The Economic Outlook

Derek Burleton
Vice President and Deputy Chief Economist

January 2011

GLOBAL RECESSION/RECOVERY

Real Global GDP Growth, Annual % Change

6
Long Run Global Growth Average *
5

-1
Forecast

-2
2005 2006 2007 2008 2009 2010 2011 2012

* Since 1970; Forecast by TD Economics as at December 2010

Source: IMF, TD Economics

The Economic Outlook 1 TD Economics, January 2011

 TWO-SPEED WORLD ECONOMY

Real GDP, Annual Average % Chg.

10

8 Developing Economies

Advanced Economies
-2

-4
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
(f) (f)
Forecast by TD Economics as at December 2010
Source: IMF, TD Economics

THE GROWTH / INFLATION DIVIDE

Annual Inflation in 2010
14
India

Argentina
10

South Africa
Australia
Russia
6
Saudi Arabia Brazil
France
Mexico Philippines
U.K. China
Thailand
Italy Canada Malaysia
2
Spain
Portugal U.S. Germany

-2 2 6 10 14
Ireland
Japan
-2 Real GDP Growth in 2010

Source: IMF, TD Economics

The Economic Outlook 2 TD Economics, January 2011

 DEVELOPING ECONOMIES ARE LEANING
AGAINST INFLATION

China
• Raised the reserve deposit ratios on five occasions during
2010
• Raised the interest rates on deposits
• Modified lending requirement standards on real estate
operations

India
• Raised the policy interest rate 200 basis points since
February 2010

Brazil
• Raised the policy interest rate 200 basis points since March
2010
• Raised the tax rate it charges to short-term capital inflows

EMERGING ECONOMIES WILL SOON

DOMINATE
Share of Global Economy (%)
70

65

Advanced Economies
60

55

50

45

40
Emerging Markets

35

30
1987 1991 1995 1999 2003 2007 2011 2015 2019 2023 2027
Forecast by TD Economics as at December 2010
Source: IMF, TD Economics

The Economic Outlook 3 TD Economics, January 2011

 EUROPEAN RECOVERY CHALLENGED
BY FISCAL AUSTERITY
% of % of GDP
140 35

Gross Debt -L-

120 30

Fiscal Deficit -R-

100 25

80 20

60 15

40 10

20 5

0 0
Italy Greece Portugal France Ireland U.K. Germany Spain

Source: OECD, TD Economics

EUROPEAN GOVERNMENT BORROWING

REQUIREMENT POSES FINANCIAL CHALLENGE
Sovereign Redemptions as % of Total Debt Outstanding
25

2011 2012 2013

20

15

10

0
Spain Portugal Italy Greece Ireland

Source: Bloomberg, TD Economics

The Economic Outlook 4 TD Economics, January 2011

 RISK OF SOVEREIGN DEBT
RESTRUCTURING
10-Year National Bond Yields Less 10-Year German Bunds
1,000

900
Portugal Spain
800 Italy Greece

700 Ireland

600

500

400

300

200

100

0
Aug-09 Oct-09 Dec-09 Mar-10 May-10 Aug-10 Oct-10 Dec-10

Source: Bloomberg, TD Economics

U.S. RECOVERY MORE THAN A YEAR OLD

U.S. Real GDP, Annualized Quarter/Quarter % Change
8

6 Forecast

4 Recession

-2

-4

-6

-8
2008 2009 2010 2011F 2012F

Forecast by TD Economics as at December 2010

Source: Bureau of Economic Analysis

The Economic Outlook 5 TD Economics, January 2011

 A UNIQUE RECESSION…A UNIQUE
RECOVERY
U.S. recessions & recoveries in real GDP
9

8 1957-58
Real GDP growth 4-quarters post-trough (%)

7 1960-61 1953

6
1974-75
5 1970 1981-82

4
1980
3

2 1990-91 2008-09

1 2001

0
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Peak-to-trough decline in real GDP (%)

Source: Bureau of Economic Analysis, TD Economics

RECOVERY IS NORMAL IF YOU

UNDERSTAND CAUSE OF DOWNTURN

RECESSIONS/RECOVERIES AFTER SYNCHRONOUS FINANCIAL CRISIS

International
U.S.
Historical Experience

Recession Duration (quarters) 7 7

Peak-to-Trough (%) -4.8 -4.1

Growth in First Year of Recovery (%) 2.8 2.8

Recovery Duration (quarters) 7 6*

*U.S. economy in 6th quarter of recovery

Source: IMF, TD Economics

The Economic Outlook 6 TD Economics, January 2011

 U.S. ECONOMY FACES STRONG
HEADWINDS

1. Housing to remain stagnant

2. Unemployment rate unlikely to decline
3. Household deleveraging
4. Credit flows to remain constrained
5. Commercial real estate will lag
6. State finances and future fiscal rebalancing

MODERATE GROWTH SHOULD KEEP

INFLATION CONTAINED
U.S. CPI, Y/Y % Change
6
All-Items CPI Forecast
5
All-items excl. food & energy

-1

-2
96 98 00 02 04 06 08 10 12

Forecast by TD Economics as at December 2010

Source: Bureau of Labor Statistics

The Economic Outlook 7 TD Economics, January 2011

 LOW INTEREST RATES TO PERSIST
U.S. Yields, %*
10

8
10-Year Government
Bond
7

5 Forecast

2
3-month T-Bill
1

0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
*End of Period. Actual data to: Q3 2010; Forecast by TD Economics as at December 2010
Source: Federal Reserve Board / Haver Analytics

