Canada I n a Messy W orld By Avery Shenfeld, Chief Econom ist & - PowerPoint PPT Presentation

Canada I n a Messy W orld By Avery Shenfeld, Chief Econom ist & Managing Director November 2011

Canadian Grow th Resum es After Disruptions in Autos and Energy Monthly GDP I ndex 108 107 106 105 104 104 103 102 101 100 99 98 Jun-09 Oct- 09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Canada Canada US US | 2

Slack Keeps Fed On Hold Through 2 0 1 3 ; Fed Extending Term to Anchor Long Rates 6 % decline in non-farm pay rolls from peak 4 2 0 -2 -4 -6 2008-11 recession / recov ery -8 -24 -24 -18 -18 -12 -12 -6 -6 0 0 6 6 12 12 Months from Em ploy m ent Trough 1948 1953 1958 2007- | 3

Global Grow th Disappointm ents A Drag on Canada’s Exports, Com m odity Prices World GDP, % chg (at purchasing power parity ) 5 .5 5 .0 4 5 4 .5 4 .0 3 .5 3 .0 2 0 1 0 A 2 0 1 1 F 2 0 1 2 F Actual/ CI BC Forecast I MF Forecast (June '11) Source: IMF, CIBC | 4 * Assumes US extends payroll tax cut and extended jobless benefits

Em erging Markets Now the Drivers For Com m odities Rallies BI C (Brazil, I ndia, China) Share of Total Consum ption 60% 40% 20% 0% 0% Refined Coal Prim ary etroleum Copper Nick el Pe Note: latest coal data as of 2009; petroleum 1990's data as of 2010; nick el and copper data as Today of 2011 Q2, copper data ex cludes Brazil Source: EIA, CRU, WBMS | 5

Com m odities Drive C$ Softer Global Grow th Keeps Loonie in Check US$/bbl US¢/C$ 120 108 110 104 100 100 90 80 80 96 70 Arrows denote BoC rate hikes 92 60 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Crude Oil (WTI) ( ) Canadian Dollar | 6

The Continental Divide Ou tp u t Ga p Em p lo y m e n t/ Po p u la tio n Ra tio 4 % 65 % 2 64 63 63 0 0 62 -2 61 60 -4 59 59 -6 58 57 -8 56 -10 55 01 03 05 07 09 11 01 03 05 07 09 11 Canada Canada US US Canada Canada US US | 7

Canada Sees 2 % Grow th in 2 0 1 2 But it W ill Take Low Rates to Get There GDP growth (s.a.a.r.) % For ecast 6.0% 5.0 4.0% 4.0 2.0% 3.0 0.0% 0 0% -2.0% 2.0 ? -4.0% 1.0 1.0 -6.0% -8.0% 0.0 Q1-07 Q1-08 Q1-09 Q1-10 Q1-11 Q1-12 Real GDP Growth (L) Ov ernight I nterest Rate (R) | 8

Bond Yields To Drift Higher; Rem ain Low By Historical Standards Canada 10-y r bond y ields (% ) 6 US US F For ecast t 5 4 3 3 2 1 Dec00 Dec00 Dec04 Dec04 Dec08 Dec08 Dec12 Dec12 | 9

Consum ers Reduced Debt Appetite Slow s Retail Sales: Low Rates Needed for Longer y/ y chg y/ y 1 0 % 2 0 % 1 6 % 6 % 1 2 % 8 % 2 % 2 % 4 % 4 % 0 % - 2 % - 4 % - 8 % - 6 % - 1 2% 3 3 4 4 5 5 6 6 7 7 8 8 9 9 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 1 1 - - - - - - - - - n n n n n n n n n a a a a a a a a a J J J J J J J J J Real Ret ail Consumpt ion ( L) Consumer Credit ( R) | 10

Debt Service Costs Unthreatening I f Overnight Rates Contained to 2 % or less % of personal disposable income 11 10 10 9 8 7 7 6 5 Q4-89 Q4-91 Q4-93 Q4-95 Q4-97 Q4-99 Q4-01 Q4-03 Q4-05 Q4-07 Q4-09 Q4-11 Q4-13 Q Q Q Q Q Q Q Q Q Q Q Q Q | 11

Gasoline and Food I nflation Should Ease Giving Lift to Consum er Spending Pow er 2005= 100 1982-84= 100 210 135 190 130 170 125 150 120 130 115 110 110 110 90 105 70 50 100 05 06 07 08 09 10 11 World Com m odity Price I ndex : Food (L) World Com m odity Price I ndex : Food (L) Cdn CPI : Food (R) Cdn CPI : Food (R) Source: Bureau of Labour Statistics, Statistics Canada, CIBC | 12

Housing Starts Easing But Not Crashing 260 '000 units, SAAR 240 240 220 193 191 190 200 180 160 140 140 120 100 80 F F 0 1 2 3 4 5 6 7 8 9 0 1 2 0 0 0 0 0 0 0 0 0 0 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 | 13

