Economics January 6, 2014


exports also should contain, and hopefully begin to reduce, Canada’s massive non-commodity trade deficit which has more than doubled to over $120 billion since the global financial crisis. Beyond mid-decade, the prospect of a comprehensive economic and trade agreement (CETA) with Europe is positive for Canadian exporters. Although European growth will remain modest, Canadian businesses will benefit from the elimination of tariffs, better access to a market of over half a billion people and new opportunities to plug into global supply networks. While less than 9% of Canadian exports go to Europe, sales have grown at an annual rate of nearly 8% over the past decade, with significant gains in two-way trade with the U.K. The CETA also will offer European firms expanded opportunities here — potentially giving Canadian shoppers greater choice and lower prices — so the net impact on Canada’s non-commodity merchandise trade deficit is difficult to predict and may be relatively small. The real game changer for exporters in Canada and other developed nations is the opportunity to tap into rapidly growing domestic demand in Asia and Latin America. While China already has passed the U.K. and Japan to become Canada’s second-largest trading partner, these regions now account for less than 7% of Canada’s international sales. Surging vehicle sales in emerging markets is very positive for base metals (and hopefully, for Canada’s auto sector), enormous housing construction will benefit the forest industry and, as incomes rise, changing diets will provide opportunities for Canada’s high-quality agri-food sector. The greatest opportunity lies in the oil and gas sector, which accounts for one-quarter of Canadian exports and a similar share of business investment. Here too lies the greatest challenge, because reaching Asian markets and breaking free of dependence on U.S. demand hinges on moving ahead with a number of key export pipeline projects to the B.C. coast and Atlantic Canada. Wide discounts on Western Canada’s light and heavy crude oil sold in the U.S. can only be lessened by reaching world markets, and the economics of shipping oil and gas to these markets is compelling. With the ramping up of U.S. shale gas and oil output casting a shadow over medium-term import requirements, providing an infrastructure to reach global energy markets is one of Canada’s top export policy objectives.

0

5

10

15

20

25

08 09 10 11 12 13

Millions of units

China

E.U.

U.S.

Motor Vehicle Sales*

*Total cars and trucks. Source: Ward's Automotive, Scotiabank Economics.

0

20

40

60

80

100

120

140

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Exports: $ bns, annualized,4-quarter moving average

Autos & Parts

Energy Products

Energy Dominates Canadian Exports And Trade

-20

-10

0

10

20

30

40

50

60

70

80

00 01 02 03 04 05 06 07 08 09 10 11 12 13

Trade balance: $ bns, annualized,4-quarter moving average

Autos & Parts

Energy Products

Source: Statistics Canada, Scotiabank Economics.

3



Forecast Changes

International Japan’s 13Q3 real GDP was

revised down to 0.3% q/q (non-annualized) from an earlier estimate of 0.5%. Accordingly, we made a modest downward revision to the country’s growth rate for 2013 — output likely expanded by an average 1.8% last year. A similar pace is anticipated for 2014.

We have revised Thailand’s 2013 real GDP growth estimate down as well, a move that reflects the country’s increasing political challenges. Output growth is now expected to have increased by 3.2% in 2013 (from 3.5% earlier). However, Thailand’s underlying fundamentals are still favourable and supportive of output expanding by 4% in 2014.

The euro area lost some momentum in 13Q3, highlighting the region’s slow pace of recovery that will characterize activity for the time being. The fourth quarter likely recorded a minuscule real GDP advance of 0.1% q/q (matching the performance of the prior three months), with the average for the year revealing a contraction of 0.5%. We expect a return to growth of 0.8% in 2014, led by Germany, followed by a 1.3% advance in 2015.

Guided by an improving labour market, the U.K. economy will maintain a robust pace of expansion through the first part of 2014. Revisions to real GDP have pushed up the annual growth estimate for 2013 to 1.9% (our previous estimate was 1.5%), though with an unchanged quarterly profile, the adjustment leaves our 2014 projection intact at 2.5%.

Latin America’s economic outlook for 2014 will be shaped by a number of factors — Presidential elections in Colombia (May) and Brazil (October), a new government in Chile and the FIFA World Cup in Brazil. Additionally, moderating copper prices and currency volatility, resulting from U.S. monetary actions, will remain key factors for policymakers. We expect the region as a whole to expand by an average of 3% in 2014-15.

*WPI inflation.

International 2000-12 2013f 2014f 2015f

Real GDP (annual % change)

World (based on purchasing power parity) 3.7 2.9 3.5 3.6

Canada 2.2 1.8 2.4 2.5 United States 1.9 1.8 2.7 3.0 Mexico 2.4 1.3 3.3 3.7

United Kingdom 1.7 1.9 2.5 1.7 Euro zone 1.3 -0.5 0.8 1.3 Germany 1.3 0.5 1.6 1.8 France 1.3 0.2 0.6 1.0 Italy 0.4 -1.9 0.2 0.7 Spain 1.9 -1.3 0.4 0.9 Greece 0.6 -4.0 -0.7 1.3 Portugal 0.5 -2.0 0.1 1.3 Ireland 2.9 0.0 1.4 2.1 Russia 5.2 1.4 2.5 2.8 Turkey 4.4 4.0 3.6 4.0

China 9.3 7.7 7.3 7.0 India 7.2 4.5 5.2 5.7 Japan 0.9 1.8 1.8 1.2 South Korea 4.3 2.7 3.3 3.5 Indonesia 5.4 5.7 5.7 6.0 Australia 3.1 2.4 2.7 2.9 Thailand 4.2 3.2 4.0 4.5

Brazil 3.4 2.3 2.8 3.4 Colombia 4.2 4.2 4.8 4.5 Peru 5.7 5.1 5.4 5.6 Chile 4.5 4.4 4.4 4.7

Consumer Prices (y/y % change, year-end)

Canada 2.0 1.0 1.7 1.9 United States 2.5 1.2 1.7 1.9 Mexico 4.7 3.9 4.3 4.0

United Kingdom 2.3 2.0 2.2 2.4 Euro zone 2.1 0.9 1.2 1.4 Germany 1.8 1.5 1.6 1.8 France 1.9 0.8 1.3 1.5 Italy 2.4 0.6 1.1 1.1 Spain 2.9 0.3 1.2 1.1 Greece 3.1 -2.0 -0.1 0.5 Portugal 2.5 0.1 0.8 1.3 Ireland 2.2 0.1 1.0 1.5 Russia 11.8 6.0 5.8 5.5 Turkey 17.3 7.0 6.2 6.0

China 2.4 3.0 3.3 3.9 India* 6.7 7.3 7.2 6.7 Japan -0.3 1.4 1.5 2.1 South Korea 3.1 1.1 2.2 2.5 Indonesia 8.0 8.4 6.5 6.0 Australia 3.0 2.5 3.0 2.9 Thailand 2.7 1.7 2.5 2.9

Brazil 6.5 6.0 5.7 5.8 Colombia 5.3 1.9 3.3 3.0 Peru 2.6 2.9 3.0 2.5 Chile 3.2 2.5 3.0 3.0

4



0

100

200

300

400

500

600

700

800

900

02 03 04 05 06 07 08 09 10 11 12 13

index:2002Q1=100

Gold

Natural Gas

WTI OilCopper

Nickel

0

1

2

3

4

5

6

NL PE NS NB QC ON MB SK AB BC

2013f

2014f

2015f

annual % change

Forecast Changes

Commodities Western Spruce-Pine-Fir 2x4

lumber prices — the fourth best-performing commodity within the ‘Scotiabank Commodity Price Index’ in 2013 — are expected to outperform again in 2014. U.S. housing starts jumped to 1.091 million units annualized in November (the highest since February 2008) and should climb to 1.23 million units in 2014, lifting lumber prices from last year’s US$356 average to US$390 per mfbm (about US$425 late year). While China’s price-sensitive buying may slow, the demand on U.S. & Canadian mill capacity (both idled and operating) should climb from 77% to 80% in 2014, giving mills considerable pricing leverage. The cyclical rebound in U.S building activity has been modest to date, but many mill shutdowns in the aftermath of the 2008-09 ‘Great Recession’ (the equivalent of 104) have sharply tightened supplies.

Metal & mineral prices are near bottom, after losing momentum in 2013, as new mine supply in copper and nickel was commissioned in a lacklustre global economy. Zinc is in ‘deficit’, with world demand exceeding supply, and is a top ‘pick’ for investors in 2014-15.

In a landmark report, the Joint Review panel of the National Energy Board and the Canadian Environmental Assessment Agency recommended approval of the Northern Gateway Pipeline, key for market access by Western Canada’s oil industry to Asia/Pacific. The Canadian Cabinet has 180 days to make a final ruling.

Provincial GDP Commodity Price Trends

Source: Statistics Canada, Scotiabank Economics.

Source: Bloomberg, Scotiabank Economics.

International 2000-12 2013f 2014f 2015f

Current Account Balance (% of GDP)

Canada 0.1 -3.3 -3.0 -2.7 United States -4.1 -2.3 -2.2 -2.2 Mexico -1.3 -1.7 -1.7 -2.2

United Kingdom -2.2 -2.9 -2.5 -2.1 Euro zone 0.0 1.4 1.6 1.8 Germany 4.1 6.4 5.9 5.5 France -0.4 -1.9 -1.9 -1.7 Italy -1.3 0.1 0.2 0.3 Spain -5.4 0.5 1.3 2.2 Greece -8.3 0.5 0.7 0.8 Portugal -9.1 0.9 1.0 1.1 Ireland -1.2 4.2 4.5 4.6 Russia 8.2 2.6 1.8 0.8 Turkey -4.2 -7.3 -7.0 -7.0

China 4.6 2.0 1.9 1.8 India -1.4 -3.8 -3.6 -3.0 Japan 3.1 0.9 1.4 1.6 South Korea 2.5 5.5 4.9 4.4 Indonesia 1.8 -3.5 -3.1 -2.4 Australia -4.3 -2.9 -2.7 -2.5 Thailand 2.8 -1.0 -0.3 0.4

Brazil -1.1 -3.7 -3.5 -3.2 Colombia -1.8 -3.2 -3.5 -3.3 Peru -1.2 -3.5 -3.3 -3.5 Chile 0.3 -4.2 -4.8 -4.1

Commodities

(annual average)

WTI Oil (US$/bbl) 60 98 92 90Brent Oil (US$/bbl) 62 109 108 108Nymex Natural Gas (US$/mmbtu) 5.45 3.72 3.85 4.00

Copper (US$/lb) 2.22 3.32 3.15 3.05Zinc (US$/lb) 0.78 0.87 0.98 1.40Nickel (US$/lb) 7.64 6.80 7.25 7.60Gold, London PM Fix (US$/oz) 745 1,410 1,270 1,375

Pulp (US$/tonne) 730 941 970 970Newsprint (US$/tonne) 585 608 615 650Lumber (US$/mfbm) 274 356 390 400

5



Forecast Changes

Canada & United States Canadian real GDP growth for

2014 is being raised by 0.2% to an average of 2.4%, largely reflecting a stronger consumer spending profile at end of 2013. Output growth for 2015 is still projected at 2.5%. The key to the outlook remains the ongoing improvement in domestic production and exports in response to strengthening U.S. activity and a weaker exchange rate, factors that will help offset the more moderate pace of domestic consumer and housing-related expenditures, slower demand in key emerging markets, and less buoyant commodity prices.

We have raised this year’s U.S. real GDP growth to 2.7%, an increase of 0.2% from our prior forecast, but kept our 3.0% growth target for 2015. The U.S. will benefit from improving job market conditions and consumer confidence, strengthening housing activity, and less fiscal restraint. There is considerably more pent-up demand for ‘big-ticket’ purchases in the United States, a key reason why it will increasingly outperform Canada. We have raised our forecast for U.S. housing starts to 1.23 million units in 2014 (from 1.15 million units) and 1.4 million units in 2015 (from 1.35 million units).

In the U.S., despite the easing of the sequester, the federal deficits for fiscal 2014 and 2015 will continue to narrow towards 3.0% of GDP. In Canada, ongoing government restraint has dampened public-sector wage settlements to an average of 1½% through the first eleven months of 2013.

Mexico We maintain our view that the

Mexican economy will expand by 3.5% on average in the 2014-15 period, with headline inflation remaining close to the upper limit of the central bank’s target range. Inflation will pick up as a result of the fiscal reform approved last year, though the overall impact will prove temporary. With the energy reform package approved in December, Mexico’s potential output growth will likely increase in coming years.

North America 2000-12 2013f 2014f 2015f

Canada (annual % change)

Real GDP 2.2 1.8 2.4 2.5 Consumer Spending 3.0 2.3 2.6 2.4 Residential Investment 4.2 0.3 -0.1 -0.2 Business Investment 3.6 1.1 4.2 6.1 Government 2.9 0.6 0.2 0.3 Exports 0.7 1.7 4.4 6.0 Imports 3.4 1.6 3.1 4.7

Nominal GDP 4.7 3.2 3.9 4.3GDP Deflator 2.5 1.4 1.5 1.8Consumer Price Index 2.1 1.0 1.3 1.8 Core CPI 1.8 1.2 1.4 1.7Pre-Tax Corporate Profits 5.2 -4.5 6.0 9.0Employment 1.5 1.3 1.2 1.3 thousands of jobs 239 225 205 238Unemployment Rate (%) 7.1 7.1 7.0 6.8

Current Account Balance (C$ bn.) -2.9 -61.5 -58.1 -54.2Merchandise Trade Balance (C$ bn.) 37.0 -8.5 -4.0 1.2Federal Budget Balance (C$ bn.) -4.5 -15.5 -7.0 1.8 per cent of GDP -0.3 -0.8 -0.4 0.1

Housing Starts (thousands) 201 187 175 170Motor Vehicle Sales (thousands) 1,595 1,743 1,760 1,775Motor Vehicle Production (thousands) 2,424 2,250 2,350 2,450Industrial Production 0.4 1.4 3.1 3.2

United States

Real GDP 1.9 1.8 2.7 3.0 Consumer Spending 2.3 2.0 2.7 3.0 Residential Investment -2.9 13.3 11.4 9.7 Business Investment 1.9 2.7 5.0 5.5 Government 1.5 -1.9 -0.4 0.2 Exports 4.0 2.4 5.0 5.8 Imports 3.3 1.5 4.5 5.7

Nominal GDP 4.1 3.3 4.3 4.9GDP Deflator 2.1 1.5 1.5 1.8Consumer Price Index 2.5 1.5 1.5 1.9 Core CPI 2.0 1.8 1.7 1.8Pre-Tax Corporate Profits 7.0 4.5 8.1 10.5Employment 0.3 1.6 1.7 1.8 millions of jobs 0.36 2.17 2.27 2.48Unemployment Rate (%) 6.3 7.4 6.8 6.3

Current Account Balance (US$ bn.) -545 -390 -387 -411Merchandise Trade Balance (US$ bn.) -652 -713 -747 -803Federal Budget Balance (US$ bn.) -528 -680 -630 -575 per cent of GDP -4.0 -4.1 -3.6 -3.1

Housing Starts (millions) 1.33 0.93 1.23 1.40Motor Vehicle Sales (millions) 15.1 15.5 16.0 16.6Motor Vehicle Production (millions) 10.4 10.9 11.3 11.7Industrial Production 0.7 2.6 3.3 3.5

Mexico

Real GDP 2.4 1.3 3.3 3.7Consumer Price Index (year-end) 4.7 3.9 4.3 4.0Unemployment Rate (%) 3.9 5.0 4.7 4.7Current Account Balance (US$ bn.) -11.9 -22.2 -23.4 -32.0Merchandise Trade Balance (US$ bn.) -7.0 -8.8 -12.4 -21.4Industrial Production 1.6 -0.4 3.0 3.3

6



Provincial 2000-12 2013f 2014f 2015f 2000-12 2013f 2014f 2015f

Real GDP Budget Balances*, FY March 31(annual % change) ($ millions)

Canada 2.2 1.8 2.4 2.5 -1,924 -18,929 -15,500 -7,000

Newfoundland & Labrador 2.8 5.3 1.3 2.2 187 -199 -451 n.a. Prince Edward Island 1.8 1.2 1.3 1.6 -36 -69 -58 n.a. Nova Scotia 1.3 1.0 1.9 2.2 45 -302 * -482 n.a. New Brunswick 1.3 0.2 0.8 1.1 -66 -508 * -538 n.a.

Quebec 1.8 1.0 1.8 1.9 -773 -1,600 * -2,500 n.a. Ontario 1.9 1.4 2.1 2.2 -4,112 -9,220 * -11,741 n.a.

Manitoba 2.3 2.4 2.3 2.4 56 ** -580 * -485 n.a. Saskatchewan 2.1 3.1 2.6 2.7 389 58 * 11 n.a. Alberta 3.2 3.2 3.7 3.3 3,348 0 * 15 n.a. British Columbia 2.5 1.3 2.2 2.8 359 -1,146 * 165 n.a.

* 2000-07: Estimated; 2012: basic prices, Industry basis. * Final. FY13 & FY14 estimates: Provincial documents. ** FY04-F

Employment Unemployment Rate(annual % change) (annual average, %)

Canada 1.5 1.3 1.2 1.3 7.1 7.1 7.0 6.8

Newfoundland & Labrador 1.0 1.2 1.1 1.2 14.8 11.5 11.2 10.9 Prince Edward Island 1.5 2.0 0.8 1.1 11.3 11.3 11.0 10.8 Nova Scotia 0.9 -0.3 0.8 1.2 8.8 9.0 8.9 8.9 New Brunswick 0.6 -0.2 0.5 0.7 9.5 10.6 10.6 10.5

Quebec 1.4 1.2 1.0 1.1 8.2 7.6 7.5 7.4 Ontario 1.4 1.5 1.1 1.2 7.1 7.5 7.4 7.3

Manitoba 1.2 0.6 1.0 1.2 5.0 5.3 5.2 5.1 Saskatchewan 1.0 3.4 1.6 1.7 5.0 4.0 4.1 4.1 Alberta 2.6 2.8 2.5 2.1 4.8 4.6 4.3 4.2 British Columbia 1.5 -0.2 1.1 1.4 6.7 6.6 6.5 6.4

Housing Starts Motor Vehicle Sales(annual, thousands of units) (annual, thousands of units)

Canada 201 187 175 170 1,595 1,743 1,760 1,775

Atlantic 12 10 10 10 115 132 134 135

Quebec 45 37 35 35 406 413 417 419 Ontario 73 61 56 54 604 644 649 654

Manitoba 5 8 6 6 45 53 54 55 Saskatchewan 5 8 7 7 43 59 60 61 Alberta 34 36 36 35 208 261 263 266 British Columbia 27 26 24 23 174 181 183 185

Forecast Changes

Provinces For 2014, Ontario’s and Manitoba’s

real GDP growth is edged higher, in part reflecting momentum in motor vehicle and bus production, respectively. Alberta’s forecast output gain and job creation this year also are revised higher, buoyed by post-flood repairs and energy sector activity. This suggests only a gradual moderation in the robust 3½% pace of y/y population increases reported for Alberta for the second half of 2013.

