Aron Gampel Vice-President & Deputy Chief Economist

Navigating Through Volatile Times 

Toronto, Ontario

February 14, 2012

-2

0

2

4

6

8

10

12

China India Brazil Mexico Japan U.S. Canada Euro zone

2010

2011f

2012f

annual % change

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

Real GDP

2004-07

Global Output Moves To A Slower Growth Trajectory

80

90

100

110

120

130

140

150

09 10 11 12

America’s Growth Engine & Competitive Realignment

Exports to High Growth Regions

Source: Bloomberg, NAR.

Uneven Sales Performance

Total Home Sales

90

100

110

120

130

140

150

160

170

180

190

200

09 10 11 12

index: January 2009 = 100

Source: Bloomberg.

Rest of World

South & Central America

Pacific Rim

index: January 2009 = 100

Auto Sales

0

2

4

6

8

10

12

14

Greece Ireland* Spain Portugal France Italy

Fiscal Deficits

*2011f: 10.3%; 2010: 32% reflects extensive bank support. Source: IMF September 2011, Scotia Economics.

General Government, 2010, % of GDP

0

20

40

60

80

100

120

140

Greece Italy Portugal Ireland France Spain

Gross Debt

Net Debt

Debt

General Government, 2010, % of GDP

n/a

European Debt Fuels Economic And Market Volatility…

0

2

4

6

8

10

12

U.S. U.K. Japan Canada Germany

Fiscal Deficits

Source: IMF September 2011, Scotia Economics.

General Government, 2010, % of GDP

0

20

40

60

80

100

120

140

160

180

200

220

Japan U.S. U.K. GermanyCanada

Gross Debt

Net Debt

Debt

Emerging Economies

General Government, 2010, % of GDP

Emerging Economies

… That Will Impede Medium-Term Growth Internationally

Budget Balances(FY11*, % of GDP)

-3 -2 -1 0 1 2

Federal

SK***

MB

NS

BC

QC

NB

ON

NL

PE

Target for Balanced Books**

FY14

balanced

FY15

balanced

FY14

FY14

FY14

FY15

FY14

FY17

FY18

AB***

-12

-10

-8

-6

-4

-2

0

2

FY95 99 03 07 11e

budget balances % of GDP

U.S. Federal ex. Social

Security

Looking Forward

Source: Budget documents, Statistics Canada, BEA, Scotia Economics.

forecast

Aggregate Provincial

Canada Federal

*Final results except for NL. SK on a General Revenue Fund basis. **Without using reserve funds. ***After transfers. Source: Budget documents, Statistics Canada.

Canada Leads Most Major Nations In Fiscal Repair …

0

5

10

15

20

25

30

35

40

452012, %

National Average assumes 10% Prov. CIT rate and cross-Canada HST

Marginal Effective Tax Rates on Capital

Source: Finance Canada, Finance Ontario.

0

5

10

15

20

25

30

35

40

45

Corporate Income Tax Rates*

Japan

France

U.S.

Germany

Canada ItalyU.K.

* Central plus sub-central rates. Source: OECD.

2011, %

Canada

Small Developed Countries

OECD

U.S.

… And Has A Competitive Tax Advantage

0

1

2

3

4

5

6

04 05 06 07 08 09 10 11 12 13 14

Source: Bank of Canada, U.S. Federal Reserve,European Central Bank, Scotia Economics.

Central Bank Rates

U.S.forecast

%

Canada

Euro zone

0

1

2

3

4

5

6

04 05 06 07 08 09 10 11 12 13 14

10-year Bond Yields

U.S.

yield

Source: Scotia Economics, Bloomberg.

Canadaforecast

Germany

Monetary Policies Geared To Reviving Growth

70

80

90

100

110

120

130

140

04 05 06 07 08 09 10 11 12

Source: Statistics Canada, Scotia Economics. *January 2012.

98

100

102

104

106

108

110

04 05 06 07 08 09 10 11 12

Euro zone

U.S.

Employment Cresting ...

index: 2004 Q1 = 100

... As Manufacturing Headwinds Rise

index: 2004 Q1=100

Construction

Manufacturing

Canada

Services

Natural Resources

*

*

*

*

*

*

Canada’s Solid But Uneven Employment Recovery

Canadian Household Debt Is A Source Of Concern

* Includes households and unincorporated business.Source: U.S. Federal Reserve, Statistics Canada, Scotia Economics.

80

95

110

125

140

155

170

94 96 98 00 02 04 06 08 10

Canada

U.S.

household* credit liabilities o/s as % of PDY

Canadians’ Debt-To-Income Now Higher …

14

18

22

26

30

94 96 98 00 02 04 06 08 10

Canada

U.S.

household* debt o/s as % of assets

… But Less Debt Used To Buy Assets

Existing Home Sales

100

200

300

400

90 95 00 05 10

200

300

400

500

600units, 000s

MLS Average

Price

MLS Sales

$000

0

1

2

3

4

5

6

04 05 06 07 08 09 10 11

Mortgage Delinquencies

Source: MBA, CBA.