Canadian Housing Market Still “Balanced” Un it Sa le s a s a sh a r e o f Ne w Listin g s 0.9 Sellers' Sellers' Mk t 0.8 0.7 0.6 0.5 0.5 Balanced Mark et Balanced Mark et 0.4 0.3 0 3 Buy ers' Mk t 0.2 00 01 02 03 04 05 06 07 08 09 10 11 Source: CREA, CIBC | 14

Mortgages Outstanding Still Grow ing Faster Than I ncom es 14 14 y / y % chg y / y % chg 12 10 10 8 6 6 4 2 2 0 00 01 02 03 04 05 06 07 08 09 10 11 Source: Bank of Canada, CIBC | 15

House Price I nflation Cooling… W e Hope 25 y / y % chg Unweighted 20 20 15 Weighted 10 10 5 0 -5 -10 -15 15 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 O O O O O A A A A A J J J J J Source: CREA, CIBC | 16

Mortgage Arrears Very Low Ca na da By Province 0.85 as a % of as of August 2011 g 0 70 0.70 total portfolio 0.80 0.75 0.60 0.70 0.65 0 65 0.50 0.60 0.55 0.50 0.40 0.45 Canada 0.40 0.30 0.35 0.30 0 30 0.20 0.25 0.20 0.10 Atl Alta Ont Que BC an/ ask O 91 91 95 95 99 99 03 03 07 07 11 11 Ma Sa A Q Source: CBA, CIBC | 17

Num ber of Stretched Households on the Rise – But Not to Troubling Levels Yet 6.5 8.0 % % 6.0 6 0 7.5 5.5 5.0 7.0 4 5 4.5 6.5 4.0 3.5 6.0 3.0 3 0 5.5 2.5 2.0 5.0 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 Effectiv e Mortgage I nterest Rates (L) Share of Households with > 40% serv ice ratios (R) Source: The Financial Monitor, CIBC | 18

Optim ism On I nvestm ent Spending A Plus for I ndustrial Properties Equipment Spending Plans, Balance of Opinion (% -pts) 40 30 20 10 10 0 -10 -20 -30 -40 -40 98:Q3 99:Q2 00:Q1 00:Q4 01:Q3 02:Q2 03:Q1 03:Q4 04:Q3 05:Q2 06:Q1 06:Q4 07:Q3 08:Q2 09:Q1 09:Q4 10:Q3 11:Q2 Source: Bank of Canada Business Outlook Survey | 19

Private Construction A Needed Offset to Governm ent I nfrastructure Pullback For ecast 160 bns 2002C$ 140 140 120 100 100 80 60 40 Gov 't Capital Spending 20 Business I nv estm ent: Non-Res Str uctur es Business I nv estm ent: Machinery 0 : 1F : 4F : 3F 3: 1 3: 4 4: 3 5: 2 6: 1 6: 4 7: 3 8: 2 9: 1 9: 4 0: 3 1: 2 03 03 04 05 06 06 07 08 09 09 10 11 12: 12: 13: | 20

Fiscal Credentials: Canada’s Earlier Hard W ork Paid Dividends General Government Debt, % (2011) 250 Gross 200 Net 150 100 128 50 101 79 75 72 55 35 General Government Net Debt, % of GDP 0 175 Fcst JPN ITA FRA UK US GER CAN 150 125 100 100 75 50 25 0 1990 95 00 05 10 15 CAN US UK FRA GER JPN ITA | 21

22 W est is Best in 2 0 1 2 | N&L PEI NS 2012 NB Qué 2011 Ont Real GDP Growth, Y/Y % Chg Man Sask Alta BC 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

TSX Forw ard PE Low by Historical Standards, Matching US 17 16 15 14 14 13 12 11 10 Valuation gap closed 9 8 Jan-07 May -10 TSX Com posite TSX Com posite S&P 500 S&P 500 | 23

Analysts Cutting 2 0 1 2 Earnings Expectations 9 9 Ratio of Downgrades to Upgrades 8 7 6 5 4 4 Normal = 1.5: 1 3 2 1 0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 | 24

Quality Dividend Stocks Should Outperform 1 05 Total Return, April 5=1 00 + 1 00 -1% 95 95 90 -11% 85 *S&P/TSX Canadian Dividend Aristocrats 80 5-Apr 3-May 31 -May 28-Jun 26-Jul 23-Aug 20-Sep 1 8-Oct High Quality Dividend Stocks* g y TSX Composite p | 25

Canadian REI Ts Helped by Low Bond Yields; Vacancies Peaked at Low Levels Vacancy Rate US Office Vacancy Rate ( REI S) 18% 16% 16% 14% 12% 12% US I ndustrial Vacancy Rate (Colliers) US I ndustrial Vacancy Rate (Colliers) 10% Cdn Office 8% 6% Cdn I ndustrial 4% 2% 0% Q4/ 01 Q2/ 03 Q4/ 04 Q2/ 06 Q4/ 07 Q2/ 09 Q4/ 10 | 26