For the next two years, Saskatchewan’s job creation, while remaining very strong, is expected to average half of the 3.4% surge in 2013.

The upward trend last year in national y/y retail sales growth reached 3.4% for the three months to October, with the Maritimes, Ontario and British Columbia picking up from negative prints in Q1 to solid gains in Q3. Sales of motor vehicles & parts continue to lead the retail sales increase for the first ten months of 2013 in every province, accounting for nearly half of the national rise.

Ontario’s flat international export receipts for first ten months of 2013, reflecting virtually no gain in international metal sales and auto plant retooling, contributed to the relatively modest 3% national increase. Assisted by our outlook for a stronger U.S. economic performance and a softer Canadian dollar in the 90¢-95¢(US) range over the next two years, stepped-up international exports are expected to centre on further strength in Alberta’s oil shipments and in areas such as forest products. As well, significant gains are anticipated from specific events such as the projected surge in Nova Scotia’s natural gas production, reflecting the repairs now completed at the Sable offshore natural gas project and production at the new Deep Panuke offshore field.

The federal government and most Provinces, in addition to constraining public-sector wage growth, are shifting pension and other retirement benefits to a more sustainable basis.

Canada

Canada

Canada

Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick

Quebec Ontario

Manitoba Saskatchewan Alberta British Columbia

Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick

Quebec Ontario


Atlantic

Quebec Ontario


Real GDP (annual % change)

Budget Balances*, FY March 31 ($millions)

Employment (annual % change)

Unemployment Rate (annual average, %)

Housing Starts (annual, thousands of units)

Motor Vehicle Sales (annual, thousands of units)

*Final. FY13 & FY14 estimates:

Provincial documents. ** FY04-FY12.

Provincial 2000-12 2013f 2014f 2015f 2000-12 2013f 2014f 2015f

7



Quarterly Forecasts 13Q3 13Q4f 14Q1f 14Q2f 14Q3f 14Q4f 15Q1f 15Q2f 15Q3f 15Q4f

Canada

Real GDP (q/q, ann. % change) 2.7 2.8 2.2 2.3 2.4 2.4 2.4 2.6 2.7 2.8Real GDP (y/y, % change) 1.9 2.4 2.3 2.5 2.4 2.3 2.4 2.5 2.5 2.6Consumer Prices (y/y, % change) 1.1 1.0 1.1 1.1 1.3 1.7 1.8 1.8 1.8 1.9 Core CPI (y/y % change) 1.3 1.2 1.3 1.3 1.4 1.5 1.6 1.6 1.7 1.8

United States

Real GDP (q/q, ann. % change) 4.1 1.8 2.5 2.8 2.7 3.0 3.0 3.0 3.1 3.1Real GDP (y/y, % change) 2.0 2.4 2.7 2.8 2.4 2.7 2.9 2.9 3.0 3.1Consumer Prices (y/y, % change) 1.6 1.2 1.3 1.5 1.5 1.7 1.8 1.8 1.9 1.9 Core CPI (y/y % change) 1.7 1.7 1.6 1.7 1.7 1.7 1.8 1.8 1.8 1.9

Financial Markets

Central Bank Rates (%, end of period)

Americas

Bank of Canada 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25U.S. Federal Reserve 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.50Bank of Mexico 3.75 3.50 3.50 3.50 4.00 4.00 4.50 5.00 5.00 5.00

Central Bank of Brazil 9.00 10.00 10.25 10.25 10.25 10.75 11.25 11.50 11.50 11.50Bank of the Republic of Colombia 3.25 3.25 3.25 4.00 4.50 4.50 4.50 5.00 5.25 5.50Central Reserve Bank of Peru 4.25 4.00 4.00 4.00 4.00 4.25 4.25 4.50 4.50 4.50Central Bank of Chile 5.00 4.50 4.50 4.50 4.50 4.75 5.00 5.50 5.50 5.50

Europe

European Central Bank 0.50 0.25 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Bank of England 0.50 0.50 0.50 0.50 0.50 0.50 0.75 1.00 1.25 1.50Swiss National Bank 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Asia/Oceania

Reserve Bank of Australia 2.50 2.50 2.50 2.50 2.50 2.75 3.00 3.25 3.50 3.50People's Bank of China 6.00 6.00 6.00 6.00 6.30 6.30 6.60 6.60 6.60 6.60Reserve Bank of India 7.50 7.75 8.00 8.00 8.00 8.00 7.75 7.50 7.50 7.50Bank of Korea 2.50 2.50 2.50 2.50 2.50 2.75 3.00 3.25 3.50 3.75Bank Indonesia 7.25 7.50 7.75 7.75 7.75 7.75 7.50 7.25 7.25 7.25Bank of Thailand 2.50 2.25 2.25 2.25 2.25 2.50 2.75 3.00 3.25 3.50

Canada

3-month T-bill 0.98 0.92 0.90 0.95 1.00 1.05 1.10 1.10 1.20 1.552-year Canada 1.19 1.14 1.05 1.15 1.35 1.60 1.80 2.05 2.30 2.455-year Canada 1.86 1.94 1.90 2.15 2.35 2.50 2.70 2.95 3.10 3.2010-year Canada 2.54 2.76 2.80 2.90 3.05 3.25 3.40 3.50 3.65 3.9030-year Canada 3.07 3.23 3.30 3.45 3.60 3.75 3.90 4.10 4.25 4.40

United States

3-month T-bill 0.01 0.07 0.05 0.05 0.05 0.10 0.15 0.15 0.40 0.802-year Treasury 0.32 0.38 0.40 0.55 0.85 1.15 1.45 1.65 2.00 2.405-year Treasury 1.39 1.74 1.80 1.80 2.15 2.45 2.60 2.85 3.00 3.2010-year Treasury 2.61 3.03 3.10 3.25 3.40 3.55 3.70 3.85 4.00 4.2030-year Treasury 3.69 3.97 4.00 4.15 4.35 4.50 4.60 4.80 4.95 5.05

Canada-U.S. Spreads

3-month T-bill 0.98 0.85 0.85 0.90 0.95 0.95 0.95 0.95 0.80 0.752-year 0.87 0.76 0.65 0.60 0.50 0.45 0.35 0.40 0.30 0.055-year 0.47 0.20 0.10 0.35 0.20 0.05 0.10 0.10 0.10 0.0010-year -0.07 -0.27 -0.30 -0.35 -0.35 -0.30 -0.30 -0.35 -0.35 -0.3030-year -0.62 -0.74 -0.70 -0.70 -0.75 -0.75 -0.70 -0.70 -0.70 -0.65



Scotiabank Economics

Scotia Plaza 40 King Street West, 63rd Floor

Toronto, Ontario Canada M5H 1H1

Tel: (416) 866-6253 Fax: (416) 866-2829

Email: [email protected]

This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.

TM Trademark of The Bank of Nova Scotia. Used under license, where applicable.

0

1

2

3

4

5

6

7

04 05 06 07 08 09 10 11 12 13 14

%

Forecast

Canada

U.S.

-4

-2

0

2

4

6

8

10

07 08 09 10 11 12 13 14

y/y % change

U.S.

China

Euro zone

Canada

Forecast

0

1

2

3

4

5

6

7

04 05 06 07 08 09 10 11 12 13 14

%

Forecast

Canada

U.S.U.K.

Euro zone

Central Bank Rates

Source: Bloomberg, Scotiabank Economics.

Global Inflation

Source: Bloomberg, Scotiabank Economics. Source: Bloomberg, Scotiabank Economics.

10-Year Yields

Financial Markets 13Q3 13Q4f 14Q1f 14Q2f 14Q3f 14Q4f 15Q1f 15Q2f 15Q3f 15Q4f

Exchange Rates (end of period)

Americas

Canadian Dollar (USDCAD) 1.03 1.06 1.07 1.08 1.07 1.07 1.06 1.06 1.06 1.06Canadian Dollar (CADUSD) 0.97 0.94 0.93 0.93 0.93 0.93 0.94 0.94 0.94 0.94Mexican Peso (USDMXN) 13.09 13.04 13.23 13.13 13.21 13.39 13.40 13.40 13.50 13.52

Brazilian Real (USDBRL) 2.22 2.36 2.38 2.40 2.45 2.50 2.50 2.45 2.45 2.40Colombian Peso (USDCOP) 1906 1930 1920 1920 1930 1940 1930 1920 1900 1900Peruvian Nuevo Sol (USDPEN) 2.79 2.80 2.75 2.73 2.73 2.70 2.68 2.68 2.65 2.65Chilean Peso (USDCLP) 505 525 530 530 540 540 535 530 525 525

Canadian Dollar Cross Rates

Euro (EURCAD) 1.39 1.46 1.42 1.40 1.36 1.34 1.33 1.31 1.31 1.30U.K. Pound (GBPCAD) 1.67 1.76 1.74 1.74 1.71 1.70 1.67 1.66 1.65 1.64Japanese Yen (CADJPY) 95 99 95 96 100 102 104 105 106 107Australian Dollar (AUDCAD) 0.96 0.95 0.93 0.95 0.95 0.96 0.95 0.95 0.95 0.95Mexican Peso (CADMXN) 12.70 12.27 12.37 12.15 12.35 12.52 12.64 12.64 12.74 12.75

Europe

Euro (EURUSD) 1.35 1.37 1.33 1.30 1.27 1.25 1.25 1.24 1.24 1.23U.K. Pound (GBPUSD) 1.62 1.66 1.63 1.61 1.60 1.59 1.58 1.57 1.56 1.55Swiss Franc (USDCHF) 0.90 0.89 0.92 0.95 0.98 1.00 1.00 1.02 1.02 1.03Swedish Krona (USDSEK) 6.43 6.44 6.50 6.62 6.73 6.80 6.76 6.77 6.69 6.71Norwegian Krone (USDNOK) 6.01 6.07 6.00 5.90 5.80 5.80 5.70 5.65 5.65 5.60Russian Ruble (USDRUB) 32.4 32.9 33.0 33.2 33.4 33.6 33.6 33.5 33.5 33.4Turkish Lira (USDTRY) 2.02 2.15 2.10 2.13 2.16 2.20 2.19 2.18 2.17 2.16

Asia/Oceania

Japanese Yen (USDJPY) 98 105 102 104 107 109 110 111 112 113Australian Dollar (AUDUSD) 0.93 0.89 0.87 0.88 0.89 0.90 0.90 0.90 0.90 0.90Chinese Yuan (USDCNY) 6.12 6.05 6.04 6.02 6.00 5.98 5.94 5.90 5.86 5.86Indian Rupee (USDINR) 62.6 61.8 62.5 63.2 63.8 64.5 65.0 65.3 65.5 66.0South Korean Won (USDKRW) 1075 1050 1048 1045 1043 1040 1030 1025 1020 1020Indonesian Rupiah (USDIDR) 11406 12171 12185 12190 12195 12200 12125 12050 11975 11900Thai Baht (USDTHB) 31.2 32.7 33.0 33.0 33.0 33.0 33.3 33.5 33.8 34.0

DOUGLAS PORTER, CFA, CHIEF ECONOMIST · www.bmonesbittburns.com/economics

Forecast Summary (averages) Actual 2013 2014 2014 2015

Nov Dec Jan Feb Q1 Q2 Q3 Q4 Q1 Q2 Q3

BoC overnight 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.2510-yr Canadas 2.56 2.65 2.75 2.80 2.80 2.95 3.10 3.30 3.50 3.75 3.95Fed funds 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.1310-yr Treasuries 2.72 2.85 2.95 3.00 3.00 3.15 3.30 3.45 3.60 3.70 3.85

C$ per US$ 1.049 1.060 1.064 1.069 1.069 1.082 1.096 1.096 1.083 1.070 1.057US$/€ 1.35 1.37 1.39 1.38 1.38 1.36 1.34 1.33 1.35 1.36 1.37US$/£ 1.61 1.63 1.65 1.64 1.64 1.63 1.61 1.61 1.62 1.63 1.65¥/US$ 100 102 103 103 103 105 107 109 111 112 113

• Fed could announce tapering next week; but QE3 over by 2014Q4 • Longer-term Treasury yields to ratchet up, front end bolted by Fed • Greenback to gain on slower QE and faster growth

Fed (and fiscal) policy… “The Committee could decide to slow the pace of purchases at one

of its next few meetings” heralded the October 29-30 FOMC

Minutes. With 200k-plus payroll prints in three of the past four

months and the jobless rate dropping to an exact, five-year low

of 7.0% in November, the market is betting tapering will start

sooner (December 18 or January 29) rather than later (March 19

or beyond). We concur, and the newly crafted budget deal

would appear to make the first two dates an even bet

(previously we favored January). The deal eliminates the risk of

another government shutdown on January 15 and removes the

additional economic headwind poised from a full phase-in of

the sequestered spending cuts. At the time of writing, the deal

had yet to be approved by either congressional body and

there’s still the reactivation of the debt ceiling (on February 7)

lurking. However, we suspect this rare (by recent standards)

display of bipartisanship will be coupled with a desire to not be

branded the culprit of an economic calamity in an election year

(look for the debt ceiling to be pushed back past November).

December is not a lay-up for the Fed, however. There is

uncertainty about growth and inflation dynamics during the

next couple months. There is potentially a hefty GDP payback

December 12, 2013

Michael Gregory, CFADeputy Chief Economist, Head of U.S. Economics

Benjamin Reitzes Senior Economist

U.S. Rates

1

2

3

4

5

0.00

0.25

0.50

0.75

1.00

11 12 13 14 15

(percent)

3.50%(Year-end ’14)

2.85%(Year-end ’13)

UNITED STATES

Sources: U.S. Federal Reserve Board, U.S. Treasury, Haver Analytics, BMO Capital Markets Economics forecasts

forecast

10-Year Treasury

(rhs)Fed

Funds(lhs)

4.00%(Year-end ’15)

92

94

96

98

100

102

104

106

108

11 12 13 14 15

U.S. BROAD TRADE-WEIGHTED DOLLAR

Sources: U.S. Federal Reserve Board, Haver Analytics, BMO Capital Markets Economics forecasts

forecast

(January 1997 = 100)

PAGE 2

looming for Q3’s 1.7 ppts of inventory build-up (although it doesn’t appear this commenced in

October and might turn out to be predominantly intentional). Meantime, core PCE inflation was

+1.1% y/y in October. Given the persistent large output gap and extra-aggressive price

discounting this holiday season, the risk is that inflation could fall even further below the Fed’s

2% target through the turn of the year. Also, heading into year end, financial market liquidity is

going to dry up considerably. This means the market impact of any policy shift could be

magnified.

Nevertheless, the FOMC might opt to throw caution to the growth/inflation/liquidity winds given

that the market is already pricing-in the inevitability of tapering with substantial odds on

December, and with record equity prices a siren of possible QE-induced risk to financial stability.

A “tiny taper”, which was the vogue back in September, might be the appropriate compromise.

Importantly, next week could still see some moves on the forward guidance front, whether the

Fed tapers or not. A 7.0% unemployment rate is an important psychological level. Back in June,

when Chairman Bernanke was talking about starting tapering “later this year”, QE was projected

to end mid-next year, with the unemployment rate “in the vicinity” of 7.0%. This massive

projection miss highlights the risk that we could be standing on the 6.5% threshold well before

anybody expects. The Fed will want to emphasize that such a scenario would have no policy

implications, against the background of an ebbing participation rate and inflation significantly

underperforming the target. Our base case calls for a relatively constant tapering clip of $10-to-

$15 billion per meeting (but perhaps with an initial $5-to-$10 billion move), which should see the

last purchases concluded in September. Finally, with sub-target inflation now expected to

persist past the next two years, we pushed back the policy rate lift-off to 2016Q1 (previously it

was 2015Q4).

Treasuries…Ten-year Treasury yields, now in the 2.80% range, have been grinding higher

since hitting late-October lows close to 2.50%. The latter reflected a rally from early-

September highs around 3.00%, when “Septaper” expectations were cresting. Since part of

the former peak also reflected Summers-as-Fed-head expectations, it’s fair to say that the

inevitability of tapering is being priced-in. Allowing for a relatively small “seeing-is-believing”

negative reaction to the initial tapering actions, we judge 10-year Treasuries will revisit 3.00%

yields early next year. As QE is slowed and stopped, and our economic outlook unfolds with

sequential growth running close to 3.0%, the trend should continue upwards. However, the

combination of persistent sub-target inflation readings and no Fed policy rate hikes until early

2016 suggests the up-trend should be more restrained than historic norms. We see the 10-

year yield averaging 3.5% by the end of 2014 and 4.0% by 2015-end (matching 2010’s post-

recession high). Emphasizing the restrained nature of the rise, both end points stand below

nominal GDP growth which is projected to run in the mid-4% range over the next two years

(on a Q4/Q4 basis).

PAGE 3

Greenback…The trade-weighted U.S. dollar (measured against the major currencies) has

also been grinding higher since hitting late-October lows (now up around 2.3%). The

greenback is still 1.3% short of its early September highs and 3.1% below the multiyear highs

hit in early July (after the Fed first signaled its intention to start tapering before year end). As

relative economic performance and monetary policy prospects become the dominant FX

drivers (supplanting “risk on” vs. “risk off”), we look for the trade-weighted unit to eventually

surpass prior highs.

• Bank of Canada taking dovish turns, rate hike pushed back to 2015Q3

• Canadas to sell off in sympathy with Treasuries

• Loonie to weaken further on BoC’s dovish tilt and greenback vigour

BoC Policy…The Bank of Canada sounded more dovish again in its December 4 policy

statement, emphasizing inflation’s underperformance. “Core inflation is being held down by

significant excess supply and by the effects of heightened competition in the retail sector,

which look to be more persistent than anticipated” and, in consequence, “the downside risks

to inflation appear to be greater.” This marks the third dovish turn in the past four

announcements since Stephen Poloz became governor. There is a chance that the Bank could

even adopt an easing bias should inflation continue to

underperform, although an actual rate cut would likely require

matching economic underperformance; say, real GDP growth

running under 1%.

Instead, we look for growth to run above 2% as stronger U.S.