U.S.

Canada

% of total loans past due three or more months

Source: Scotia Economics, Statistics Canada, Bloomberg.

0

25

50

75

100

125

04 05 06 07 08 09 10 11 12 13

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10CADUSD

Canadian Dollar(RHS) forecast

The Loonie Continues to Fly High …

WTI Oil(LHS)

WTI Oil US$/bbl

-150

-100

-50

0

50

100

150

200

04 05 06 07 08 09 10 11

Commodities

… Despite Weaker Trade Balances

C$ billions, s.a.

Merchandise Trade ex. Commodities

Merchandise Trade

Loonie Strength, U.S. Weakness Hit Canadian Exports

Focus On Global Markets For Long-Term Growth

0

10

20

30

40

50

U.S. Japan U.K. Canada Germany

Exports (Goods & Services)

% of GDP, 2010

Source: World Bank, Scotia Economics. World exports for 2011 is an estimate.

15

20

25

30

35

80 83 86 89 92 95 98 01 04 07 10

% of world GDP

World Exports

Focus On Global Markets For Long-Term Growth

Source: World Bank, Strategis, Scotia Economics, ytd = Jan - Nov. World exports for 2011 is an estimate.

0

20

40

60

80

U.S. Asia WesternEurope

Other LatinAmerica

Germany

Canadian Exports

% share of total exports, 2011 ytd

15

20

25

30

35

80 83 86 89 92 95 98 01 04 07 10

% of world GDP

World Exports

Africa

Japan

Europe

IndiaChina

Other America

U.S./Canada

Emerging Market Strength Is Helping To Rebalance Growth …

0.0

0.3

0.6

0.9

1.2

1.5

Rest ofAsia

China India

Populationbillions, 2010*

* 2010 IMF forecast.

Euro area

Japan

Brazil

Mexico

Russia

U.S.Rest

of Asia(ex.

Japan)

Indonesia

Vietnam

KoreaThailand

Canada

% of global GDP, 2010*

Global GDP (PPP)

Other Asia/Oceania

Emerging Market Strength Is Helping To Rebalance Growth …

0.0

0.3

0.6

0.9

1.2

1.5

Rest ofAsia

China India

Populationbillions, 2010*

* 2010 IMF forecast.

Euro area

Japan

Brazil

Mexico

Russia

U.S.Rest

of Asia(ex.

Japan)

Indonesia

Vietnam

KoreaThailand

Canada

*Market exchange rate, USD. Source: Bank of Canada, IMF WEO estimates, World Bank Development Indicators, CIA Factbook.

Per Capita GDP*

Motor vehicles per 1000 people

Number of

Airports

India 1,000 17 350

China 4,000 58 500

Brazil 10,000 158 4,050

Canada 46,000 619 1,400

United States

47,000 766 15,100

0

5

10

15

20

25

04 05 06 07 08 09 10 11 12

… But Is Reshaping The Global Manufacturing Landscape

Motor Vehicle Sales

0

4

8

12

16

20

02 03 04 05 06 07 08 09 10 11 12

millions of units

North America*

EU & Japan

*Includes light trucks in North America. Source: Scotia Economics, Ward’s Automotive.

Brazil, Russia, India & China

forecast millions of units

Motor Vehicle Production

North America*

Europe

China

forecast

Source: Scotia Economics, IMF, Bloomberg.

Housing Starts

0

5

10

15

20

25

G7 China

millions of starts, 2011e

Motor Vehicle Sales

0

4

8

12

16

20

02 03 04 05 06 07 08 09 10 11 12

millions of units

North America*

EU & Japan

Brazil, Russia, India & China

forecast

… But Is Reshaping The Global Manufacturing Landscape

*Includes light trucks in North America. Source: Scotia Economics, Ward’s Automotive.

Motor Vehicle Sales

0

4

8

12

16

20

02 03 04 05 06 07 08 09 10 11 12

millions of units

North America*

EU & Japan

Brazil, Russia, India & China

forecast

90

110

130

150

170

190

210

230

99 00 01 02 03 04 05 06 07 08 09 10

1999 = 100

Emerging Asia

China

United States

Global Oil Consumption

… But Is Reshaping The Global Manufacturing Landscape

Ontario’s Trade Needs More East-West, Less North-South

-50

-34

-18

-2

14

30

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

International Trade Balance

$ billions

Source: Statistics Canada, Ontario Economic Accounts. *ytd, 2011Q3

0

10

20

30

40

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

Interprovincial Trade Balance

$ billions

0 4 8 12

2002

2011ytd

Ontario Exports Beyond the U.S.