U.S. FISCAL CHALLENGES TO BE

ADDRESSED IN 2013 AND BEYOND
U.S. Federal Government Spending and Revenues, % GDP
28
Forecast*
26

Spending
24

22

20

18

16

Revenues
14

12
1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

*Forecast by CBO, TD Economics

Source: Congressional Budget Office, TD Economics

The Economic Outlook 8 TD Economics, January 2011

 CANADIAN ECONOMY REBOUNDED, BUT
HAS NOW SLOWED
Canadian Real GDP, Annualized Quarter/Quarter % Change
8

Forecast
6

-2

-4

-6

-8
2009 2010 2011 F 2012 F

Forecast by TD Economics as at December 2010

Source: Statistics Canada / Haver Analytics

EXPORT GROWTH CONSTRAINED BY

MODERATE DEMAND ABROAD
Real Exports, Index (1st Quarter of Recession = 100)
135

130

125 1981-82 1990-91 2008-09

120

115

110

105

100

95

90 Last Realized Value

85
1 2 3 4 5 6 7 8 9 10 11 12 13
Quarters from start of recession
Source: Statistics Canada. Forecast by TD Economics as at December 2010.

The Economic Outlook 9 TD Economics, January 2011

 STRONG CANADIAN DOLLAR HERE TO
STAY
US$/C$
1.10

1.00

0.90

0.80 Forecast

0.70

0.60
2000 2002 2004 2006 2008 2010 2012
End-of period forecast by TD Economics as at December 2010
Source: Bloomberg, TD Economics

HOUSING MARKET HAS HAD A SOFT

LANDING
Units C$
140,000 400,000

380,000
130,000 Forecast
360,000

120,000 340,000

320,000
110,000
300,000
100,000
280,000

90,000 260,000

240,000
80,000 Sales (left scale)
220,000
Average price (right scale)
70,000 200,000
Q1-06 Q1-07 Q1-08 Q1-09 Q1-10 Q1-11 Q1-12

Forecast by TD Economics as at December 2010

Source: CREA, seasonally-adjusted quarterly data

The Economic Outlook 10 TD Economics, January 2011

 HOUSEHOLD INDEBTEDNESS A
HEADWIND ON SPENDING
Household Debt to Personal Disposable Income, %
180

160

United States
140

120

100
Canada

80

60
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Source: Statistics Canada, TD Economics

INVESTMENT A BRIGHT SPOT IN THE

OUTLOOK
Y/Y % Chg.
40

30 Forecast

20

10

-10

-20
M&E Investment
-30 Corporate Profits

-40

-50
02 03 04 05 06 07 08 09 10 11 12

Forecast by TD Economics as at December 2010

Source: Statistics Canada

The Economic Outlook 11 TD Economics, January 2011

 REGIONAL GROWTH

Real GDP Growth By Region, Y/Y % Chg.

3.5
Praires
3.3

2.4
Ontario
2.3

2.4
B.C. 2011
2.3

2012
2.3
Atlantic
2.5

2.1
Quebec
2.2

Forecast by TD Economics as at December 2010

Source: TD Economics

INFLATION TO STAY TAME

Y/Y % Chg.
14

12 Forecast

10

All-Items CPI
8

6
Inflation Target Band

2
Core CPI*
0

-2
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13

*Headline CPI excl. 8 most volatile components and indirect taxes

Forecast by TD Economics as at December 2010. Source: Statistics Canada

The Economic Outlook 12 TD Economics, January 2011

 BANK OF CANADA TO TIGHTEN BEFORE
FED
Percent
7

6
Forecast
5
Bank of Canada
Target Rate
4

1
U.S. Federal
Funds Rate
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Forecast by TD Economics as at December 2010

Source: Bank of Canada, U.S. Federal Reserve Board, Haver Analytics

YIELDS TO GRIND SLOWLY HIGHER

Canadian Bond Yields, %

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

1.0
Current* Q4 2011 Q4 2012
0.5

0.0
Overnight 3-Month 2-Year 5-Year 10-Year 30-Year

*As at January 7, 2011; Forecasts by TD Economics as at December 2010

Source: Bloomberg / Haver Analytics, TD Economics

The Economic Outlook 13 TD Economics, January 2011

 ECONOMIC RISKS WILL PERSIST
• Emerging market economies will be rebalancing monetary policy,
developed world will largely leave hyper-stimulative policies in place.
This could create asset price problems.

• European fiscal problems and fallout will remain a dominant theme in

2011 and likely 2012.

• China’s current account surplus will remain enormous. China is

focused on maintaining stability while experiencing massive economic
development. It also cannot unlock domestic spending potential until a
social security safety net is put in place to reduce saving.

• US current account deficit is a reflection of inadequate saving. It was

due to inadequate household saving, but now is a reflection of public
sector deficit. No prospect to be addressed in 2011 and 2012.

• All of this is a recipe for political tensions, public sector interference in

financial markets, and potentially protectionist policies. It also augurs
for continued uncertainty and volatility.

TD Economics
www.td.com/economics

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The Economic Outlook 14 TD Economics, January 2011