(and global) demand pumps Canadian exports and, with a lag,

business investment. In addition to uncomfortably low core

inflation readings (currently 1.2% y/y), the Bank seems

concerned that Canadian exporters might not be able to fully

rise to the occasion. Competitiveness has been undermined

by relatively poor productivity and unit labour cost

performance, not to mention the loonie’s lofty legacy. There is

uncertainty about whether Canadian firms have sufficient

capacity, or the willingness to expand their capacity, to stay

sure-footed on U.S. economic coattails after several years of

investment and business creation dormancy. The dual

concern over inflation and export underperformance strongly

suggests Mr. Poloz is keeping a watchful eye on the Canadian

dollar, and is not the least unhappy with its recent weakening.

Canadian Rates

CANADA(percent)

1

2

3

4

5

0.5

1.0

1.5

2.0

2.5

3.0

11 12 13 14 15

3.40%(Year-end ’14)

2.65%(Year-end ’13)

Sources: Bank of Canada, Haver Analytics, BMO Capital Markets Economics forecasts

forecast

10-Year GoC(rhs)

BoCOvernight

Rate(lhs)

4.15%(Year-end ’15)

0.94

0.97

1.00

1.03

1.06

1.09

1.12

11 12 13 14 15Sources: U.S. Federal Reserve Board, Haver Analytics, BMO Capital Markets Economics forecasts

forecast

CANADIAN DOLLAR(C$/US$)

PAGE 4

With our Fed rate hike call pushed back by a quarter, and the Bank’s re-skewing of policy

toward price stability from financial stability and a more dovish tack, we pushed back our BoC

rate hike call by a couple quarters to 2015Q3. We suspect the Bank will move cautiously for

fear of fuelling too much Canadian dollar strength (say, no more than a rate hike per quarter

until the Fed joins the tightening party).

Canadas…The combination of up-drifting Treasury yields (and the typical pattern of GoC

outperformance during such episodes) along with the Bank of Canada’s dovish manoeuvres

contributed to narrower Canada-U.S. spreads along the curve. Since October 23 (when the

bias was dropped), spreads narrowed as much as 13 bps in the 10-year area. Indeed, the 7-

year segment has now joined 10s and 30s in boasting negative spreads. Short of new BoC

dovish steps, Canada’s relatively richer valuation likely limits further meaningful spread

compression during QE’s wind down (we look for relatively stable spreads). Once the tapering

pressure is off Treasuries and strong U.S. economic performance is noticeably rippling across

the border, the eventuality of BoC rate hikes should ignite relative underperformance,

particularly at the short end.

Loonie…The Canadian dollar is currently trading around C$1.06, depreciating 1% over the

past month as the Bank of Canada dropped its tightening bias and the greenback rebounded

from its late-October lows. As tapering unfolds and the risk remains of additional dovish steps

by the BoC (including overtly talking down the currency), we look for the loonie to continue

depreciating, averaging C$1.10 by the autumn. The shift to Fed neutrality and, eventually, the

arrival of evidence that shows the Canadian economy benefitting from a stronger U.S.

economy (which will stoke BoC tightening speculation), and, more significantly, a couple solo

rate hikes in 2015 H2 should support the loonie. But, the BoC will be very mindful of its impact

on the currency. We look for the loonie to end 2015 around C$1.05.

• ECB downgrades inflation forecast

• Rates to stay at current or lower levels for "extended period"

The euro rallied through November and into December in spite

of the early November ECB rate cut. Moreover, ECB President

Draghi maintained a dovish tone at the December press

conference and the inflation forecast was sliced and is

expected to average below 1.5% through 2015. Ordinarily that

wouldn't be good news for a currency, but technical forces are

overwhelming fundamentals. Corporate hedging and a rush to

re-establish positions in European financial markets before year

end are expected to keep the euro elevated through January.

Thereafter, Fed tapering and an outperforming U.S. economy

Euro

1.20

1.25

1.30

1.35

1.40

1.45

1.50


forecast

EURO(US$/€)

PAGE 5

are expected to weigh on the euro until late 2014. With policy rates expected to be on hold

through 2015, the euro looks to gain some traction. Further action from the ECB in the near-

term remains a possibility; but, with the refi rate near zero, options are limited and likely to

have little impact.

On the domestic economic front, while the Euro Area has emerged from recession, the pace

of improvement has slowed. Germany continues to outperform, and most of peripheral

Europe is gradually shifting to growth, as the harshest stages of austerity have passed. Ireland

is scheduled to exit its bailout plan early next year, welcome news for the struggling region.

It's highly likely that Portugal and Greece will need further assistance—though substantially

smaller in size.

• U.K. economic data continue to strengthen

• Carney warns on housing, but stresses rates to stay low

The Bank of England looks to be on hold for an extended period, committed to low rates at

least until the jobless rate falls to 7%, subject to three ‘knockouts’—1) inflation is projected to

be more than 0.5 ppts above target in 18 to 24 months, 2) inflation expectations become

unanchored, 3) there’s a risk to financial stability. Consistently improving economic data

prompted the BoE to bring forward their expected tightening timeline to 2015Q3 in the

November inflation report. Since then, the data have continued

their strong run, suggesting Q4 growth was solid.

The strengthening economic backdrop and a stabilizing financial

situation in the Euro Area have provided support for Sterling,

which hit its best level in over two years in early December.

Look for the currency to gain modestly over the next month,

pulled higher by a firmer euro and still-solid data. Thereafter,

with the Fed expected to announce tapering by January and

persistently pare asset purchases through 2014, we anticipate

that broad US$ strength will drive Sterling lower.

• Japan growth stumble points to more stimulus in 2014

• April 2014 sales tax hike looms

The Bank of Japan has moved to the sidelines following April’s aggressive easing

announcement. Abenomics, driven in large part by monetary easing, is having a positive

impact on the economy. However, the latest indicators suggest economic growth may be

losing momentum. Third quarter GDP growth was revised lower, and early Q4 indicators have

been soft. Combined with the coming sales tax hike in April, it looks like further stimulus from

U.K. Pound

1.45

1.50

1.55

1.60

1.65

1.70


forecast

BRITISH POUND(US$/£)

Japanese Yen

PAGE 6

the Bank of Japan is highly likely. The current stimulus program

is set to expire at the end of 2014, so it could be extended for

another year or potentially expanded. Moreover, while inflation

has accelerated, it isn't likely to hit the 2% target until 2015 at

the earliest, highlighting the need for continued policy easing.

The yen has weakened consistently since late October,

stopping just short of hitting the softest level in over five years.

It's just a matter of time though, with further BoJ easing

anticipated and the Fed expected to start tapering within the

next few months. We anticipate the yen will weaken

consistently through 2014, with that trend persisting into 2015.

• RBA on hold as China stabilizes

• RBA open to rate cuts as A$ still too strong

The Reserve Bank of Australia held rates steady at a record-low 2.5% in December, following

a cumulative 225 bps in rate cuts over the past two years. The RBA’s statement kept a neutral

tone, stating that policy remains appropriate. However, the Bank dovishly continues to believe

that the Australian dollar is overvalued, saying that it is "uncomfortably high" and that "a

lower level of the exchange rate is likely to be needed to achieve balanced growth in the

economy." China’s economy appears to be stabilizing, but strength in the A$ is weighing on

Australian growth and further gains could prompt a rate cut. Indeed, modest employment

growth and a rising jobless rate highlight the still-cautious tone from the RBA.

The Australian dollar has fallen consistently since mid-October,

hitting a three-month low. Softer commodity prices, modest

growth expectations and the potential for another rate cut are

weighing on the currency. In addition, with the Fed expected to

taper within the next few months, look for the A$ to decline

further. We anticipate the A$ will weaken consistently through

most of 2014 before finding some stability in the second half of

the year as the Fed ends QE3 and markets pay a bit more

attention to the A$ interest rate advantage.

70

80

90

100

110

120


forecast

JAPANESE YEN(¥/US$)

Australian Dollar

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15


forecast

AUSTRALIAN DOLLAR(US$/A$)

PAGE 7

• Growth stabilizing, on track for 2013 target of 7.5% • Economic and financial reforms to continue

After persistently decelerating through the first half of 2013, China’s economic data have

stabilized, with Q3 GDP growth clocking in at a 7.8% pace. The early Q4 data have softened

modestly, suggesting growth held steady or perhaps decelerated slightly. The slower growth

path relative to the double-digits seen prior to the Great Recession is entirely by design.

Policymakers, focused on economic reforms—restructuring the economy toward consumption

instead of exports and investment—have accepted that slower growth is the new norm. GDP

growth is on track to meet the 7.5% target this year. However,

look for modestly slower growth next year (around 7%), as

stimulus measures enacted this past summer fade.

China's top policymakers announced a wide-ranging reform plan

in late November/early December. The one-child policy was

relaxed further, the new Shanghai free-trade zone will allow for

some policy experimentation, property rights are being

reformed, which, along with other efforts, are expected to lift

long-term growth. Still, most of the announced measures lack

complete details.

The Chinese yuan appreciated about 0.5% versus the US$ since the start of November,

continuing the trend over the past few years. Stabilizing growth in China, improving global

demand (according to the latest trade figures) and a more focused reform effort suggest that

the yuan is likely to keep appreciating at a modest pace. Look for the yuan to strengthen about

2% vs. the US$ through 2014.

Chinese Yuan

5.80

6.00

6.20

6.40

6.60

6.80


forecast

CHINESE YUAN(CNY/US$)

PAGE 8

Foreign Exchange Forecasts Local Currency per U.S. Dollar (averages)

Actual 2013 2014 2014 2015 Nov Dec Jan Feb Q1 Q2 Q3 Q4 Q1 Q2 Q3

Canadian Dollar

C$ per US$ 1.049 1.060 1.064 1.069 1.069 1.082 1.096 1.096 1.083 1.070 1.057

US$ per C$ 0.954 0.943 0.940 0.935 0.935 0.924 0.912 0.912 0.923 0.935 0.946

Trade-Weighted 115.0 113.7 113.1 112.7 112.7 111.7 110.6 110.7 111.9 113.1 114.4

U.S. Dollar

Trade-Weighted* 101.8 101.8 101.7 102.1 102.1 103.1 104.2 104.3 103.4 102.6 101.7

European Currencies

Euro** 1.35 1.37 1.39 1.38 1.38 1.36 1.34 1.33 1.35 1.36 1.37

Danish Krone 5.53 5.45 5.35 5.40 5.40 5.50 5.55 5.60 5.55 5.50 5.45

Norwegian Krone 6.09 6.15 6.10 6.05 6.05 6.10 6.20 6.20 6.15 6.10 6.05

Swedish Krona 6.59 6.50 6.45 6.45 6.45 6.55 6.65 6.70 6.65 6.60 6.55

Swiss Franc 0.91 0.90 0.90 0.91 0.91 0.92 0.93 0.95 0.96 0.97 0.98

U.K. Pound** 1.61 1.63 1.65 1.64 1.64 1.63 1.61 1.61 1.62 1.63 1.65

Asian Currencies

Chinese Yuan 6.14 6.10 6.10 6.09 6.09 6.06 6.03 6.00 5.98 5.96 5.95

Japanese Yen 100 102 103 103 103 105 107 109 111 112 113

Korean Won 1062 1065 1075 1085 1085 1110 1140 1140 1120 1100 1075

Indian Rupee 62.5 62.8 63.0 63.3 63.3 64.0 64.5 64.5 63.0 62.0 60.5

Singapore Dollar 1.25 1.25 1.25 1.26 1.26 1.27 1.28 1.27 1.25 1.24 1.22

Malaysian Ringgit 3.20 3.20 3.22 3.24 3.24 3.31 3.38 3.38 3.34 3.29 3.25

Thai Baht 31.6 31.5 31.6 31.7 31.7 32.1 32.4 32.4 32.0 31.6 31.2

Philippine Peso 43.6 43.5 43.7 43.8 43.8 44.3 44.8 44.8 44.2 43.6 43.0

Taiwan Dollar 29.5 29.5 29.6 29.6 29.6 29.8 29.9 29.9 29.5 29.0 28.5

Indonesian Rupiah 11467 11500 11550 11600 11600 11800 11950 11975 11900 11800 11700

Other Currencies

Australian Dollar** 0.932 0.910 0.903 0.897 0.895 0.875 0.855 0.855 0.875 0.895 0.920

N.Z. Dollar** 0.826 0.815 0.807 0.799 0.799 0.775 0.755 0.755 0.775 0.795 0.815

Mexican Peso 13.06 13.20 13.25 13.30 13.30 13.40 13.50 13.40 13.10 12.85 12.60

Brazilian Real 2.30 2.30 2.31 2.32 2.32 2.36 2.39 2.39 2.36 2.34 2.31

Russian Ruble 32.7 32.3 32.4 32.5 32.5 33.0 33.6 33.7 33.0 32.0 31.0

South African Rand 10.2 10.3 10.3 10.3 10.3 10.4 10.5 10.4 10.1 9.7 9.3

* Federal Reserve Broad Index ** (US$ per local currency)

Cross RatesVersus Canadian Dollar

Euro (C$/€) 1.41 1.45 1.48 1.48 1.48 1.47 1.47 1.46 1.46 1.45 1.44

U.K. Pound (C$/£) 1.69 1.73 1.76 1.76 1.76 1.76 1.76 1.76 1.75 1.75 1.74

Japanese Yen (¥/C$) 95 96 97 96 96 97 98 99 102 105 107

Australian Dollar (C$/A$) 0.978 0.965 0.961 0.959 0.957 0.947 0.937 0.937 0.948 0.958 0.972

Versus Euro

U.K. Pound (£/€) 0.84 0.84 0.84 0.84 0.84 0.84 0.83 0.83 0.83 0.83 0.83

Japanese Yen (¥/€) 135 140 143 142 142 143 143 145 149 152 154

PAGE 9

Interest Rate Forecasts Percent (averages)

Actual 2013 2014 2014 2015Nov Dec Jan Feb Q1 Q2 Q3 Q4 Q1 Q2 Q3

Cdn. Yield CurveOvernight 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.253 month 0.93 0.93 0.93 0.93 0.93 0.93 0.93 0.93 0.93 0.93 1.196 month 0.95 0.94 0.94 0.94 0.94 0.94 0.94 0.94 0.94 0.94 1.201 year 1.01 0.98 0.99 1.00 1.00 1.07 1.15 1.30 1.45 1.60 1.852 year 1.11 1.08 1.09 1.13 1.15 1.25 1.45 1.70 2.00 2.35 2.603 year 1.22 1.20 1.20 1.23 1.25 1.35 1.55 1.80 2.15 2.50 2.805 year 1.77 1.80 1.85 1.90 1.90 2.05 2.20 2.45 2.70 3.00 3.257 year 2.08 2.10 2.15 2.20 2.20 2.35 2.55 2.75 3.05 3.35 3.6010 year 2.56 2.65 2.75 2.80 2.80 2.95 3.10 3.30 3.50 3.75 3.9530 year 3.13 3.25 3.30 3.40 3.35 3.50 3.65 3.85 4.05 4.25 4.40

1m BA 1.19 1.20 1.20 1.20 1.20 1.20 1.20 1.20 1.20 1.20 1.453m BA 1.22 1.22 1.22 1.22 1.22 1.22 1.22 1.22 1.22 1.22 1.506m BA 1.36 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.35 1.6012m BA 1.46 1.45 1.45 1.50 1.50 1.55 1.65 1.75 1.90 2.10 2.35

Prime Rate 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.25U.S. Yield Curve

Fed funds 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.133 month 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.07 0.076 month 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.10 0.101 year 0.12 0.13 0.13 0.13 0.13 0.13 0.14 0.21 0.33 0.50 0.652 year 0.30 0.30 0.30 0.30 0.30 0.30 0.31 0.45 0.70 1.00 1.353 year 0.58 0.63 0.64 0.65 0.65 0.67 0.70 0.85 1.10 1.40 1.805 year 1.37 1.49 1.52 1.56 1.55 1.63 1.70 1.85 2.05 2.25 2.557 year 2.07 2.22 2.27 2.33 2.32 2.44 2.55 2.70 2.85 3.00 3.2010 year 2.72 2.85 2.95 3.00 3.00 3.15 3.30 3.45 3.60 3.70 3.8530 year 3.80 3.88 3.94 4.00 4.00 4.15 4.25 4.35 4.45 4.55 4.65

1m LIBOR 0.17 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.15 0.153m LIBOR 0.24 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.256m LIBOR 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.35 0.3512m LIBOR 0.59 0.55 0.55 0.55 0.55 0.55 0.60 0.65 0.75 0.90 1.10

Prime Rate 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25Other G7 Yields

ECB Refi 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.2510yr Bund 1.70 1.85 1.95 2.00 2.00 2.20 2.40 2.65 2.80 2.95 3.10

BoE Repo 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.6510yr Gilt 2.75 2.95 3.00 3.05 3.05 3.20 3.40 3.55 3.70 3.80 3.95

BoJ O/N 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.0510yr JGB 0.62 0.65 0.70 0.70 0.70 0.80 0.90 0.95 1.05 1.10 1.15

PAGE 10

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A look ahead at the Canadian and American economies December 19, 2013

A Publication of BMO Capital Markets Economic Research • Douglas Porter, CFA, Chief Economist

2014: A Break-Out Year, Finally

United States The U.S. economy underwhelmed expectations in 2013. At the start

of the year, we projected growth of 2.4%, but it will likely end up about half a percentage point weaker. For the most part, consumers and housing markets met expectations, with auto sales accelerating to six-year highs, housing starts popping above one million, and existing home sales returning toward normal levels. However, businesses retrenched in the face of renewed political uncertainty, exports weakened on sluggish global demand, and the federal government slashed spending and hiked taxes. The good news is that most headwinds are abating, pointing to stronger 2.7% growth in 2014.

Consumer spending is expected to strengthen in 2014, also rising 2.7%, in response to record household wealth, lighter debt loads and improved job prospects. The wealth effect, which was largely absent in the early recovery, should intensify as consumers regain confidence in their financial and job security. The average age of a car on the road is a rusty 12 years, suggesting replacement demand will remain strong. The housing recovery should continue to drive spending, with purchases of household furnishings and appliances running at a 7% clip in the past year. Improved credit quality should encourage a further relaxation of bank lending standards and stronger credit growth.

With the federal budget deficit now on a sustainable course in the near term, the fiscal drag should fade almost completely after carving about 1½ ppts from growth in 2013. The recent budget deal implies a lesser $45 billion (or 0.3% of GDP) of sequestered spending cuts, or half the original amount. Even assuming an extra 0.1% hit from expiring emergency jobless benefits, the federal fiscal drag in 2014 should be less than a third of that in 2013. Moreover, rising state and local government spending could add slightly to growth, as more states plan to reduce taxes and lift infrastructure spending, while cities are hiring after axing staff during the recession.