% of international merchandise trade receipts

EU27

Latin AmericaJapan

ChinaIndia

Other AsiaMexico

Source: Strategis trade data.

05

1015202530354045

BC MB SK QC AB AT ON

Trade With Asia*

% of total, 2011ytd

* Excludes Middle East; domestic basis. Source: Strategis trade data. 2011ytd = Jan-Nov.

-2 0 2 4 6

Germany

Canada

U.S.

Wages

2000-2010 % change, compound annual growth

Source: Scotia Economics.

Canada’s Competitive Challenge

-2 0 2 4 6

Germany

Canada

U.S.

Wages

Productivity

2000-2010 % change, compound annual growth

Source: Scotia Economics.

Canada’s Competitive Challenge

-2 0 2 4 6

Germany

Canada

U.S.

Wages

Productivity

ULC

2000-2010 % change, compound annual growth

Source: Scotia Economics.

Canada’s Competitive Challenge

-2 0 2 4 6

Germany

Canada

U.S.

Wages

Productivity

ULC

FX

2000-2010 % change, compound annual growth

Source: Scotia Economics.

Canada’s Competitive Challenge

-2 0 2 4 6

Germany

Canada

U.S. Wages

ProductivityULC

FXUS$ULC

2000-2010 % change, compound annual growth

Source: Scotia Economics.

Canada’s Competitive Challenge

8

10

12

14

16

18

20

00 02 04 06 08 10

Auto Industry Investment Shifts Away From Canada

Investment Slumps in Canada, But Has Stabilized in the U.S. & Mexico*

Mexico – The Big NAFTA Winner

% of North American output

0

0.5

1

1.5

2

00 02 04 06 08 10

U.S.

Canada

000s of USD

*Investment per vehicle produced in each country. Source: Scotia Economics, Global Auto Report.

Mexico

Canada

Mexico

Source: Statistics Canada, Scotia Economics.

100

110

120

130

140

150

160

170

180

04 05 06 07 08 09 10 11e 12f 13f

Nominal GDP Per Capitaindex: 2004=100

100

110

120

130

140

150

160

170

180

04 05 06 07 08 09 10 11e 12f 13f

Nominal GDP Per Capitaindex: 2004=100

Ontario

B.C.

AlbertaQuebec

Saskatchewan

P.E.I.

New Brunswick

Nova Scotia

Newfoundland and Labrador

forecast forecast

Manitoba

Growth And Income Prospects Best In Resource Regions

Demographic Trends Favour Western Canada

Interprovincial Migration

-0.4

-0.3

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

0.5

ATL QC ON MB SK AB BC

% of population, 2011 ytd

International Migration

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

ATL QC ON MB SK AB BC

Source: Statistics Canada, ytd = 2011 Q1-Q3.

% of population, 2011 ytd

* Annual averages. Source: Scotia Economics, Bloomberg. Forecasts as of February 2, 2012 .

ECONOMIC OUTLOOK 11e 12f 13f MARKET OUTLOOK 11 12f 13f

REAL GDP, annual average CURRENCY, end of period

U.S. 1.7 2.0 2.2 USDCAD 0.98 1.02 1.04

Canada 2.3 1.9 2.2 USDBRL 1.87 1.75 1.85

Brazil 2.8 3.8 4.5 EURUSD 1.30 1.25 1.29

Mexico 3.9 2.9 3.7 USDYEN 75 84 88

U.K. 0.9 0.7 1.8 USDMXN 13.9 13.1 13.4

Euro zone 1.6 -0.5 0.9 USDCNY 6.30 6.07 5.84

Japan -0.4 2.2 1.7 3-MONTH T-BILLS, end of period

China 9.2 8.6 8.9 Canada 0.86 0.95 1.55

India 7.2 7.4 7.6 U.S. 0.05 0.10 0.20

INFLATION, end of period 10-YEAR BONDS, end of period

U.S.* 3.3 1.6 2.3 Canada 1.93 2.05 2.95

Canada* 2.7 1.9 2.1 U.S. 1.83 2.00 3.00

Brazil 6.5 5.5 5.0 COMMODITIES, annual average

Mexico 3.6 4.1 4.1 WTI Oil (US$/bbl) 95 100 105

U.K. 4.2 2.1 2.3 NYMEX Natural Gas (US$/mmbtu) 4.03 3.25 4.00

Euro zone 2.7 1.5 1.7 Gold, London PM Fix (US$/oz) 1,569 1,750 1,650

Japan -0.1 0.0 0.2

China 4.1 4.5 4.3

India 7.5 6.5 6.0

Disclaimer

This report has been prepared by Scotia 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 Group nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.

Aron Gampel Vice-President & Deputy Chief Economist

Navigating Through Volatile Times 

Toronto, Ontario

February 14, 2012