Research Template 1

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North American Economic Outlook
Presentation to CME Conference Winnipeg,
Manitoba
Paul Ferley [phone]Assistant Chief
EconomistRBC Financial Grouppaul.ferley_at_rbc.com
March 10, 2009
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Financial Market TurmoilWhat are the
Implications?

• Near-term macroeconomic impacts for the U.S. and
  Canada
• Higher cost of capital will weigh on economic
  growth
• Longer-term effects on the financial services
  sector
• An upward adjustment to the pricing of risk that
  will permanently raise the cost of funds
• Increased regulation though more so in the U.S.
  than in Canada
• Impaired balance sheets that will result from
  re-capitalization and deleveraging
• Future of securitization?
• Demise of U.S. investment banks?

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U.S. Economic Outlook Falling Deeper into
Recession
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The macroeconomic fallout of the credit
tightening is becoming increasingly apparent
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The rise in defaults on subprime mortgages was
the catalyst for the turmoil in financial markets
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The situation has been aggravated by falling
house prices.
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The uncertainty as to who holds U.S. subprime
assets has weighed on financial markets
Weekly observation
Monthly observation
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The rise in lending cost has been more muted in
Canada
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• What will turn around the deterioration in
  financial markets?

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Aggressive policy actions by the Administration
and Congress

• have committed trillions of dollars shoring up
  financial markets
• the Obama Administration has introduced a 787
  billion fiscal stimulus package
• are undertaking initiatives to stem mortgage
  delinquencies

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The Fed has been forcefully cutting interest
rates though with rates almost as low as they can
go???
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the central bank has increasingly been turning
to credit easing
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Rising housing prices would also facilitate a
recovery in financial markets
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Hints of a stabilization in sales does provide a
hopeful sign that housing has troughed
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Credit tightening needs to ease to allow growth
to rebound
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Canadian Economic Outlook Expected to Weather
U.S. Slowdown
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Four key assumptions affecting Canadas economic
outlook
Two Key Assumptions affecting Canadas Economic
Outlook

• commodity prices, though trading lower, remain at
  historically high levels
• less upward pressure on the cost of capital
• the Canadian housing market avoids the free-fall
  in activity evident in the U.S.
• financial market volatility eases and the U.S.
  avoids a major recession

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Energy prices will remain high historically as
concerns about oil supply ease only slightly
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while demand from emerging markets, though
slowing, does not collapse
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which will help keep non-energy commodity
prices historically high as well
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Favourable terms of trade will be maintained
through the forecast period
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Positive terms of trade has boosted income, and
thus domestic spending, in recent years
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and is expected to continue to do so through
the forecast
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In contrast, the strong C and high export prices
have been weighing on net exports
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with the restraint from net exports further
aggravated by weak US growth near term
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In contrast to the U.S., Canadian housing
construction is holding up well
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though housing prices in Canada are starting to
move lower mirroring the U.S.
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Though with housing affordability deteriorating
and likely to be aggravated further by the
recession
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Canadian housing starts will slow significantly
in both 2008 and 2009
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and residential investment growth will remain
negative in 2009
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Positive terms of trade is expected to support
ME spending offsetting tightening credit
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Weakness in net exports along with credit
tightening will weigh on near-term growth
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To assure that the weak growth is short-lived,
the Bank of Canada has also aggressively cut rates
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This moderate pace of growth will keep the
unemployment rate out of inflationary territory.
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Core inflation to remain close to the central
banks target as the impact of a strong C wanes.
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Bond yields eventually rise as markets anticipate
that the rate cuts will start to be reversed
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The Canadian dollar to mirror our outlook for
commodity prices.
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Risks to the Canadian outlook

• Financial market volatility continues unabated
  resulting in a prolonged U.S. recession
• Commodity prices go back to levels that prevailed
  in the 1990s

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Regional Outlook Manitoba to feel the impact
of U.S. recession though will outperform the
national average
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High commodity prices have contributed to a
marked divergence in economic performance by
province
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though with Alberta starting to pay the price
for earlier surges in housing activity
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Growth in Manitoba to weaken though still
outperform the national average
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The manufacturing in Manitoba has out-performed
the sector nationally because of the limited
exposure to autos
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Please visit our website
www.rbc.com/economics
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