Despite moderately higher mortgage rates, 2014 should be another banner year for housing markets. Residential construction should see a third annual double-digit gain, with starts moving toward long-term demographic needs of 1.2 million units. Even as mortgage rates climb moderately, affordability will remain healthy, allowing first-time buyers to take the baton from investors. After leaping 12% in the past year, home prices should climb further, albeit more moderately.

ECONOMIC RESEARCH 1-800-613-0205 • www.bmocm.com/economics Sal Guatieri, Senior Economist 416-359-5295 [email protected]

HIGHLIGHTS

The U.S. economy is gaining strength, and is poised for solid growth in 2014.

A resurgent energy sector and housing market have lifted the Canadian economy, but stronger exports to the U.S. are badly needed to sustain the pickup.

While the Fed will slowly wind down QE3, it is unlikely to raise policy rates until early 2016.

Low inflation will counter improved economic growth to keep the Bank of Canada on hold until 2015Q3.

Fed tapering and a sizeable trade deficit flag further weakness in the Canadian dollar.

Page 2 of 7 December 19, 2013

Business investment is expected to take off as the fiscal fog clears. The budget deal implies less dysfunction on Capitol Hill and less political uncertainty. Assuming lawmakers avoid another debt ceiling tussle—not a forgone conclusion, sadly—business confidence should improve, raising non-residential investment about 5%. Driven by solid productivity gains, companies are sitting on record amounts of cash, ready to be unleased as the outlook brightens. U.S. automakers are investing heavily amid solid demand and rising profits, with GM announcing a major upgrade to five plants in the Midwest.

Export growth is expected to double to 6% next year as a result of improved competitiveness and stronger global demand. Meantime, soaring oil and natural gas output and a shrinking energy trade deficit will continue to support growth in 2014.

One thing that won’t take off next year is inflation amid elevated unemployment, a stronger dollar and intense retail competition. However, with unit labor costs running near 2%, some modest upward drift in the CPI rate to 1.4% is expected in 2014.

In all, supportive financial conditions, improved household finances, pent-up demand for housing and automobiles, diminished fiscal drag and less political uncertainty should propel U.S. growth in 2014. This will reduce the unemployment rate to six-year lows of 6.5% by year-end, even as discouraged workers are drawn back to the workforce. 2014 should be the year the economy achieves escape velocity, setting the stage for strong growth through mid-decade.

With fiscal policy risks diminishing, the main threat to the economy is that long-term interest rates could rise too quickly amid fading monetary stimulus. That’s why the Fed, though announcing a modest reduction in asset purchases at the December 18 meeting, said it would keep the fed funds rate near zero “well past” the time the jobless rate falls below 6.5%. The extended forward-rate guidance reinforced the view that policy rates will stay low for a long time, consistent with our call for no change until early 2016. Still, a gradual winding down of QE3 should lift the 10-year Treasury yield more than 50 basis points to 3.5% by late 2014.

Canada Canada’s economy should strengthen moderately to 2.3% in 2014

following two years of sub-2% growth. In fact, the economy already picked up in the second half of 2013 amid resilient consumers and homebuyers and an upturn in energy production and manufacturing. Auto dealers enjoyed a record year, and home sales rebounded nicely. A weaker dollar and firmer U.S. demand are lifting exports after two years of stagnation. While elevated household debt will restrain consumers next year, further weakness in the loonie and strength in


the U.S. economy should spur a welcome rotation of growth toward exports and business investment.

Energy-rich Alberta and Saskatchewan will lead the expansion in 2014, assisted by improved pipeline and rail capacity to move oil down to the U.S. Gulf Coast refineries. Canada is expected to quadruple its rail-loading oil terminals in a few years, possibly increasing its U.S.-bound oil exports by 20%. Meantime, a bumper crop is helping Prairie farmers, despite lower grain prices.

Above-potential growth should reduce the jobless rate from 6.9% currently to 6.6% in late 2014, marking a return to full employment after six years.

Home sales have made a full recovery from last year’s plunge. Existing home sales were up 6% y/y in November, led by double-digit gains in Vancouver, Calgary and Toronto. While the pace has slowed somewhat, sales are close to the past-decade average and higher than when the mortgage rules were tightened last year. Markets are generally balanced, though sellers carry the upper hand in Calgary. House prices have picked up to a 4.1% pace, in line with personal income gains. In 2014, elevated household debt and modestly higher long-term interest rates should apply a gentle brake on housing activity and prices, even as solid demand from immigrants and echo boomers provides support. The prime-home buying age group (30 to 34 year olds) is expanding about twice as fast as the general population. Most regions are expected to see steadier sales and starts in 2014, and smaller price gains.

The Bank of Canada’s recent shift toward neutral from a mild tightening bias opens the rate-cut door a crack if economic growth falters or CPI inflation remains very low. However, growth is expected to improve, while inflation should climb modestly, as wage growth is holding around 2% and the currency will likely weaken further. We still believe the next move in rates is up, though not until 2015Q3, two quarters later than we thought previously.

The Canadian dollar has fallen about 7% this year on the BoC’s waning appetite for rate hikes, the Fed’s tapering move and sagging commodity prices. The currency is expected to weaken to C$1.09 by late 2014 as the Fed winds down QE3. The depreciation will help reduce the current account deficit, which is running around 3% of GDP, and support economic growth, especially in manufacturing-heavy Central Canada.


Forecasts

I II III IV I II III IV 2012 2013 2014

Real GDP (q/q % chng : a.r.) 2.3 1.6 2.7 2.6 2.2 2.3 2.4 2.4 1.7 1.8 2.3

Consumer Spending 1.1 3.6 2.2 2.4 2.2 2.3 2.1 2.1 1.9 2.2 2.3

Business Investment (non-residential) 1.4 -1.3 2.2 5.3 6.2 8.0 7.3 6.6 6.2 2.0 5.6

Consumer Price Index (y/y % chng) 0.9 0.8 1.1 0.9 0.9 1.3 1.4 1.8 1.5 0.9 1.3

Unemployment Rate (%) 7.1 7.1 7.1 6.9 6.9 6.8 6.8 6.6 7.3 7.0 6.8

Housing Starts (000s : a.r.) 175 190 193 195 185 180 175 180 215 188 180

Current Account Balance ($blns : a.r.) -59.1 -63.7 -61.9 -59.4 -58.1 -56.9 -55.5 -53.6 -62.2 -61.0 -56.0

Interest Rates(average for the quarter : %)

Overnight Rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

3-month Treasury Bill 0.95 1.00 1.00 0.93 0.93 0.93 0.93 0.93 0.94 0.97 0.93

10-year Bond 1.92 1.96 2.58 2.58 2.80 2.96 3.11 3.31 1.87 2.26 3.04

Canada/U.S. Interest Rate Spreads(average for the quarter : bps)

90-day 86 95 96 87 86 86 86 86 85 91 86

10-year -3 -3 -13 -15 -19 -19 -19 -14 7 -9 -18

UNITED STATES

Real GDP (q/q % chng : a.r.) 1.1 2.5 3.6 2.2 2.7 2.9 2.9 3.0 2.8 1.8 2.7

Consumer Spending 2.3 1.8 1.4 3.2 2.7 3.2 2.7 2.9 2.2 1.9 2.7

Business Investment (non-residential) -4.6 4.7 3.5 1.9 5.0 5.4 5.2 5.4 7.3 2.3 4.3

Consumer Price Index (y/y % chng) 1.7 1.4 1.6 1.2 1.2 1.6 1.4 1.7 2.1 1.4 1.4

Unemployment Rate (%) 7.7 7.5 7.3 7.1 6.9 6.7 6.6 6.5 8.1 7.4 6.7

Housing Starts (mlns : a.r.) 0.96 0.87 0.88 0.99 1.04 1.11 1.18 1.24 0.78 0.93 1.14

Current Account Balance ($blns : a.r.) -420 -386 -379 -374 -362 -364 -367 -367 -440 -390 -365

Interest Rates(average for the quarter : %)

Fed Funds Target Rate 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13

3-month Treasury Bill 0.09 0.05 0.03 0.06 0.07 0.07 0.07 0.07 0.09 0.06 0.07

10-year Note 1.95 2.00 2.71 2.73 2.99 3.15 3.30 3.45 1.80 2.35 3.22

EXCHANGE RATES(average for the quarter)

US¢/C$ 99.1 97.7 96.3 95.4 93.6 92.4 91.3 91.3 100.1 97.1 92.1

C$/US$ 1.009 1.023 1.038 1.048 1.069 1.082 1.096 1.096 0.999 1.030 1.086

¥/US$ 92 99 99 100 103 105 107 109 80 97 106

US$/Euro 1.32 1.31 1.33 1.36 1.38 1.36 1.34 1.33 1.29 1.33 1.35

US$/£ 1.55 1.54 1.55 1.62 1.64 1.63 1.61 1.60 1.59 1.56 1.62

Note: Shaded areas represent BMO Capital Markets forecasts

CANADA 2013 2014 ANNUAL


FINANCIAL STRESS REMAINS LOW United States (as of December 18, 2013)

CREDIT RISK IS STEADY United States (ppts)

0

100

200

300

400

500

07 08 09 10 11 12 13 14

Ted Spread 1 VIX 2

1 3-mnth Eurodollar minus 3-mnth T-bills (bps) 2 CBOE market volatility index

0

20

40

60

80

100

07 08 09 10 11 12 13 14

1

2

3

4

5

07 08 09 10 11 12 13 14

Corporate Bond Spreads 1

1 15-year BoA Merrill Lynch AA Corporate Yield less 10-year Treasury Yield

CANADIAN DOLLAR TO WEAKEN (US¢ : as of December 18, 2013)

COMMODITY PRICES HAVE MODERATED Commodity price range since start of 2013

60

70

80

90

100

110

03 04 05 06 07 08 09 10 11 12 13 14 15

Canadian Dollar

Parity

93.57¢

forecast

Lumber

Soybeans

Wheat

Corn

Gold

Oil

Natural Gas

Copper

(US$/oz)

(US$/bbl)

(US$/mmbtu)

(US$/lb)

(US$/1000 sq ft)

(US$/bu)

(US$/bu)

(US$/bu)

Materials & Foodstuffs Metals & Energy

7.523.99

4.09

(as of December 18, 2013)

399.80277.40

371.80 [current]

16.1012.43

13.19

7.715.37

5.43

3.743.01

3.28

(as of December 18, 2013)

1693.751192.00

1230.50

4.413.11

4.28

110.5386.68

97.80

But Lumber Prices Holding Firm

FIRMER GROWTH EXPECTED IN 2014 (y/y % change)

U.S. CONSUMER SPENDING TO PICK UP (y/y % change)

Real GDP

-6

-4

-2

0

2

4

6

00 02 04 06 08 10 12 14

forecast

12 13 14 15Canada 1.7 1.8 2.3 2.5US 2.8 1.8 2.7 2.9

Canada

U.S.

-4

-2

0

2

4

6

00 02 04 06 08 10 12 14

Real Personal Consumption Expenditures

forecast

Canada

U.S.


BUSINESS INVESTMENT TO IMPROVE (y/y % change)

CANADIAN HOME SALES REBOUND Existing Homes (y/y % change : 3-month m.a.)

-30

-20

-10

0

10

20

30

00 02 04 06 08 10 12 14

Real Non-Residential Business Investment

forecast

Canada

U.S.

-40

-20

0

20

40

60

80

00 02 04 06 08 10 12 14

Sales Prices

Canada

U.S.

-20

-15

-10

-5

0

5

10

15

20

25

00 02 04 06 08 10 12 14

Canada

U.S.

…U.S. Home Prices Accelerating

JOBLESS RATES FALLING SLOWLY (percent)

INFLATION STAYING VERY LOW Consumer Price Index (y/y % change)

2

4

6

8

10

12

14

70 75 80 85 90 95 00 05 10 15

Unemployment Rate

forecast

Canada

U.S.

33-YearLow

Canada United States

-3

0

3

6

07 09 11 13 15-3

0

3

6

07 09 11 13 15

Headline

Core

Headline

Core

forecast

1.2%

0.7%

1.7%

1.2%

forecast

BANK OF CANADA ON HOLD UNTIL 2015Q3 (% : as of December 18, 2013)

LONG-TERM RATES TO RISE GRADUALLY (% : as of December 18, 2013)

Overnight Rate

0

1

2

3

4

5

6

7

01 03 05 07 09 11 13 15

forecast

Canada

U.S.1%

45-Year Low

1.0%

0%–0.25%

Fed Funds Rate Steady Until Early 2016

10-Year Bonds

0

1

2

3

4

5

6

07 08 09 10 11 12 13 14 15

forecast

2.65%(year end’13)

3.40%(year end

’14)

4.15%2.85%

3.50%

4.00%(year end

’15)

U.S. 2.88%Canada 2.68%

Canada-U.S. Spread -20 bps

Canada

U.S.


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January 2014

ECONOMIC AND STRATEGY GROUP – 514.879.2529 Stéfane Marion, Chief Economist and Strategist

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In his post-FOMC news conference, Mr. Bernanke suggested QE may end late in 2014. However, given the 2014 GDP growth outlook, we think the tapering will be accelerated and QE will be completely wound down by the end of Q3, somewhat earlier than the chairman implied at his news conference but unchanged from our previous forecast.

With the North American economy expected to gain momentum over the coming year, our base case scenario still projects the BoC to start hiking its target rate in early 2015. In our 2014 forecast, 2-year and 10-year Government of Canada bonds will be trading around 1.77% and 3.36% respectively at year end.

Paul-André Pinsonnault [email protected]

Forecast dated December 19, 2013

United States

Quarters Fed Fund 3 Mth Bill 2YR 5YR 10YR 30YR12/18/13 0.250 0.063 0.334 1.542 2.894 3.907

Q1 0.250 0.006 0.395 1.710 3.144 4.069Q2 0.250 0.075 0.490 1.853 3.279 4.156Q3 0.250 0.095 0.608 2.019 3.366 4.228Q4 0.250 0.105 0.801 2.206 3.498 4.292Q1 0.250 0.105 0.997 2.374 3.612 4.374Q2 0.250 0.175 1.226 2.621 3.714 4.457Q3 0.500 0.453 1.483 2.882 3.815 4.537Q4 0.750 0.823 1.783 3.060 3.880 4.587

Canada

Quarters Overnight 3 Mth Bill 2YR 5YR 10YR 30YR12/18/13 1.000 0.904 1.103 1.819 2.679 3.215

Q1 1.000 0.925 1.188 2.096 2.967 3.454Q2 1.000 0.982 1.290 2.244 3.095 3.535Q3 1.000 0.982 1.568 2.479 3.216 3.636Q4 1.000 1.210 1.770 2.661 3.359 3.739Q1 1.500 1.610 1.973 2.846 3.498 3.847Q2 1.750 1.770 2.210 3.039 3.643 3.977Q3 2.000 1.946 2.450 3.195 3.720 4.025Q4 2.000 1.972 2.515 3.265 3.785 4.101

Monthly FIXED INCOME Monitor

January 2014 2

Inflation, a monetary phenomenon

Bank of Canada governor Stephen Poloz took advantage of a speech in Montreal in early December to reaffirm his belief in many credos of central banking. First, the Bank’s inflation target is sacrosanct for Mr. Poloz. He then went further along the line of central banking orthodoxy, stating in answer to a question from the floor that since inflation is a monetary phenomenon, a central bank can choose the inflation rate it wants, as long as it is willing to act accordingly. Moreover, Mr. Poloz said, in focusing greater attention on financial stability these days, the Bank is only returning to its roots. Indeed, the Bank of Canada, like many other central banks, was created (in 1934) primarily to preserve financial stability. Those roots can still be found in the preamble of the Bank of Canada Act: “… to regulate credit and currency in the best interest of the economic life of the nation.”

Like many of his predecessors, Mr Poloz noted that the central bank does not target the exchange rate. In his view, it is up to markets to grind out the exchange rate as they see fit.

A few decades ago, central bankers were describing their policy action as leaning against the wind. A new paradigm emerged during the Greenspan era at the Fed: central bankers began describing their art in the context of risk management. Although Mr. Poloz’s roots at the Bank date to the era of leaning against the wind, he sees monetary policy formulation as a process of risk management.

In the Canadian context, our central bank must balance the risk that inflation will fall further below its target against the risks arising from imbalances in household finance. This is not easy, since the current inflation trend calls for an accommodative policy stance that could fuel those imbalances. Fortunately, the Bank is not alone in managing risks to the financial system. The federal finance minister, the OSFI, the CDIC and the Financial Consumer Agency of Canada all play a role in an integrated regulatory and supervisory system. Macro-prudential initiatives have so far been successful, leading the BoC to expect a soft landing in the housing market. Yet vigilance is still in order.

The severity of the last recession and the expected fallout from the international financial crisis led former BoC governor Mark Carney to champion the idea that the central bank runs monetary policy within a flexible inflation-targeting framework, a framework that leaves

the Bank of Canada with room to manoeuvre in terms of the time it should take to bring inflation back to target. The optimal timing depends on the source and nature of the shocks pushing the economy off course. Yet central bankers are aware that inflation expectations can slip their moorings if actual inflation diverges too much or for too long from the official target, undermining the central bank’s credibility. And credibility is fundamental to the BoC’s ability to operate effectively within a flexible inflation-targeting framework. This is why Mr. Poloz said in Montreal that the central bank must keep earning its credibility by ensuring, first and foremost, that monetary policy remains focused on keeping inflation on target.

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

2000 2002 2004 2006 2008 2010 2012

Canadian inflation well below target since May 2012CPIW is a measure of inflation adjusted for the volatility of CPI components

NBF Economy & Strategy (data via Bloomberg) 2013-12-16

CPI

CPIW

% 12-month change

In this regard, it will not go unnoticed that the last time headline inflation was on target was in the spring of 2012, more than a year ago. Moreover, not only does the Bank expect that it will take another two years for inflation to return to target, but various measures of underlying trends suggest that inflation will be quite low for some time. One such measure, called CPIW, suggests that core inflation is running close to 1%. CPIW does not exclude volatile components from the total price index, but reduces their influence by weighting them in inverse proportion to their volatility. Although CPIW is less familiar to many, Bank of Canada studies show that it is among the most informative measures of core inflation.

With current inflation well below target and expected to remain so for some time, ought the Bank to worry about its perceived ability (or resolve) to manage inflation symmetrically around its 2% target?

The results of the latest Bank of Canada Business Outlook Survey show the vast majority of respondents


January 2014 3

still seeing inflation between 1% and 3% over the next two years. Yet most see inflation remaining in the bottom half of that range.

0

10

20

30

40

50

60

70

80

90

100

110

2002 2004 2006 2008 2010 2012

Canada: Expectation for inflation over next two yearsBank of Canada Business Outlook Survey

1% to 2%

2% to 3%

> 3%• Inflation expectations are little

changed. Almost all firms expect CPI inflation to be within the Bank’s 1% to 3% target range over the next two years.

