Economic & Financial

Market Outlook

BC Pension Forum

March 1, 2013

Chris Lawless, Chief Economist

Overview

Global forces

Recent economic performance

~ US, Europe, Japan, China

~ Other emerging markets

~ Canada & BC

Financial markets

Outlook

Risks

2

De-leveraging

90%

100%

110%

120%

130%

140%

2000 2002 2004 2006 2008 2010 2012

Source: Federal Reserve

U.S. household debt as a percent of after-tax income

3

40% of the world way below potential

-8

-6

-4

-2

0

2

4

US

Eurozone

Japan

4 Source: Oxford Economics

GDP: percent above/below potential

Outlook >

Europe - unemployment rates

0

5

10

15

20

25

30

5

Annual averages, percent

Source: Oxford Economics

Spain

Eurozone

Germany

Outlook >

Inflation

0

5

10

15

20

25

30

35

World

Advanced

Emerging

6

% change in consumer prices

Outlook >

Source: International Monetary Fund

Eurozone labour cost adjustments

90

100

110

120

130

140

2000 2002 2004 2006 2008 2010 2012

Source: Eurostat

Data through 2012Q3

Unit labour costs* (Index 2000 Q1 = 100; seas. adj.)

Germany

Italy

Portugal

Spain

* Labour costs per unit of real economic output

France

U.S. job market improving

30

35

40

45

50

55

60

65

2001 2003 2005 2007 2009 2011

Source: Bureau of Labor Statistics

Layoffs

Quits

Quits and layoffs as % of total separations (s.a.)

Jan01–Dec07 avg.

Jan01–Dec07 avg.

U.S. housing

0

650

1,300

1,950

2,600

0

25

50

75

100

2005 2006 2007 2008 2009 2010 2011 2012 Jan-13

Source: Federal Reserve Bank of St. Louis; National Association of Home Builders

Housing market index (seasonally adjusted)

Monthly data to Feb 2013

9

Building permits (000s; SAAR)

U.S. household net worth recovers

$40,000

$45,000

$50,000

$55,000

$60,000

$65,000

$70,000

2000 2002 2004 2006 2008 2010 2012

$US Billions

Source: Federal Reserve 10

U.S. energy independence?

11

Oil Natural gas

Source: U.S. Department of Energy

U.S. manufacturing renaissance?

-6 -4 -2 0 2 4 6

All industries

Heavy machinery

Autos & trucks

Aerospace

Chemical

Pharmaceuticals

Employment Shipments

12

Average annual % change 2000-2011

Source: Empirical Research Partners

Japanese Yen

74

79

84

89

94

99

Yen per U.S. dollar, daily (inverted)

Source: Federal Reserve 13

China economic activity

Source: Bloomberg; bcIMC estimates

9

12

15

18

46

50

54

58

2010 2011 2012 2013

Sales (year/year % change)

Purchasing managers’ index (left)

Real retail sales (right)

14

PMI level (50 = balanced)

2012 emerging market surprises

-3

-2

-1

0

1

2

3

% difference between January 2012 real GDP growth forecasts and current estimates

Source: Consensus Economics, Oxford Economics 15

Canada’s external balance

-6%

-4%

-2%

0%

2%

4%

6% Current account balance as a % of GDP

16 Source: Statistics Canada

Canada’s merchandise exports

40

55

70

85

100

115

130

2005 2006 2007 2008 2009 2010 2011 2012

Source: Statistics Canada

Real merchandise exports (Index Jan 2005 = 100; 3mma seas. adj.)

Monthly data to Dec 2012

17

Autos and parts

Forestry

Other

Metals and

minerals Energy

Commodity prices

100

200

300

400

500

600

700

800

900

1,000

2003 2005 2007 2009 2011 2013

18

Bank of Canada commodity price index, weekly, in US$ (Jan 1972 = 100)

Oil sands’ price disadvantage

$0

$20

$40

$60

$80

$100

$120

$140

Western Cda Select WTI Brent

19

Western Canada Select (heavy oil) vs. global light crude benchmarks, $US/barrel

Source: Bloomberg

Canadian dollar

$0.92

$0.94

$0.96

$0.98

$1.00

$1.02

$1.04 C$ per U.S. $, daily

Source: Federal Reserve 20

Canada fiscal tightening

Source: Statistics Canada

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012

Year/year % change in nominal government spending + investment

21

22

Canada housing activity

30

35

40

45

50

55

60

65

70

2010 2011 2012 2013

Sales to new listings of all homes (%; 3- month moving average, seas. adj.)