• The majority expect it to remain in the bottom half of that range (less than 2% but more than 1%).

• A number of firms cited the current lack of inflationary pressures and subdued demand as factors driving their expectations.


Market measures, such as the breakeven inflation rate for real-return bonds, also convey a message that expectations for long-term inflation are well-anchored.

0.8

1.2

1.6

2.0

2.4

2.8

3.2

3.6

4.0

4.4

4.8

1996 1998 2000 2002 2004 2006 2008 2010 2012


%

Canada RRBs: Breakeven inflation rateRelatively stable since the summer of 2012

So far, surveys and other indications derived from financial markets also suggest that inflation expectations are still well-anchored and central bank credibility has not been tarnished.

Our forecast for Q42014 is economic growth of 2.2% and inflation averaging 1.6%. That inflation rate is still below the midpoint of the range targeted by the BoC, but closer to it than previously. Consequently we share Mr. Poloz’s view that “at this stage, rates will stay where they are for quite some time.” However, if inflation expectations show signs of dragging their anchor to the

downside, we would expect Mr. Poloz to adopt an outright easing bias.

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2010 2011 2012 2013

Dec 17, 2013 @ 13 hr 50Meeting Date 0.00% 0.25% 0.50% 0.75% 1.00% 1.25%

01/22/2014 3.0% 97.0%

03/05/2014 0.0% 4.1% 95.9%

04/16/2014 0.0% 0.2% 8.0% 91.8%

06/04/2014 0.0% 0.0% 0.3% 9.4% 90.2%

07/16/2014 0.0% 0.0% 0.3% 8.5% 82.4% 8.8%

09/03/2014 0.0% 0.1% 2.4% 27.3% 63.7% 6.6%

OIS implied probability


Canada: OIS market sees a more dovish BoC2-year yield in a trading range in early 2014

%

Canada 2-year

The market currently puts the odds of a rate cut by September at roughly 30%. In our base case scenario, GDP grows modestly in 2014 and inflation drifts up. In this scenario we see the BoC staying on the sidelines, allowing the front portion of the Canadian yield curve to spend most of the first half of 2014 in the range where it has been trading in since last summer.

However, as the North American economy gains momentum over the coming year, the outlook for interest rates will deteriorate somewhat. In our forecast, 2-year and 10-year Government of Canada bonds will be trading around 1.77% and 3.36% respectively at year end. Our base case scenario still projects the first rate BoC hike in early 2015.

Forecast: Real GDP growth by province in 2014

3.1

2.6 2.52.2 2.1 2.0

1.31.51.6

1.9

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AB SK BC NS ON MB QC PE NB NL

%

National average: 2.2%

NBF Economy & Strategy 2013-12-16

GDP growth in 2014 will vary substantially by province. We see Alberta’s economy expanding 3.1% on the


January 2014 4

strength of momentum in crude oil production and resource development investment. Saskatchewan’s growth will cool substantially but is nonetheless likely to be the second fastest among the provinces, with nonresidential business investment rising at a double-digit rate. British Columbia has suffered from a poor labour market this year. Next year is likely to be better as sales of forest products to the U.S. and China pick up. The province will also benefit from the federal shipbuilding program. We expect Nova Scotia, Ontario and Manitoba to grow at roughly the national average rate. For Quebec, whose economic performance has been weaker than expected this year, we anticipate a positive contribution from trade and a rebound in growth to 1.9% from just below 1% this year. We expect New Brunswick and Newfoundland to lag the national average in 2014, but our growth forecast of 1.5% for New Brunswick would be a marked improvement from the 0.5% of 2013, which came on the heels of a 1.1% contraction in 2012.

2013-12-17 2013-10-15 2013-05-28 2012-12-31Yield Yield Yield Yield

Can 4% 06/01/41 3.186 3.178 2.663 2.363Provincial Spreads Spreads Spreads SpreadsB.C. 4.3% 2042 0.794 0.954 0.908 0.939Alberta 4.5% 2040 0.805 0.927 0.829 0.863Saskat. 4.75% 2040 0.807 0.921 0.832 0.891Manitoba 4.65% 2040 0.895 1.017 0.951 1.016ONT. 4.65% 2041 0.956 1.059 0.973 1.038Que 5% 2041 1.089 1.203 1.077 1.182N.B. 4.8% 2041 1.047 1.169 1.091 1.154N.S. 4.7% 2041 0.971 1.087 1.014 1.087N.& L. 4.6% 2040 0.963 1.037 0.975 1.025PEI 4.6% 2041 1.143 1.240 1.162 1.230Average Prov. 0.968 1.083 0.992 1.063


Provincial spreads to CanadasBased on long-term provincial bonds and Canadas maturing in 2041

Although provincial spreads in the long portion of the curve have on average tightened considerably since mid-October, we would not underweight provincial bonds. If we are right in projecting moderate but still positive economic growth over the next 24 months, their spreads can be expected to contract further, though slowly. Provincial public finances are of course not what they were before the last recession – only two provinces are expected to balance their books in fiscal 2013-14. Yet the economic outlook leaves the door open for improvements over the medium term. Even a slow and partial retracement from current spreads toward those of 2007 would result in provincial bonds outperforming comparable Canadas.

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Spreads of Ontario 5- and 10-years to CanadasBased on Bloomberg fair-value yields for Ontario and Canada

Basis points

5-year

10-year


At this writing, 10-year provincials look attractive, relative not only to Canadas but also to other provincial bonds, as suggested by duration-neutral box trades.

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Box trade: 10-year provincials look attractiveBased on Bloomberg fair-value yields for Ontario and Canada

Ontario (buy 10-yr sell 5-yr) + Canada (buy 5-yr sell 10-yr)

Ontario (buy 30-yr sell 10-yr) + Canada (buy 10-yr sell 30-yr)


Basis points

Over the year to date, total returns of corporate bonds have handsomely outpaced those of Canadas – by 459 basis points in the case of single-A long corporates. The excess return is also quite impressive for mid-terms (331 basis points). Single-A short corporates have returned 2.61%, versus 2.04% for provincials and 1.28% for Canadas – excess returns of 57 and 133 basis points respectively.


January 2014 5

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Corporate A spreads to CanadasBased on Bloomberg fair-value yields

30-year

10-year

5-year


Basis points

If history is a guide, corporate spreads in the long part of the curve leave much less room for outperforming Canadas. Mid- and short-term spreads still look attractive.

Corporate spreads to long provincials, however, look tight, especially for 10-years. In the shorter portion of the curve, the yield on single-As maturing in 5 years are still quite attractive on a relative basis.

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5-year

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Corporate A spreads to provincialsBased on Bloomberg fair-value yields

Basis points


Bottom line: At this stage we expect the 2-10 slope of the yield curve for Canadas to steepen in Q1 and the 10-30 slope to flatten slightly. If our economic outlook is on the mark, spread products should still do relatively well. We prefer 5-year corporates and 10-year provincials. Among provincial issuers, our preference goes to provinces whose economies are likely to outpace the national average.

… and in the U.S.

When the FOMC began its QE program in September 2012, its stated goal was to foster job creation. When the Fed scaled down its program on December 18, the previous four months of nonfarm payroll reports had certainly paved the way for it. Given the time of year, associated with less market liquidity, we had thought the odds were marginally in favour of a January move.

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2000 2002 2004 2006 2008 2010 2012


Monthly change in U.S. nonfarm payrollsFour-month moving average: 204,000 in Nov. 2013 vs. 136,000 in Sept. 2012

Thousands

Still, the Fed’s first step in tapering its asset-purchase program – from $85 billion a month to $75 billion – is a small one. Moreover, the Fed has strengthened its forward guidance on interest rates. The FOMC now says “it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6.5%,” especially if inflation continues to run below target (our italics). In previous statements the wording was “at least as long as.” The message is further strengthened by a more dovish distribution of the appropriate fed funds rates projected by the various FOMC participants for the end of 2015 and the end of 2016, despite a slightly more optimistic view of the unemployment rate over the forecast horizon.

In his post-FOMC news conference, Mr. Bernanke suggested that if the economy unfolds as expected, the FOMC would keep tapering its purchases at about the pace announced at the meeting. That would put the end of QE late in 2014. However, given that the Fed’s central tendency for 2014 GDP growth is more than decent, we think the tapering will be accelerated and QE will be completely wound down by the end of Q3, somewhat earlier than the chairman implied at his news conference but unchanged from our previous forecast.


January 2014 6

Recommended bond allocationRecommended duration 6.45 vs. 6.75 for the benchmarkOverweight short term corporate bonds

Long25.5%

Short49.5%

Mid25.0%

Federal34.8%

Corporate33.0%

Provinces32.2%

Benchmark Allocation

Short 45.9%, Mid 26.0%, Long 28.1%Federal 38.3%, Provinces 31.2%

Corporations 30.5%

Canadian Bond Market – Total Returns

NBF Economy & Strategy (data via Datastream)

Total Returns 12/19/2013

Since Since Since Since11/21/2013 09/19/2013 06/20/2013 12/20/2012

Cash 0.08 0.25 0.53 1.01

CanadaShort 0.04 0.92 1.07 1.40Mid -0.12 1.43 -0.09 -1.47Long -0.14 0.98 -3.96 -7.88Universe -0.04 1.04 -0.16 -1.09

Provincial 0.60 2.20 -0.46 -2.11Municipal 0.50 2.21 0.41 -0.25

CorporateAA 0.11 1.43 1.41 2.09A 0.26 2.05 0.11 0.36BBB 0.17 2.38 0.62 1.75Universe 0.19 1.97 0.63 1.27

Total 0.22 1.68 -0.01 -0.72

S&P/TSX -0.36 4.40 13.65 11.55

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

U.S. interest ratesLast observation December 20, 2013

%

NBF Economy & Strategy (data via Bloomberg)

Long corporate

U.S. 10-year

U.S. 2-year

Target fed funds

30-year mortgage

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Canadian interest ratesWeekly, last observation December 20, 2013

%Long corporate A

Long provincial

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Canada 2-year

BoC overnight target

NBF Economy & Strategy (data via Bloomberg)

Bond Market - Canada

AM 9:45 Close-on12/20/2013 11/22/2013 09/20/2013 06/21/2013 12/21/2012

Interest Rates90-day (B/A's) 1.28 1.28 1.28 1.27 1.292 years 1.12 1.11 1.23 1.23 1.125 years 1.84 1.76 2.00 1.81 1.3710 years 2.67 2.57 2.69 2.45 1.8130 years 3.19 3.15 3.21 2.91 2.37Spreads90 d - 2 years -16 -17 -5 -4 -182 - 5 years 72 65 78 58 252 - 10 years 155 147 146 121 6910 - 30 years 52 57 52 46 57CurrenciesCAD / USD 1.0703 1.0515 1.0305 1.0454 0.9933EUR / CAD 0.6840 0.7014 0.7179 0.7288 0.7633

Source: NBF Economy and Strategy (data via Bloomberg)

NATIONAL BANK

Canada USTotal (%-y/y) CPIX-8(%-y/y) Total (%-y/y) CORE(%-y/y)

2011 Q1 2.60 1.34 2011 Q1 2.13 1.09 Q2 3.36 1.59 Q2 3.35 1.49 Q3 3.00 1.90 Q3 3.75 1.89 Q4 2.70 2.04 Q4 3.34 2.16

2012 Q1 2.34 2.09 2012 Q1 2.81 2.24 Q2 1.58 1.96 Q2 1.90 2.26 Q3 1.22 1.53 Q3 1.70 2.00 Q4 0.94 1.18 Q4 1.90 1.94

2013 Q1 0.91 1.29 2013 Q1 1.68 1.94 Q2 0.77 1.17 Q2 1.42 1.68 Q3 1.15 1.31 Q3 1.55 1.73 Q4 0.99 1.21 Q4 1.20 1.68

2014 Q1 0.97 1.07 2014 Q1 1.28 1.55 Q2 1.32 1.16 Q2 1.64 1.61 Q3 1.44 1.41 Q3 1.34 1.57 Q4 1.70 1.59 Q4 1.50 1.61

2015 Q1 1.77 1.64 2015 Q1 1.47 1.65 Q2 1.86 1.59 Q2 1.55 1.69 Q3 1.80 1.54 Q3 1.64 1.72 Q4 1.53 1.49 Q4 1.72 1.76

2011 2.91 1.72 2011 3.14 1.66

2012 1.52 1.69 2012 2.08 2.11

2013 0.95 1.25 2013 1.46 1.76

2014 1.36 1.31 2014 1.44 1.58

2015 1.74 1.57 2015 1.60 1.70

QUARTERLY ECONOMIC FORECAST

TD Economics

Canada’s economy is headed in the right direction, but continues to face challenges that will keep growth modest and inflationary pressures subdued. The economy has made progress over the past year, with real GDP gains accelerating from a 1% pace year-over-year at the end of 2012, to an expected 2.2% at the end of this year. Stronger U.S. economic growth next year should help pull Canada’s export sector out of its slump, and be the catalyst for economic growth to pick up momentum from 1.7% this year to 2.3% in 2014 and 2.4% in 2015.

While our outlook for Canada’s economy in 2014-2015 has been little altered from our September forecast (see Chart 1), the bigger changes have been to our expectations for monetary policy and the Canadian dollar. Inflation has been weaker than forecast, and the Bank of Canada has softened its language on future rate hikes. We have thus pushed back our next forecasted rate hike until the third quarter of 2015, and lowered our medium-term view on the Canadian dollar to under 90 U.S. cents. Despite these more stimulative monetary and currency conditions, growth prospects for exports and business investment have actually been scaled back relative to September, while household spending gains have been nudged upwards.

Inflation’s disappearing act

One of the more notable economic trends of the past year has been that inflation has remained consistently lower than forecast. Global spare capacity and softer commodity prices have led to

A VERY CANADIAN OUTLOOK

Highlights

• Canadians are often stereotyped as modest, and in our current economic forecast, that label is very fitting. After a sub-par 1.7% pace this year, real GDP growth is expected to improve to 2.3% next year and 2.4% in 2015, as an accelerating U.S. economy helps lift exports (see table page 5).

• In the meantime, inflation in Canada has been softer than expected, and we have pushed back when we expect the Bank of Canada to raise interest rates until the second half of 2015. We have also lowered our forecast for the Canadian dollar, which we expect to fall below 90 U.S. cents in 2015 (see table page 6).

• The projection of a slower increase in interest rates provides more momentum to consumer spending over the forecast horizon, and a weaker loonie should lend a hand to exporters. However, the outlook is not without challenges. Lacklustre prospects for commodity prices are weighing on investment in the resource sector and exporters continue to face serious competitive challenges, all of which will lean against the expected upswing in these components.

December 16, 2013

Craig Alexander, SVP & Chief Economist, 416-982-8064Derek Burleton, VP & Deputy Chief Economist, 416-982-2514Leslie Preston, Economist, 416-983-7053

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2013 2014 2015

CHART 1. CANADIAN REAL GDP

September QEF

December QEF

Forecast by TD Economics as of December 2013 Source: Statistics Canada/HaverAnalytics

Forecast*

Annualized Q/Q % change

TD Economics | www.td.com/economics

2December 16, 2013

subdued inflation in many advanced economies, including Canada. Add intense competition at the retail level in Canada into the mix, and inflation has been softer than either we, or the Bank of Canada, had expected. Core inflation is currently tracking 1.2% in Q4, and will likely remain below-target for a few quarters still. Outright price reductions in health and personal care costs, combined with disinflation in prices for food and transportation, are the main culprits behind the low inflation picture in 2013. Looking ahead, our call for a weaker Canadian dollar over the next two years will help to reverse the recent downtrend in inflation. However, this process will take time, leaving increases in the CPI below the Bank of Canada’s 2% target until midway through 2015 (see Chart 2).

Consumers lay a solid foundation

The upside of the soft inflation picture is that consumer incomes stretch farther. Real personal disposable income is stronger than it otherwise would be. Not to mention that the bargains created by intense retail competition has likely lured Canadians to the malls, or in the case of generous vehicle incentives, the dealer lots. This has underpinned an acceleration in consumer spending, particularly in the second half of this year. Real Consumer spending is on track to end 2013 at a 2.3% year-on-year pace, the strongest momentum in three years.

A big part of the strength in consumer spending has been purchases of cars and trucks, which appear to have remained strong in the fourth quarter. Vehicles are a major consumer purchase, and the fact that Canadians are confident enough to purchase these big-ticket items is a positive sign, and con-

sistent with recent improvements in consumer confidence.It is also encouraging that these expenditures have been

less debt-financed than in the past. In fact, with most of 2013 on the books, growth in real disposable income exceeded consumer spending growth for three years straight, a perfor-mance that has not occurred in quite some time. This greater prudence by consumers is demonstrated by household credit growth that remains at the lowest level in a generation (see Chart 3). That said, household debt levels remain elevated relative to incomes, which makes households vulnerable in the event of an economic or financial shock.

These high debt levels will keep many consumers on the cautious side over the next few years, but we expect the cur-rent positive momentum in consumer spending to carry into next year. This outlook is supported by low interest rates, decent job growth and continued solid gains in real after-tax incomes. Moreover, we expect the household savings rate not to lose too much ground, remaining above 5%.

A rebound in Canadian home sales activity this year from the negative impact of tighter mortgage rules in 2012 will also add to near-term consumer spending strength. Our expectation is that amid gradually deteriorating affordability, the upward momentum in sales and prices will stabilize in 2014 and weaken moderately in 2015 (for more details please see our latest Canadian Regional Housing Market Outlook). A weaker housing market in 2015 should contrib-ute to softer momentum in consumer spending in that year.

As for residential investment, which includes new home construction, renovations and transfer costs on existing home sales, our outlook is little changed from our last forecast. Renewed momentum in housing starts this year,

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CHART 2. INFLATION TO GRADUALLY DRIFT HIGHER

USD/CAD (left axis)

Core CPI (right axis)

Source: Statistics Canada/Haver Analytics. *Fcst by TD Economics as at Dec. 2013.

Year/Year % Chg. Year/Year % Chg.

Forecast*

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91 94 97 00 03 06 09 12

CHART 3. CONSUMERS SHOW GREATER PRUDENCE ON DEBT

Disposable Income Growth

Household Credit Growth

Source: Statistics Canada/Haver Analytics

Year/Year % Chg.

http://www.td.com/document/PDF/economics/special/CanadianRegionalHousingMarketOutlook_oct2013.pdf

http://www.td.com/document/PDF/economics/special/CanadianRegionalHousingMarketOutlook_oct2013.pdf


3December 16, 2013

combined with growth in renovation spending, is expected to keep residential investment growth decent in 2014. How-ever, we expect that the overbuilding that has occurred in Canada’s housing market to weigh on construction activity by the end of next year, and residential construction should experience a modest contraction in 2015.

Exports, cleared for takeoff?

Canada’s export sector is the only component of eco-nomic growth that has not returned to its pre-recession level of activity. In part reflecting a frustratingly slow recovery in the United States, our largest export market, and in part reflecting a loss of competitiveness. Net exports were a drag on growth in Q3; however, we expect this to prove a temporary setback (see Chart 4).

Production measures have been very strong recently, but this output produced a sizeable buildup in inventories in Q3. We expect Q3’s inventories to become Q4’s exports, and a rebound in exports should help keep overall economic growth above 2%. The most encouraging part of Canada’s export outlook is the U.S. growth forecast, which has re-ceived a slight upgrade. An acceleration in growth south of the border should help pull Canada’s export sector out of its recent doldrums. This improvement will likely be aided by a weaker Canadian dollar. As already noted, the loonie has already depreciated roughly 7% from a year ago, and we expect it to depreciate another 6%, to 88.5 U.S. cents by the end of 2015.

That should start to repair some of the damage to Canada’s competitiveness (Chart 5). However, it won’t deflect all of the headwinds facing Canada’s export sector.

Manufacturing has been strengthening in the U.S. since the recession, but gains have been concentrated in southern states, with arguably fewer linkages to Canadian supply chains. In addition, significant manufacturing capacity has been shuttered in Canada since the recession, and it may be difficult to meet the coming rise in U.S. demand with exist-ing capacity. All of these factors have led us to slightly pare back export growth from what we would typically expect from the coming acceleration in the U.S. economy. Even so, exports are the key factor driving Canada’s growth to a stronger pace over the forecast horizon.

Commodity prices weigh on business investment

Canada’s underwhelming export performance recently has been reflected in a very weak corporate profit backdrop. While profits did rebound in the third quarter, they remain in the red on a year-on-year basis. It is perhaps not surpris-ing then that the latest Bank of Canada Business Outlook Survey, released in October, indicated that Canadian firms remain very cautious. Businesses surveyed have become more optimistic about their sales prospects, but less upbeat about hiring or investment plans.

This pessimism left an indelible mark on business investment in 2013. With most of the year on the books, investment has slowed to a paltry 1.8% in real terms, after growing by more than 10% on average in the three previous years. A key factor behind the slowdown has been softer commodity prices, which has weighed on investment in the resource sector. Sizeable growth in commodity prices over the past decade has driven an impressive expansion of Canada’s resource sector. Investment in expanding resource

400,000

450,000

500,000

550,000

600,000

02 04 06 08 10 12 14

CHART 4. EXPORTS SET TO ACCELERATE

fcst*

Source: Statistics Canada; Fcst* by TD Economics as at Dec. 2013

Real Exports of Goods and Services (Mil.Chn.2007.C$)

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1.8

81 85 89 93 97 01 05 09 13

CHART 5. CANADA'S COMPETITIVENESS

Source: TD Economics; *Forecast as of Dec. 2013

Fcst*

Relative Business Sector Unit Labour Costs (U.S./Canada)

Canada less competitive

vs. U.S

http://www.stg.td.com/document/PDF/economics/qef/qefdec2013_us.pdf

http://www.stg.td.com/document/PDF/economics/qef/qefdec2013_us.pdf


4December 16, 2013

sector projects tends to be accounted for in the “engineering structures” portion of nonresidential construction invest-ment. Indeed, its share of nominal GDP has made healthy gains since the downturn, but has also plateaued since 2012 (see Chart 6).

Looking ahead, our forecast is for Canada’s basket of commodity prices to remain relatively flat (see Chart 7). And while we don’t expect an outright contraction in re-source sector investment, growth is unlikely to return to its headier days over our forecast horizon. In part, that reflects the long-term nature of development in the resource sector, where investment is heaviest during the construction phase, but as projects move into production, capital outlays shrink.

Therefore, business investment is expected to improve once export growth has been more sustained, but that im-provement will likely be more heavily weighted towards machinery and equipment rather than nonresidential struc-tures. Overall, business investment is expected to make a

larger contribution to growth in Canada’s economy come 2015, but due to more modest growth in investment in the resource sector, its contribution will be smaller relative to the lift provided over the past decade.

The Bottom Line

Canada’s economy is stuck in a modest growth, low inflation environment. As a result, market sentiment on the Canadian dollar has soured and prospects for a higher overnight rate have been pushed back until mid-2015, at the earliest. Even so, our forecast calls for Canada’s economic growth to gain momentum over the next couple of years, although still trail the U.S. performance. Further deprecia-tion in the Canadian dollar does create winners and losers, but it will help inflation move back towards the Bank of Canada’s target, and can help Canada’s exporters regain some of their lost competitiveness.

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CHART 6. SOFTER COMMODITY PRICES WEIGH ON INVESTMENT

Investment in nonresstructuresTD Commodity PriceIndex

Source: TD Economics; *Forecast as at Dec. 2013

Forecast*Year/Year % Chg.

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CHART 6. BUSINESS INVESTMENT MIX SET TO SHIFT

Source: Statistics Canada/Haver Analytics

Business Investment as a % of Nominal GDP

Engineering Structures

Machinery & Equipment

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CHART 7. SOFTER COMMODITY PRICES WEIGH ON INVESTMENT

Investment in nonresstructuresTD Commodity Price Index

Source: TD Economics; *Forecast as of Dec. 2013

Forecast* Year/Year % Chg.


5December 16, 2013

Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F 13F 14F 15F 13F 14F 15F

Real GDP 2.3 1.6 2.7 2.3 2.1 2.4 2.5 2.4 2.3 2.4 2.5 2.4 1.7 2.3 2.4 2.2 2.3 2.4

Consumer Expenditure 1.1 3.6 2.2 2.2 2.4 2.4 2.3 2.4 2.3 2.2 2.1 2.1 2.2 2.4 2.3 2.3 2.4 2.2

Durable Goods 2.2 12.7 -0.6 3.0 2.8 3.0 2.6 2.4 2.3 2.2 2.1 2.0 3.5 3.0 2.3 4.2 2.7 2.1

Business Investment 1.4 -1.3 2.2 1.4 1.6 2.0 2.3 3.0 3.4 3.7 4.0 4.1 1.8 1.7 3.3 0.9 2.2 3.8

Non-Res. Structures 1.9 -1.9 2.1 1.6 2.0 2.0 2.2 2.0 2.2 2.5 2.7 2.6 2.0 1.7 2.3 0.9 2.0 2.5

Machinery & Equipment 0.7 -0.2 2.5 1.0 1.0 2.0 2.5 4.5 5.4 5.5 6.0 6.5 1.4 1.7 4.8 1.0 2.5 5.8

Residential Investment -4.4 6.8 2.4 3.9 5.0 2.8 1.2 -2.5 -3.5 -3.5 -3.4 -3.0 0.5 3.2 -2.3 2.1 1.6 -3.4 Government Expenditures -0.6 0.6 0.8 0.8 1.0 1.0 1.1 1.1 1.2 1.2 1.3 1.3 0.7 0.9 1.2 0.6 0.9 1.1

Final Domestic Demand 0.3 2.2 1.8 1.9 2.1 2.0 1.9 1.8 1.7 1.8 1.8 1.8 1.5 2.0 1.8 1.5 2.0 1.8

Exports 4.8 3.4 -2.0 3.7 2.5 3.2 3.5 3.6 4.1 4.6 4.5 3.8 1.4 2.5 4.0 2.4 3.2 4.2

Imports 2.8 1.4 -1.4 0.7 2.5 2.4 2.2 1.8 2.0 2.3 2.2 2.3 0.8 1.5 2.1 0.9 2.2 2.2

Change in Non-FarmInventories ($2007 Bn) 9.0 2.7 5.2 2.8 3.0 4.0 5.0 6.0 6.0 5.5 6.0 7.0 4.9 4.5 6.1 --- --- ---

Final Sales 0.9 3.0 1.7 3.0 2.1 2.3 2.4 2.4 2.4 2.5 2.5 2.3 1.8 2.4 2.4 2.1 2.3 2.5

International CurrentAccount Balance ($Bn) -59.1 -63.7 -61.9 -54.1 -62.2 -64.0 -59.6 -57.7 -50.8 -48.5 -40.2 -40.5 -59.7 -60.9 -45.0 --- --- ---

% of GDP -3.2 -3.4 -3.3 -2.8 -3.3 -3.3 -3.1 -2.9 -2.5 -2.4 -2.0 -2.0 -3.2 -3.1 -2.2 --- --- ---

Pre-tax Corp. Profits 4.1 -18.8 23.2 4.0 3.5 4.5 6.0 6.5 7.0 7.2 8.0 6.0 -4.6 4.9 6.7 2.0 5.1 7.0

% of GDP 12.7 12.1 12.6 12.6 12.6 12.7 12.7 12.7 12.8 12.9 13.0 13.0 12.5 12.7 12.9 --- --- ---

GDP Deflator (Y/Y) 1.4 1.4 1.6 1.0 1.3 0.5 1.1 1.1 1.7 1.1 2.2 2.3 1.3 1.1 2.3 1.0 1.7 2.2

Nominal GDP 5.0 0.7 5.6 1.9 2.6 4.0 5.1 4.6 5.0 4.3 5.7 3.9 3.1 3.4 4.8 3.3 4.1 4.7

Labour Force 0.1 1.4 0.8 0.5 1.0 1.0 1.0 1.0 0.9 0.9 0.9 0.8 1.0 0.9 0.9 0.7 1.0 0.9

Employment 0.8 1.3 0.8 1.4 1.2 1.3 1.4 1.4 1.4 1.5 1.6 1.5 1.3 1.3 1.4 1.1 1.3 1.5

Employment ('000s) 33 56 35 62 55 58 62 63 61 66 73 67 227 223 256 187 238 267

Unemployment Rate (%) 7.1 7.1 7.1 6.9 6.8 6.8 6.7 6.6 6.5 6.3 6.2 6.0 7.0 6.7 6.3 --- --- ---

Personal Disp. Income 5.4 1.2 5.0 2.3 3.2 3.9 4.6 4.5 4.6 3.8 4.7 4.1 3.8 3.5 4.4 3.5 4.1 4.3

Pers. Savings Rate (%) 6.0 5.3 5.4 5.2 5.1 5.0 5.0 5.1 5.2 5.0 5.2 5.2 5.5 5.0 5.1 --- --- ---

Cons. Price Index (Y/Y) 0.9 0.8 1.1 1.2 1.4 1.5 1.5 1.7 1.8 1.9 2.1 2.1 1.0 1.5 2.0 1.2 1.7 2.1

Core CPI (Y/Y) 1.3 1.2 1.3 1.1 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.9 1.2 1.5 1.8 1.1 1.6 1.9

Housing Starts ('000s) 175 190 193 195 182 179 177 176 169 167 165 159 188 179 165 --- --- ---

Productivity: Real GDP / worker (Y/Y) -0.2 0.2 0.6 1.2 1.0 1.2 1.0 1.0 1.0 1.0 0.9 0.9 0.4 1.0 1.0 1.2 1.0 0.9

F: Forecast by TD Economics as at December 2013

Source: Statistics Canada, Bank of Canada, Canada Mortgage and Housing Corporation, Haver Analytics

CANADIAN ECONOMIC OUTLOOKPeriod-Over-Period Annualized Per Cent Change Unless Otherwise Indicated

2013 2014 Annual Average2015 4th Qtr/4th Qtr


6December 16, 2013

Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F 2013F 2014F 2015FCrude Oil (WTI, $US/bbl) 94 94 106 98 97 95 97 95 98 95 102 98 98 96 98Natural Gas ($US/MMBtu) 3.48 4.02 3.56 3.65 3.50 4.00 3.85 3.80 3.75 4.20 4.00 4.05 3.68 3.79 4.00Gold ($US/troy oz.) 1632 1417 1330 1272 1195 1125 1150 1225 1250 1275 1295 1305 1413 1174 1281Silver (US$/troy oz.) 30.1 23.2 21.5 20.7 19.0 17.3 17.5 18.9 19.5 19.5 20.0 20.3 23.9 18.2 19.8Copper (cents/lb) 360 325 321 325 332 325 320 310 300 300 280 280 333 322 290Nickel (US$/lb) 7.85 6.79 6.33 6.45 7.25 7.75 8.25 8.00 7.75 7.50 7.25 7.25 6.86 7.81 7.44Aluminum (Cents/lb) 91 83 81 81 86 86 84 84 84 82 82 80 84 85 82Wheat ($US/bu) 9.32 9.14 8.40 8.54 8.85 8.90 9.10 9.15 9.20 9.20 9.20 9.20 8.85 9.00 9.20

COMMODITY PRICE FORECASTS

F: Forecast by TD Bank Group as at December 2013; All forecasts are period averages; Source: Bloomberg, USDA (Haver).

2013 2014 2015 Annual Average

2013 2014 2015Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4F

CANADAOvernight Target Rate 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.50 1.503-mth T-Bill Rate 0.98 1.02 0.98 0.95 0.95 0.95 0.95 0.95 0.95 1.05 1.40 1.402-yr Govt. Bond Yield 1.00 1.22 1.19 1.10 1.15 1.25 1.30 1.35 1.50 1.70 1.95 2.055-yr Govt. Bond Yield 1.30 1.80 1.86 1.80 1.95 2.05 2.15 2.25 2.50 2.60 2.75 2.9010-yr Govt. Bond Yield 1.76 2.44 2.54 2.65 2.80 2.90 2.95 3.10 3.30 3.35 3.45 3.5530-yr Govt. Bond Yield 2.50 2.89 3.07 3.15 3.25 3.35 3.45 3.55 3.70 3.75 3.80 3.95

10-yr-2-yr Govt Spread 0.76 1.22 1.35 1.55 1.65 1.65 1.65 1.75 1.80 1.65 1.50 1.50

U.S. Fed Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.503-mth T-Bill Rate 0.07 0.04 0.02 0.20 0.20 0.20 0.20 0.20 0.25 0.50 0.80 1.002-yr Govt. Bond Yield 0.25 0.36 0.33 0.30 0.35 0.50 0.60 0.70 0.95 1.00 1.25 1.655-yr Govt. Bond Yield 0.77 1.41 1.39 1.40 1.50 1.65 1.80 1.95 2.35 2.50 2.80 3.0510-yr Govt. Bond Yield 1.87 2.52 2.64 2.75 2.85 3.05 3.20 3.30 3.65 3.65 3.70 3.7530-yr Govt. Bond Yield 3.10 3.52 3.69 3.80 3.95 4.20 4.30 4.40 4.60 4.55 4.60 4.60

10-yr-2-yr Govt Spread 1.62 2.16 2.31 2.45 2.50 2.55 2.60 2.60 2.70 2.65 2.45 2.10

CANADA - U.S SPREADSCan - U.S. T-Bill Spread 0.91 0.98 0.96 0.75 0.75 0.75 0.75 0.75 0.70 0.55 0.60 0.40Can - U.S. 10-Year Bond Spread -0.11 -0.08 -0.10 -0.10 -0.05 -0.15 -0.25 -0.20 -0.35 -0.30 -0.25 -0.20

INTEREST RATE OUTLOOK

F: Forecast by TD Bank Group as at December 2013; All forecasts are end-of-period; Source: Bloomberg, Bank of Canada, Federal Reserve

FOREIGN EXCHANGE OUTLOOK2013 2014 2015

Q1 Q2 Q3 Q4F Q1F Q2F Q3F Q4F Q1F Q2F Q3F Q4FExchange rate to U.S. dollar Japanese yen JPY per USD 94 99 98 100 102 102 105 110 110 110 112 115 Euro USD per EUR 1.28 1.30 1.35 1.30 1.27 1.25 1.24 1.22 1.22 1.20 1.20 1.20 U.K. pound USD per GBP 1.52 1.52 1.62 1.59 1.55 1.54 1.55 1.56 1.61 1.60 1.60 1.58

Exchange rate to Canadian dollar U.S. dollar USD per CAD 0.98 0.95 0.97 0.94 0.94 0.93 0.92 0.90 0.89 0.89 0.89 0.89 Japanese yen JPY per CAD 92.7 94.3 95.4 94.3 95.3 94.4 96.3 99.0 97.9 97.9 99.1 101.8 Euro CAD per EUR 1.30 1.37 1.39 1.38 1.36 1.35 1.35 1.36 1.37 1.35 1.36 1.36 U.K. pound CAD per GBP 1.54 1.60 1.67 1.68 1.66 1.67 1.69 1.74 1.80 1.80 1.81 1.78

f: Forecast by TD Bank Group as at December 2013; All forecasts are end-of-period: Source: Federal Reserve, Bloomberg, TDBG

Currency Exchange rate


7December 16, 2013

CONTACTS AT TD ECONOMICSCraig Alexander

Senior Vice President and Chief Economist mailto:[email protected]

TO REACH US Mailing Address 55 King Street West 17th Floor, TD Bank Tower Toronto, Ontario M5K 1A2 Fax: (416) 944-5536 mailto:[email protected]

CANADIAN ECONOMIC ANALYSISDerek Burleton, Vice President and Deputy Chief Economist [email protected]

Sonya Gulati Senior Economist, Government Finance and Public Policy [email protected]

Diana Petramala Economist, Real Estate [email protected]

Francis Fong Senior Economist, Financial [email protected]

Dina Ignjatovic Economist, Autos, Commodities and Other Industries [email protected]

Leslie Preston Economist, Macro [email protected]

Jonathan Bendiner Economist, Regional [email protected]

Connor McDonald Economist, Environmental [email protected]

U.S. & INTERNATIONAL ECONOMIC ANALYSISBeata Caranci, Vice President and Deputy Chief Economist [email protected] James Marple Senior Economist [email protected]

Martin Schwerdtfeger Senior Economist, International [email protected]

Michael Dolega Senior Economist [email protected]

Thomas Feltmate Economist [email protected]

Ksenia Bushmeneva Economist [email protected]

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. 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. This 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 the 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.

FINANCIAL MARKET FORECASTS

The material contained in this report 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 from sources con-sidered to be reliable. We make no representation or warranty, express or implied, as 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.

®Registered trademark of Royal Bank of Canada. ©Royal Bank of Canada.