Source: Canadian Real Estate Association 23 Data to January 2013

Calgary

Greater Vancouver

Toronto

Victoria

<40 = buyer’s market

>60 = seller’s market

Canada house prices

80

85

90

95

100

105

110

115

120

125

130

135

2010 2011 2012 2013

Average home price* (Index Jan 2010 = 100)

Source: Canadian Real Estate Association 24

Data to January 2013

Calgary

Greater Vancouver Toronto

Victoria

*Includes condos and townhomes

B.C. employment

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2000 2002 2004 2006 2008 2010 2012

25

Year/year percentage change; 3-month moving avg,

Source: Statistics Canada

B.C. manufacturing & exports

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2000 2002 2004 2006 2008 2010 2012

Goods exports

Mfg. sales

26

Year/year percentage change in $ value (3mon avg)

Source: Statistics Canada

B.C. capital expenditures

$20

$25

$30

$35

$40

$45

$50

2008 2009 2010 2011 2012 2013

27

Private & public capital expenditures, billions

Source: Statistics Canada Intentions

+10%

-16.9%

+9.1% +2.4%

+6.8% +0.9%

Canadian interest rates

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan Apr Jul Oct Jan Apr Jul Oct Jan

Source: Bloomberg

Yields on Government of Canada securities (%; weekly)

2011 2012 2013

28

3-month

10-year

Eurozone – will Italy cause more trouble?

0

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012 2013

Portugal Spain

Italy France

What governments pay to borrow - 10-year bond yield (%)

Source: Bloomberg Data to Feb 22, 2013

29

2.0 2.3

2.0

-0.5

1.6 1.7

0.3

-0.2

2.0 2.5

1.3

0.5

-2

0

2

4

6

8

10

Canada U.S. Japan Eurozone

2012 2013 2014

Real GDP growth (annual % chg)

Source: bcIMC

Economic outlook

30

3.9

2.6

5.3

0.9

5.4

7.8

3.8 4.3

5.6

3.3

6.0

8.2

4.9

5.6

6.5

4.5

7.1

9.0

-2

0

2

4

6

8

10

Mexico Turkey India Brazil India China

2012 2013 2014

Real GDP growth (annual % chg)

Source: Oxford Economics (March 2013)

Economic outlook

31

Stock markets

95

100

105

110

115

120

125

130

Source: FactSet, MSCI

Major market total return indexes (Dec 31, 2011 = 100; $C)

2012

U.S. S&P 500

Emerging Markets

Europe

Canada/TSX

Data to Feb 26, 2013

2013

32

Canadian stock vs. bond yields

3.02 2.47

0

2

4

6

8

10

12

14

16

18

20

1956 1964 1972 1980 1988 1996 2004 2012

Source: FactSet; Statistics Canada; TD Securities

Government of Canada bond yield, 10yr+

TSX dividend yield

%

33

Data to Jan 2013

Lower expectations

34

Short-Term

Bonds

Mortgages

Real Estate Global Equities

Emerging Markets Equity

Private Placements

Short-Term

BondsMortgages

Real Estate Global Equities

EmergingMarkets Equity

Private Placements

0%

2%

4%

6%

8%

10%

12%

14%

16%

2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Return

Risk (Standard Deviation of 2-Year Return)

Capital Markets - Long Term Expectations1990 and 2012

1990

2012

Actuarial discount rate: 6.5%1990 & 2012

Risks

2013:

~ Eurozone financial crisis resumes

~ U.S. fiscal showdown

~ Middle East/Africa conflicts

~ Canada: housing & consumer sector, business/energy investment, First Nations

~ Wild cards – weather, etc.

Longer-term:

~ Market-driven fiscal crisis in U.S. and Japan

~ Climate change

~ Are productivity & innovation in decline?

35

Questions, comments?

Chris.Lawless@bcimc.com

36