December 2013

Interest rates (%, end of quarter)

Exchange rates (%, end of quarter)

Actual

12Q1 12Q2 12Q3 12Q4 13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 2012 2013 2014

Australian dollar 1.03 1.02 1.04 1.04 1.04 0.91 0.93 0.98 0.95 0.91 0.92 0.94 1.04 0.98 0.94

Canadian dollar 1.00 1.02 0.98 0.99 1.02 1.05 1.03 1.05 1.06 1.07 1.08 1.09 0.99 1.05 1.09

Euro 1.33 1.27 1.29 1.32 1.28 1.30 1.35 1.36 1.35 1.32 1.30 1.27 1.32 1.36 1.27

Yen 83 80 78 87 94 99 98 95 92 89 95 100 87 95 100

New Zealand dollar 0.82 0.80 0.83 0.83 0.84 0.77 0.83 0.88 0.86 0.82 0.83 0.84 0.83 0.88 0.84

Swiss franc 0.90 0.95 0.94 0.92 0.95 0.95 0.90 0.90 0.92 0.94 0.96 0.98 0.92 0.90 0.98

U.K. pound sterling 1.60 1.57 1.62 1.62 1.52 1.52 1.62 1.62 1.67 1.69 1.71 1.69 1.62 1.62 1.69

Forecast ForecastActual

Actual13Q1 13Q2 13Q3 13Q4 14Q1 14Q2 14Q3 14Q4 15Q1 15Q2 15Q3 15Q4 2012 2013 2014 2015

CanadaOvernight 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50 1.75 1.00 1.00 1.00 1.75

Three-month 0.98 1.02 1.00 0.95 1.00 1.05 1.10 1.10 1.10 1.35 1.60 1.85 1.05 0.95 1.10 1.85

Two-year 1.00 1.22 1.20 1.15 1.20 1.30 1.50 1.65 1.85 2.15 2.55 2.70 1.05 1.15 1.65 2.70

Five-year 1.30 1.80 2.00 1.80 1.95 2.15 2.40 2.70 2.80 3.00 3.30 3.50 1.30 1.80 2.70 3.50

10-year 1.88 2.44 2.65 2.60 2.75 3.00 3.20 3.40 3.50 3.65 3.90 4.10 1.75 2.60 3.40 4.10

30-year 2.50 2.90 3.15 3.15 3.30 3.45 3.70 3.90 3.95 4.05 4.20 4.40 2.40 3.15 3.90 4.40

Yield curve (10s-2s) 88 122 145 145 155 170 170 175 165 150 135 140 70 145 175 140

United StatesFed funds 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.13 0.50 0.13 0.13 0.13 0.50

Three-month 0.07 0.04 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.10 0.20 0.09 0.05 0.05 0.20

Two-year 0.25 0.36 0.35 0.30 0.35 0.40 0.60 0.85 1.05 1.30 1.65 2.05 0.25 0.30 0.85 2.05

Five-year 0.77 1.41 1.45 1.40 1.60 1.90 2.10 2.50 2.70 2.90 3.10 3.35 0.70 1.40 2.50 3.35

10-year 1.87 2.52 2.60 2.70 2.85 3.10 3.25 3.60 3.70 3.80 4.00 4.20 1.70 2.70 3.60 4.20

30-year 3.10 3.52 3.70 3.75 3.85 4.00 4.05 4.35 4.45 4.55 4.70 4.90 2.90 3.75 4.35 4.90

Yield curve (10s-2s) 162 216 225 240 250 270 265 275 265 250 235 215 145 240 275 215

Yield spreadsThree-month T-bills 0.91 0.98 0.95 0.90 0.95 1.00 1.05 1.05 1.05 1.30 1.50 1.65 0.96 0.90 1.05 1.65

Two-year 0.75 0.86 0.85 0.85 0.85 0.90 0.90 0.80 0.80 0.85 0.90 0.65 0.80 0.85 0.80 0.65

Five-year 0.53 0.39 0.55 0.40 0.35 0.25 0.30 0.20 0.10 0.10 0.20 0.15 0.60 0.40 0.20 0.15

10-year 0.01 -0.08 0.05 -0.10 -0.10 -0.10 -0.05 -0.20 -0.20 -0.15 -0.10 -0.10 0.05 -0.10 -0.20 -0.10

30-year -0.60 -0.62 -0.55 -0.60 -0.55 -0.55 -0.35 -0.45 -0.50 -0.50 -0.50 -0.50 -0.50 -0.60 -0.45 -0.50

ForecastForecastActual

ECONOMIC FORECAST DETAIL — CANADA

The material contained in this report 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 from sources con-sidered to be reliable. We make no representation or warranty, express or implied, as 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.

®Registered trademark of Royal Bank of Canada. ©Royal Bank of Canada.

Real growth in the economy (Quarter-over-quarter annualized % change unless otherwise indicated)

Other indicators (Year-over-year % change unless otherwise indicated)

December 2013

Actual

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012 2013 2014 2015

Household Consumption 1.1 3.6 2.2 2.4 2.6 2.5 2.4 2.3 2.3 2.2 2.2 2.2 1.9 2.2 2.5 2.3

Durables 2.2 12.7 -0.6 6.0 3.7 2.4 2.4 2.4 2.4 2.6 2.5 2.5 2.6 3.7 3.6 2.4

Semi-Durables 0.1 1.6 6.3 2.5 2.6 3.2 2.8 2.5 2.5 2.6 2.5 2.5 2.1 2.0 3.1 2.6

Non-durables -0.8 1.5 2.1 2.0 2.6 3.2 2.8 2.5 2.5 2.3 2.3 2.3 0.7 1.6 2.5 2.5

Services 1.9 2.9 2.4 1.8 2.3 2.1 2.2 2.1 2.1 2.1 2.1 2.1 2.2 2.2 2.2 2.1

NPISH consumption 4.8 1.7 0.3 2.4 2.6 2.5 2.4 2.3 2.3 2.2 2.2 2.2 1.2 3.3 2.1 2.3

Government expenditures 0.0 1.7 0.4 0.2 0.4 0.4 0.4 0.4 0.8 0.8 1.0 1.0 1.1 0.8 0.4 0.7

Government fixed investment -3.3 -5.2 2.7 0.5 0.6 0.6 0.6 1.0 1.2 1.2 1.5 1.5 0.5 -0.1 0.5 1.1

Residential investment -4.4 6.8 2.4 -0.4 -0.4 -1.6 -3.4 -2.1 -0.6 0.6 -0.2 0.0 6.1 0.2 -0.3 -1.0

Non-residential investment 1.4 -1.3 2.2 3.9 4.6 6.6 6.9 5.6 4.6 5.0 4.7 4.3 6.2 1.9 4.5 5.3

Non-residential structures 1.9 -1.9 2.1 4.5 4.5 6.8 7.2 6.0 4.5 5.1 4.8 4.4 6.9 2.2 4.6 5.4

Machinery & equipment 0.7 -0.2 2.5 3.0 4.8 6.3 6.5 4.9 4.7 4.9 4.4 4.2 5.2 1.5 4.4 5.0

Intellectual property -3.0 -10.2 3.2 3.5 4.7 6.6 6.9 5.5 4.6 5.0 4.6 4.3 -1.5 -2.9 3.9 5.2

Final domestic demand 0.3 2.2 1.8 1.9 2.1 2.2 2.1 1.9 2.0 2.1 2.1 2.0 2.3 1.5 2.0 2.0

Exports 4.8 3.4 -2.0 7.5 7.9 7.4 9.3 9.4 8.3 7.8 7.2 6.7 1.5 1.6 6.4 8.2

Imports 2.8 1.4 -1.4 3.3 4.5 4.7 6.5 7.0 5.5 5.5 5.5 5.3 3.1 1.0 3.8 5.8

Inventories (change in $b) 10.2 5.4 10.2 7.1 5.7 5.5 5.3 6.0 6.4 6.4 6.4 5.4 6.8 8.2 5.6 6.1

Real gross domestic product 2.3 1.6 2.7 2.4 2.7 2.9 2.8 2.7 2.9 2.8 2.5 2.2 1.7 1.7 2.6 2.7

2013

Actual Forecast Forecast

year-over-year % change2014 2015

Business and labour

Productivity -0.5 0.4 1.1 1.2 1.4 1.4 1.3 1.4 1.5 1.5 1.5 1.4 0.0 0.5 1.4 1.5

Pre-tax corporate profits -10.2 -8.2 -1.1 1.1 0.5 7.3 3.7 4.8 6.7 6.4 5.1 4.3 -4.9 -4.8 4.0 5.6

Unemployment rate (%)* 7.1 7.1 7.1 6.9 6.9 6.8 6.7 6.7 6.6 6.6 6.5 6.5 7.2 7.1 6.8 6.6

Inflation

Headline CPI 0.9 0.8 1.1 1.0 1.2 1.6 1.6 1.7 1.8 1.9 1.9 2.0 1.5 0.9 1.5 1.9

Core CPI 1.3 1.2 1.3 1.3 1.3 1.5 1.6 1.8 1.8 1.9 1.9 2.0 1.7 1.3 1.6 1.9

External trade

Current account balance ($b) -59.1 -63.7 -61.9 -45.9 -45.2 -44.2 -42.6 -41.8 -40.1 -39.2 -38.4 -37.8 -62.2 -57.6 -43.5 -38.9

% of GDP -3.2 -3.4 -3.3 -2.4 -2.3 -2.3 -2.2 -2.1 -2.0 -1.9 -1.9 -1.8 -3.4 -3.1 -2.2 -1.9

Housing starts (000s)* 175 190 193 196 190 184 178 178 176 176 173 173 215 188 182 174

Motor vehicle sales (mill., saar)* 1.71 1.79 1.80 1.81 1.79 1.80 1.80 1.81 1.81 1.82 1.83 1.83 1.72 1.78 1.80 1.82

December 12, 2013

1

Global Economic Calendar 2014LBS Economic Research will publish its 2014 global outlook within the next few weeks. Meanwhile, this edition of the Monitor focuses on the key potential market movers to watch for

in the next 12 months.

DECEMBER 2013 December 15 – 2013Q3 Euro Zone GDP: the euro zone

economy is expected to expand at a very mild pace.

December 15 – Ireland is due to officially leave the EU-IMF bailout.

December 18 – FOMC decision. FOMC members have been looking at other options (thresholds, forward guidance, IOER cut) to replace the QE3 program, although no consensus was reached in the previous meeting. As a reminder, Bernanke mentioned last summer that the Fed could start to taper QE3 before year-end.

JANUARY 2014 January 15 – 2013Q4 China GDP. Recent indicators suggest

timid signs of acceleration in economic growth.

January 22 – BOC decision. BoC is in a risk management mode: below-desired inflation on one hand; elevated household debt on the other hand.

January 29 – FOMC decision.

January 31 – Bernanke officially ends his term.

REMAINING of 2014 May 22 – European Parliament election.

September 18 – The Scottish independence referendum. Recent polls indicate that slightly less than 50% are in favour of the union and that nearly a quarter of respondents support the independence.

September 22 – General elections in New Brunswick. The results from a poll conducted in August 2013 are: Liberals at 47%, NDP at 24% and PC at 23%.

UNSCHEDULED

EU/IMF Review: The Troika and the Greece/Portugal governments are still negotiating on a bailout review.

Keystone XL pipeline: A final decision from US authorities concerning the Keystone XL pipeline project is not expected before 2014. An approval would have a positive impact on the Canadian economy and oil-producing provinces, notably Alberta. The lack of market access has put a dent into Western Canadian Select prices this fall.

Japan: Additional monetary easing expected from the BoJ in early 2014 to offset the introduction of the increase in the retail sales tax rate to 8% in April 2014.

Asset Quality Review: More than 100 European banks will be subject to a balance-sheet exam by the ECB.

China: Authorities may start to gradually implement some of the points highlighted in the latest reform. Containing the shadow banking system and the end of the expansionist credit cycle is one of the biggest global risks in 2014.

Spain: Catalonia may hold an independence referendum.

EU-US FTA: The European Union and the US aims at finalizing a Free Trade Agreement by the end of November 2014.

Canada-US SLA: Negotiations surrounding a new Softwood Lumber Agreement are expected to begin during 2014. The current deal, signed in 2006, ends in October 2015.

Sébastien Lavoie | Assistant Chief Economist

December 12, 20132

North American Forecasts

2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2014Q5 2012 2013 2014 2015 2013 2014 2015

Real GDP (%) 1.6 2.7 1.5 2.2 2.3 2.6 2.4 1.8 1.7 1.7 2.2 2.4 2.0 2.4 2.6

Consumption 3.6 2.2 2.1 1.8 1.8 2.1 2.2 2.2 1.9 2.2 2.1 2.2 2.3 2.0 2.2 Business investment -1.3 2.2 4.2 6.1 6.8 7.1 8.1 7.3 5.5 1.9 5.2 7.4 0.9 7.0 7.3 Non-residential structures -1.9 2.1 4.0 7.0 7.5 8.0 9.0 7.5 6.9 2.1 5.6 7.8 1.5 7.9 7.5 Machinery and equipment -0.2 2.5 4.5 5.0 6.0 6.0 7.0 7.0 5.2 1.6 4.7 6.8 1.9 6.0 7.0 Residential construction 6.8 2.4 -2.0 -3.0 -4.0 -2.0 -2.0 -4.0 6.1 0.1 -1.6 -1.7 0.6 -2.8 0.2 Government spending 0.6 0.8 0.9 1.2 0.4 1.1 1.1 1.0 1.0 0.7 0.9 0.9 0.1 1.0 0.9 Exports 3.4 -2.0 4.3 3.2 3.0 3.3 2.9 3.9 1.5 1.4 2.7 3.6 2.8 3.1 4.1 Imports 1.4 -1.4 1.6 2.1 2.2 2.4 2.7 2.9 3.1 0.9 1.6 2.7 1.0 2.4 2.9Inflation Total CPI (y/y % ) 0.8 1.1 1.0 0.9 1.1 1.4 1.8 1.9 1.5 1.0 1.3 1.8 1.0 1.8 1.7 Core CPI (y/y % ) 1.2 1.3 1.4 1.4 1.5 1.9 1.9 2.0 1.7 1.3 1.7 1.9 1.4 1.9 1.8Unemployment rate (%) * 7.1 7.1 7.0 7.0 7.0 6.9 6.8 6.7 7.3 7.1 6.9 6.6 - - -Employment 1.3 0.8 1.2 1.2 1.2 1.2 1.5 1.3 1.2 1.3 1.2 1.3 1.0 1.3 1.3Housing starts (in 000s) 190 193 185 175 177 176 175 165 215 186 176 164 - - -Before-tax corp. profits (y/y %) -14.7 0.2 3.1 2.3 17.6 5.2 6.2 7.0 -8.2 -6.1 7.5 8.3 3.1 6.2 9.5Nominal GDP 0.9 5.4 1.4 3.6 3.9 4.4 4.2 3.6 3.4 3.1 3.5 4.2 3.1 4.1 4.5

*Av erage rate for the period.as of December 2, 2013

Annual Average Q4/Q4Period-Over-Period Annualized Per Cent Change (Unless Otherwise Indicated)

Canada

2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2012 2013 2014 2015 2013 2014 2015

Real GDP 2.5 3.6 1.5 2.6 2.6 2.9 3.0 2.8 1.7 2.6 2.9 2.2 2.8 2.8

Consumption 1.8 1.4 2.3 2.0 2.0 2.4 2.4 2.2 1.9 2.1 2.5 1.9 2.2 2.5 Private investment 7.5 4.1 5.3 4.6 4.6 5.7 5.7 9.2 2.4 5.1 6.7 2.1 5.2 7.4 Non-residential structures 17.6 13.7 6.0 6.0 6.0 5.0 5.0 12.7 1.8 7.4 5.7 1.3 5.5 6.0 Machinery and equipment 3.2 0.0 5.0 4.0 4.0 6.0 6.0 7.6 2.8 4.0 7.1 2.4 5.0 8.0 Residential construction 14.2 13.0 7.5 9.0 9.0 7.0 7.0 12.9 13.7 9.1 6.5 11.8 8.0 6.0Government spending -0.4 0.4 0.6 0.8 0.8 0.8 0.8 -1.0 -1.9 0.6 0.9 -0.9 0.8 0.9 Exports 8.0 3.7 5.5 5.0 5.0 6.5 6.5 3.5 2.4 5.4 6.7 3.9 5.7 7.0 Imports 6.9 2.7 3.5 4.0 4.0 5.5 5.5 2.2 1.6 4.2 5.8 3.4 4.7 6.2Inflation Total CPI (y/y % ) 1.4 1.6 1.5 1.4 1.9 1.8 1.8 2.1 1.5 1.7 1.9 1.5 1.8 1.8 Core CPI (y/y % ) 1.7 1.7 1.7 1.7 1.8 1.8 1.7 2.1 1.8 1.7 1.9 1.7 1.7 1.9Unemployment rate (%)* 7.6 7.3 7.1 7.0 6.9 6.8 6.7 8.1 7.4 6.9 6.4 - - -Employment 1.7 1.4 1.8 1.8 2.0 2.0 2.0 1.7 1.6 1.8 2.0 1.7 1.9 2.0Housing starts (in 000s) 869 920 930 950 1000 1100 1100 783 919 1038 1200 - - -Before-tax corp. profits (y/y %) 4.5 5.6 4.0 4.0 4.0 5.0 5.0 7.0 4.0 4.5 4.0 4.0 5.0 4.0Nominal GDP (y/y %) 3.1 3.3 3.7 4.2 4.7 4.6 5.1 4.6 3.3 4.7 5.2 3.7 5.1 5.1

* Av erage rate for the periodas of December 12, 2013

United States

Q4/Q4Annual AverageQuarter-to-Quarter % Change at annual rates (Unless Otherwise Indicated)

December 12, 20133

North American Forecasts

Historical Data

2009 2010 2011 2012 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4

Canada

Overnight Rate 0.43 0.59 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.50 2.00 2.00

3-Month Treasury Bills 0.33 0.56 0.91 0.94 0.96 1.00 0.97 1.00 1.00 1.00 1.00 1.00 1.05 1.55 2.05 2.05

2-Year Bond 1.23 1.54 1.36 1.12 1.00 1.22 1.19 1.10 1.10 1.10 1.30 1.35 1.60 2.10 2.40 2.40

5-Year Bond 2.34 2.48 2.05 1.39 1.30 1.80 1.86 1.90 1.90 2.00 2.20 2.35 2.50 2.75 2.90 3.00

10-Year Bond 3.23 3.24 2.78 1.88 1.88 2.44 2.54 2.70 2.90 2.95 3.00 3.20 3.40 3.50 3.60 3.75

30-Year Bond 3.85 3.77 3.29 2.45 2.50 2.90 3.07 3.20 3.25 3.30 3.60 3.80 4.00 4.10 4.20 4.35

United States

Federal Funds Rate 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 1.000

3-Month Treasury Bills 0.15 0.14 0.05 0.09 0.07 0.04 0.01 0.10 0.10 0.10 0.10 0.10 0.25 0.50 0.90 1.00

2-Year Bond 0.96 0.70 0.45 0.28 0.25 0.36 0.32 0.30 0.30 0.35 0.35 0.40 0.50 0.75 1.20 1.50

5-Year Bond 2.19 1.93 1.52 0.76 0.77 1.41 1.42 1.40 1.50 1.60 1.75 2.00 2.20 2.50 2.75 2.90

10-Year Bond 3.26 3.22 2.78 1.80 1.87 2.52 2.61 2.80 3.00 3.10 3.25 3.50 3.60 3.75 3.85 3.90

30-Year Bond 4.08 4.25 3.91 2.92 3.10 3.68 3.69 3.80 4.00 4.10 4.25 4.50 4.50 4.60 4.70 4.75

Canadian Dollar (US$/C$) 0.88 0.97 1.02 1.00 0.98 0.95 0.97 0.93 0.93 0.94 0.95 0.95 0.96 0.96 0.97 0.98

Canadian Dollar (Euro/C$) 0.63 0.73 0.73 0.78 0.77 0.73 0.72 0.69 0.69 0.70 0.69 0.69 0.70 0.70 0.70 0.70

Euro (US$/Euro) 1.39 1.33 1.39 1.29 1.28 1.30 1.35 1.34 1.34 1.35 1.37 1.38 1.38 1.38 1.38 1.40

Yen (Yen/US$) 93.7 87.8 79.7 79.8 94 100 98 103 104 107 109 110 110 110 112 115

Quarter-end data and annual av erages

* As of Dec. 2, 2013

Interest-Rate and Exchange-Rate Forecasts

December 12, 20134

Market Review : Bonds and Currencies INTERNATIONAL BONDSBenchmark 2-Year Yield

Dec-10-13 -1 week -4 weeks -1 quarter - 1 year Jan-01-13U.S. #N/A 0.28 0.34 0.50 0.24 0.26Canada 1.08 1.02 1.11 1.31 1.08 1.15Spread US - Canada #N/A -0.74 -0.77 -0.81 -0.84 -0.89

Germany 0.22 0.13 0.10 0.28 -0.06 0.02France 0.31 0.24 0.26 0.33 0.05 0.07Portugal 3.44 3.37 3.53 5.39 3.84 3.68Spain 1.07 1.08 1.03 1.76 3.05 2.75Belgium 0.27 0.19 0.23 0.39 0.11 0.14Netherlands 0.24 0.17 0.18 0.36 0.00 0.06Italy 1.12 1.20 1.27 2.13 2.24 1.94

Switzerland -0.04 -0.09 0.00 0.04 -0.16 -0.12UK 0.48 0.49 0.47 0.54 0.30 0.37Australia 2.77 2.81 2.83 2.81 2.64 2.71Japan 0.09 0.09 0.09 0.12 0.10 0.10

INTERNATIONAL BONDSBenchmark 10-Year Yield

Dec-10-13 -1 week -4 weeks -1 quarter - 1 year Jan-01-13

U.S. 2.81 2.79 2.75 2.96 1.66 1.82Canada 2.62 2.59 2.58 2.82 1.73 1.84Spread US - Canada 0.19 0.20 0.17 0.14 -0.07 -0.02

Germany 1.83 1.73 1.73 2.03 1.32 1.41France 2.31 2.22 2.27 2.63 1.96 2.04Portugal 6.03 5.85 5.91 7.11 7.55 6.82Spain 4.04 4.16 4.10 4.53 5.44 5.17Belgium 2.42 2.34 2.45 2.90 2.13 2.09Netherlands 2.15 2.04 2.08 2.45 1.54 1.57Italy 4.07 4.09 4.12 4.53 4.74 4.41

Switzerland 0.99 0.91 0.99 1.20 0.39 0.48UK 2.88 2.83 2.80 3.03 1.80 1.93Australia 4.28 4.23 4.17 4.13 3.06 3.34Japan 0.67 0.64 0.61 0.74 0.70 0.81

PROVINCIAL BONDSBenchmark 10-Year Yield Current

as of Dec-06-13 Dec-06-13 -1 week -4 weeks -1 quarter - 1 year Jan-01-13

Canada 2.69Alberta 3.32 63.0 65.0 71.0 77.5 81.0 68.0British Columbia 3.32 63.0 65.0 71.0 78.5 87.0 76.0Prince Edward Island 3.55 86.0 88.0 95.0 98.5 113.0 100.0Manitoba 3.41 72.0 74.0 80.0 86.5 94.0 83.0New Brunswick 3.50 81.0 83.0 91.0 96.5 108.0 93.0Nova Scotia 3.48 79.0 81.0 87.0 92.5 102.0 89.0Ontario 3.48 79.0 81.0 87.0 92.5 101.0 90.0Quebec 3.53 84.0 86.0 93.0 96.0 111.0 98.0Saskatchewan 3.32 63.0 65.0 71.0 77.5 83.0 72.0Newfoundland & Labrador 3.48 79.0 81.0 87.0 92.5 101.0 90.0

CURRENCIES Dec-10-13 -1 week -4 weeks -1 quarter - 1 year Jan-01-13

(%)Canada (Canada/US$) 1.06 1.06 1.05 1.03 0.99 7.2Canada (US$/Canada) 0.94 0.94 0.95 0.97 1.01 -6.7

Australia (Australia/US$) 0.91 0.91 0.93 0.93 1.05 14.2U.K. (US$/£) 1.64 1.64 1.59 1.57 1.61 -1.2Japan (US$/Yen) 102.84 102.51 99.64 100.39 82.51 18.2Euro (US$/Euro) 1.38 1.36 1.34 1.33 1.30 -4.1Mexican Peso (Peso/US$) 0.08 0.08 0.08 0.08 0.08 0.5Brazilian Real (Real/US$) 0.43 0.42 0.43 0.44 0.48 12.8Chinese Yuan (Yuan/US$) 0.16 0.16 0.16 0.16 0.16 -2.6

Data updated as at: 11/12/2013

Currencies

Yield (%)

Yield (%)

Spreads (b.p.) against Canada

December 12, 20135

Market Review : Fixed Income Charts

0.0

1.0

2.0

3.0

4.0

5.0

6.0

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

May

-12

May

-13

Yield on 3-Month T-Bills

Canada

U.S.

%

1.0

2.0

3.0

4.0

5.0

6.0

May

-06

May

-07

May

-08

May

-09

May

-10

May

-11

May

-12

May

-13

Yield on 10-Year Federal Bonds

Canada

U.S.

%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

3m 6m 2y 5y 10y 30y

U.S. - Yield Curve

14-Nov-13

-1 month

-1 year

%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

3m 6m 2y 5y 10y 30y

Canada - Yield Curve

14-Nov-13

-1 month

-1 year

%

-30

-10

10

30

50

70

90

110

130

3m 6m 2y 5y 10y

Yield Spreads in basis points (Canada minus U.S.)

14-Nov-13 -1 month-1 year

10

30

50

70

90

110

130

150

May

-11

Aug-

11

Nov-

11

Feb-

12

May

-12

Aug-

12

Nov-

12

Feb-

13

May

-13

Aug-

13

Spreads on 2-Year Federal Bonds(Can-U.S., basis pts)

December 12, 20136

Market Review: Stocks Exchange and Commodities

Stock Market SummaryDec-10-13 52w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan-01-13

CanadaS&P/TSX 13,324 13,483 11,837 0.0 0.0 3.9 8.5 6.7S&P/TSX 60 766 778 681 -0.2 -0.3 3.9 8.7 7.0S&P/TSX Small Cap Index 596 610 518 0.9 1.7 3.4 3.6 0.8

United StatesS&P 500 1,803 1,808 1,402 0.4 2.0 7.0 26.2 24.8Dow Jones 15,973 16,097 12,938 0.4 1.4 5.1 20.6 20.5Nasdaq 4,060 4,069 2,960 0.6 3.6 8.9 34.4 32.4

InternationalU.K. - FTSE 100 6,523 6,840 5,898 -0.1 -3.0 -0.9 10.1 9.4Germany - DAX 9,114 9,405 7,460 -1.2 0.4 7.9 20.1 18.0France - CAC 40 4,091 4,321 3,596 -1.9 -4.0 -0.6 12.2 10.9Japan - Nikkei 225 15,611 15,750 9,525 -0.9 7.0 8.2 63.9 48.5Hong Kong - Hang Seng 23,744 24,039 19,814 -0.7 3.7 3.3 6.4 3.3Russia - RST 1,391 1,636 1,233 1.3 -3.3 0.0 -6.3 -9.8Australia - ASX All Ordinaries 5,146 5,437 4,581 -2.0 -4.5 -1.0 12.3 9.6Brazil - Bovespa 50,993 63,312 45,044 1.3 -1.6 -5.5 -14.5 -17.8

S&P/TSX Sector SummaryDec-10-13 52w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan-01-13

S&P/TSX 13,324 13,483 11,837 0.0 0.0 3.9 8.5 6.7

Energy 269 273 232 -0.3 2.6 2.4 8.6 7.8Materials 220 331 211 3.0 -4.2 -8.7 -31.6 -33.0Industrials 133 134 95 -0.1 -0.1 6.8 39.1 36.3Consumers Discretionary 163 166 120 -0.2 3.2 16.6 36.0 32.4Consumers Staples 298 307 244 -1.9 -2.2 0.9 21.7 20.2Health Care 83 86 62 -2.1 -0.3 -2.4 31.1 30.5Financials 227 233 188 -0.4 -0.5 7.0 20.8 18.6Information Technology 33 34 26 -1.2 0.2 -0.3 26.2 27.4Telecommunication Services 120 124 107 0.6 1.8 5.4 6.5 7.1Utilities 204 235 194 -0.7 -0.4 3.4 -6.9 -9.1

CommoditiesDec-10-13 52w HI 52w LOW (-1W) (-4W) (-13W) (-52W) Jan-01-13

London -- Gold (US$/once) 1237.00 1716.25 1192.00 1217.25 1281.25 1358.25 1710.00 1678.88London -- Silver (US$/once) 20.32 33.28 18.70 19.10 20.85 23.00 32.95 30.00Copper (US$/LB) 3.30 3.78 3.03 3.20 3.24 3.26 3.67 3.64WTI Crude Oil (US$/barrel) 98.51 110.53 85.79 95.83 93.04 107.39 85.79 91.82Natural Gas (Henry Hub) (US$/MMBTU) 4.23 4.37 3.07 3.83 3.69 3.63 3.38 3.40

Data updated as at:11/12/2013

Level

Level

Level

Change (%)

Change (%)

December 12, 20137

Calendar of Major Economic Indicators

CanadaDate Time Release Unit Data for: LBS * Consensus Previous

Dec 16 8:30 International Securities Transactions Billions October - - 8.360

Dec 18 8:30 Wholesale Sales M/M October - 0.3% 0.2%

Dec 20 8:30 Consumer Price Index M/M November 0.0% 0.1% -0.2%

Dec 20 8:30 Consumer Price Index Y/Y November 0.9% 1.0% 0.7%

Dec 20 8:30 Bank of Canada CPI Core M/M November -0.1% 0.2% 0.2%

Dec 20 8:30 Bank of Canada CPI Core Y/Y November 1.0% 1.4% 1.2%

Dec 20 8:30 Retail Sales M/M October - 0.2% 1.0%

Dec 20 8:30 Retail Sales Less Autos M/M October - 0.0% 0.0%

* Laurentian Bank Securities ForecastConsensus from Bloomberg L.P 12/11/2013

United StatesDate Time Release Unit Data for: LBS* Consensus Previous

Dec 16 8:30 Unit Labor Costs M/M 3Q F - -1.4% -0.6%

Dec 16 9:15 Industrial Production M/M November - 0.5% -0.1%

Dec 16 9:15 Capacity Utilization - November - 78.4% 78.1%

Dec 17 8:30 Consumer Price Index M/M November - 0.1% -0.1%

Dec 17 8:30 CPI Ex. Food & Energy M/M November - 0.1% 0.1%

Dec 17 8:30 Current Account Balance Billions 3Q - -$101.0 -$98,9

Dec 17 8:30 Consumer Price Index Y/Y November - 1.3% 1.0%

Dec 17 8:30 CPI Ex. Food & Energy Y/Y November - 1.7% 1.7%

Dec 18 8:30 Housing Starts Thousands November - 950.0 -

Dec 18 8:30 Building Permits Thousands November - 978.0 1039.0

Dec 18 14:00 FOMC Rate Decision - Dec 18 0.25% 0.25% 0.25%

Dec 19 8:30 Initial Jobless Claims Thousands Dec 13 - - -

Dec 19 10:00 Existing Home Sales Millions November - 5.01 5.12

Dec 19 10:00 Existing Home Sales M/M November - -2.2% -3.2%

Dec 19 10:00 Leading Indicators - November - 0.7% 0.2%

Dec 20 8:30 GDP (Annualized) Q/Q 3Q T - 3.6% 3.6%

Dec 20 8:30 GDP Price Index Q/Q 1Q T - 2.0% 2.0%

Dec 20 8:30 Core PCE Q/Q 1Q T - - 1.5%

Consensus from Bloomberg L.P 12/11/2013

KEY ECONOMIC INDICATORS

WEEK OF DECEMBER 16, 2013

December 12, 20138

North American Economic Indicators

CANADACurrent Previous - 3 Month - 1 Year

Gross Domestic Product (GDP) September 0.3% 0.3% 1.2% 2.3%Manufacturing Shipments September 0.6% 0.0% 2.4% 1.0%Housing Starts ( ' 000) * October 198 196 199 197Retail Sales September 1.0% 0.1% 1.6% 3.6%Trade Balance (M$) * September 646 -1,112 -916 -840

Employment ( ' 000) * * November 22 13 84 214Unemployment Rate * November 6.9 6.9 7.2 7.1Wages (avg. hourly earnings) November 2.4% 1.9% 1.8% 2.4%

Total CPI inflation October 0.7% 1.1% 1.3% 0.9% Inflation ex-food & energy October 1.2% 1.3% 1.4% 1.2%Industrial Product Price Index October -0.3% -0.2% -0.2% 0.8%Raw Materials Price Index October -2.3% -1.2% -2.5% 0.4%

UNITED STATESCurrent Previous - 3 Month - 1 Year

ISM - manufacturing * October 56.4 56.2 55.4 51.7ISM - Non-manufacturing * October 55.4 54.4 56.0 51.7Industrial Production * October 100.0 100.1 99.0 96.8Capacity Utilization Rate * October 78.1 78.3 77.7 77.0

Consumer Confidence Index * November 75.1 73.2 82.1 82.7Retail Sales October 0.4% 0.0% 0.6% 3.9%Trade Balance (M$) * September -42,969 -38,945 -34,637 -42,650

Housing Starts ( ' 000) * October #N/A #N/A 891 864Existing home sales October -3.2% -1.9% -5.0% 6.0%Median price of ex. home sales October 0.5% -5.3% -6.1% 12.8%

Non-Farm Payrolls ( ' 000) * * October 200 175 613 2337Unemployment Rate * October 7.3 7.2 7.3 7.8Wages (avg. hourly earnings) October 2.3% 2.3% 2.0% 1.3%

Total CPI inflation October 0.9% 1.2% 1.8% 2.2% Inflation ex-food & energy October 1.7% 1.7% 1.7% 2.0%Producer Price Index October -0.2% -0.1% 0.1% 0.3% - Ex-Food & Energy October 0.2% 0.1% 0.2% 1.4%

* Level, * * Change in level for the last month, 3 months and 1 year, * * * Annual % changeData updated as at:

11/12/2013

Period Monthly Chg. (% or Level) Cumulative change

PeriodMonthly Chg. (% or Level) Cumulative change

This document is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author is an employee of Laurentian Bank Securities (LBS), a wholly owned subsidiary of the Laurentian Bank of Canada. The author has taken all usual and reasonable precautions to determine that the information contained in this document has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze it are based on accepted practices and principles. However, the market forces underlying investment value are subject to evolve suddenly and dramatically. Consequently, neither the author nor LBS can make any warranty as to the accuracy or completeness of information, analysis or views contained in this document or their usefulness or suitability in any particular circumstance. You should not make any investment or undertake any portfolio assessment or other transaction on the basis of this document, but should first consult your Investment Advisor, who can assess the relevant factors of any proposed investment or transaction. LBS and the author accept no liability of whatsoever kind for any damages incurred as a result of the use of this document or of its contents in contravention of this notice. This report, the information, opinions or conclusions, in whole or in part, may not be reproduced, distributed, published or referred to in any manner whatsoever without in each case the prior express written consent of Laurentian Bank Securities.



February 2014


HEARING DATE

February 14, 2014




ICBC REFERENCE

2013 RR BCUC.UT.13

REQUESTOR: BCUC

QUESTION

Will ICBC agree to consider the items in the table provided in the response to information

request 2013.1 RR BCUC.105.1, Attachment A – Table 1 as future performance measures or

for discussion in the next revenue requirements application.

RESPONSE

This table (Attachment A-Table 1 of the response to information request 2013.1 RR

BCUC.105.1) with the six metrics was provided in response to specifically address

information request 2013.1 RR BCUC.105.1. However, in response to information request

2013.2 RR BCUC.223.1, which referenced this table, ICBC advised that while ICBC does

consider the six metrics as informative and important in managing injury claims, they can

also be impacted by a number of factors outside of ICBC’s control therefore ICBC would not

consider them as appropriate performance measures.

ICBC further advised in the response to information request 2013.2 RR BCUC.224.1-2 that

ICBC is not in a position to have a comprehensive review of its performance measures until



February 2014

it has had an opportunity to further implement its transformation process and better

understand the future landscape of data available.

ICBC has committed to file a review of its performance measures as part of the 2017

Revenue Requirements Application.



February 2014


HEARING DATE

February 14, 2014


Volume 7, page 1109, lines 11 to 25

ICBC REFERENCE

2013 RR TREAD.UT.2

REQUESTOR: TREAD

QUESTION

Where does ICBC show that operating expenses reduce the Basic insurance rate indication

by 0.6 percentage point? Provide reference from the actuarial chapter (Chapter 3) exhibits.

RESPONSE

Please see the response to information request 2013.1 RR BCUC.8.1, Attachment A,

Indicated Rate Change Calculation by Components, Line (5), columns (d) to (i) for the

calculation and reference to the 0.6 percentage point reduction of operating expenses on

the rate indication. Attachment A references the 2013 Revenue Requirements Application,

Chapter 3, Exhibit A.0.1.

Documents

building trust. driving confidence. · If ICBC were to maintain Basic capital at the proposed capital management target of 150% MCT today, the capital maintenance provision for policy