New Year, New Promise

Aron GampelVice-President & Deputy Chief EconomistScotiabank Economics March 5, 2013

Source: DataInsight, Scotiabank Economics.

Canada’s Growth Performance At High End Of G7 Trends

0.6

7.5

8.8

9.2

0.0 2.0 4.0 6.0 8.0 10.0

U.S.

Germany

Canada

Cumulative Output Rise From 2009 Trough

% change

-4.7

1.4

2.5

4.4

-5.0 -2.5 0.0 2.5 5.0

Germany

U.S.

Canada

Cumulative Output Rise From Prior Peak

% change

Euro zone (ex.

Germany)

Euro zone (ex.

Germany)

Canada’s Performance Underpinned By A Diversified Economy

60

70

80

90

100

110

120

130

04 06 08 10 12 14

Canada’s Primary Sector Output

index, 2004=100

Oil, Gas & Coal (3%)

Agriculture & Fishing (2%)

Mining (1%)

Forestry & Lumber (2%)

80

90

100

110

120

130

04 06 08 10 12 14

Canadian Output

index, 2004=100

Manufacturing (9%)

Primary (11%)

Total

Construction (6%)

Services (72%)

forecast forecast

Bracketed numbers represent share of total output.Source: Statistics Canada, Scotiabank Economics.

Utilities (3%)

Source: Statistics Canada, Scotiabank Economics.

100

110

120

130

140

150

160

170

180

190

200

04 06 08 10 12e 14f

Nominal GDP Per Capitaindex: 2004=100

100

110

120

130

140

150

160

170

180

190

200

04 06 08 10 12e 14f

Nominal GDP Per Capitaindex: 2004=100

OntarioB.C.

Alberta

Quebec

Saskatchewan

P.E.I.

New Brunswick

Nova Scotia

Newfoundland and Labrador

forecastforecast

Manitoba

Growth And Income Prospects Best In Canada’s Resource Regions

-2

0

2

4

6

8

10

12

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

2012f2013f2014f

annual % change

Source: Bloomberg, U.S. BEA, Statistics Canada, Eurostat, Scotiabank Economics.

Real GDP

2004-07

Rebuilding Momentum, But Slowly

25

50

75

100

125

04 06 08 10 12 14

U.S.

Canada

Housing Starts

forecast

25

50

75

100

125

04 06 08 10 12 14

Motor Vehicle Sales

U.S.

Canadaforecast

U.S. Begins To Play Catch-Up In Big-Ticket Purchases

Source: Scotiabank Economics, CMHC, U.S. Census Bureau, Ward’s Automotive.

index: 2004=100 index: 2004=100

250

300

350

400

450

500

550

600

04 06 08 10 12

Existing Home Sales

Canadian Housing Activity Adjusting Lower For Longer

000s of units, annualized

Source: CREA, Scotiabank Economics.

10-year average

150

200

250

300

350

400

04 06 08 10 12

Existing Home Prices

$000s, national average

10-year average

Source: Statistics Canada, U.S. BEA, Scotiabank Economics.

-4

-2

0

2

4

6

08 09 10 11 12f 13f 14f

Real Government Spending – Canada

annual % change

-4

-2

0

2

4

6

08 09 10 11 12f 13f 14f

Real Government Spending – U.S.

annual % change

0%

From Fiscal Stimulus To Fiscal Drag

Source: Statistics Canada, Bloomberg, Scotiabank Economics.

-150

-100

-50

0

50

100

150

200

04 06 08 10 12

Commodities

Canadian Merchandise Trade Balances

C$ billions, s.a.

Merchandise Trade ex. Commodities

Merchandise Trade

Faster Imports, Slower Exports Erode Canada’s Trade Performance

Canadian Dollar And Oil Prices

0

25

50

75

100

125

02 04 06 08 10 12 140.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10CADUSD

Parity

Canadian Dollar(RHS)

forecast

WTI Oil(LHS)

WTI Oil US$/bbl

$100/bbl

Canada’s Large Current Account Deficit Will Be Slow To Unwind

¹ Includes industrial M&E, motor vehicles & parts, aircraft and other transportation equipment, ² industrial materials, special transactions, and other items. Source: Statistics Canada, Scotiabank Economics.

-75

-50

-25

0

25

50

75

82 85 88 91 94 97 00 03 06 09 12

Canada's Current Account Balance

$bns

Investment Income

Goods

Services

Current AccountBalance

-150

-100

-50

0

50

100

150

82 85 88 91 94 97 00 03 06 09 12

EnergyFarm & FishingConsumer goodsMetals & MineralForestryM&E, Electronics, & Autos¹other²

Canada's Goods Trade Balance

$bns

Goods Trade Balance

0

1

2

3

4

5

6

04 06 08 10 12

Mortgage Delinquencies

U.S.

Canada

% of total loans past due by three or more months

Source: CBA, MBA, CMHC, U.S. Census Bureau, Scotiabank Economics.

Less Financial Strains In Canada, But Risks Persist

-12

-10

-8

-6

-4

-2

0

2

FY95 97 99 01 03 05 07 09 11 13f

budget balances % of GDPFiscal year-ends: U.S. federal – Sept. 30, Canada – March 31.

U.S. Federal ex. Social

Security

Government Budget Imbalances

Source: U.S. BEA, Statistics Canada, Budget documents; Nominal GDP and federal forecasts: Scotiabank Economics.

forecast

Aggregate Provincial

Canada Federal

Global Industrial Activity Reviving, But Slowly

Global Orders And Production

48

50

52

54

56

58

60

10 11 12 13-2

0

2

4

6

8

10

12

14

Global New Orders (LHS)

Global Industrial Production (RHS)

6 month annualized % change

index

Record Aircraft Backlog

Source: Bloomberg, J.P. Morgan, CPB Netherlands Bureau for Economic Policy Analysis, Scotiabank Economics.

0

2

4

6

8

10

05 07 09 11 130

2

4

6

8

10

Thousands of Units

Years

backlog

Aircraft Deliveries % Share

Asia 34Europe 25North America 21Latin America 8Middle East 7Other 5

Profits And Large Cash Holdings to Underpin Investment Spending

Growth In Corporate Profits …

-40

-30

-20

-10

0

10

20

30

40

00 02 04 06 08 10 12 14

y/y % change

United States

Canada

Source: U.S. BEA, Statistics Canada, Scotiabank Economics.

… and Business Fixed Investment

90

100

110

120

130

140

-4 -2 0 2 4 6 8 10 12 14

U.S. Historical Avg.U.S. Current Cyclical Cdn Historical Avg.Cdn Current Cyclical

index, quarterly, zero=recession trough

forecast

80

90

100

110

120

130

140

150

160

170

180

04 06 08 10 12 140

3

6

9

12

15

18

04 06 08 10 12

forecast

Canada

U.S.

Non-Residential Construction

index: 2004Q1=100 %

Canada

U.S.

Office Vacancy Rates

Source: Statistics Canada, U.S. BEA, Cushman & Wakefield, CBRE, Scotiabank Economics.

Vancouver

Calgary

Non-Residential Construction Much Stronger In Canada

Toronto

0

1

2

3

4

5

6

04 06 08 10 12 14

,

0

1

2

3

4

5

6

04 06 08 10 12 14

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

Central Bank Rates

U.S.forecast

%

Canada

Euro zone

Yield Curve – Flatter Now, Steeper Later

U.S.

yield

Canada

Germany

forecast

Source: Bloomberg, Scotiabank Economics.

10-year Bond Yields

0

1

2

3

4

5

6

04 06 08 10 12 14

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

Central Bank Rates

U.S.forecast

%

Canada

Euro zone

Less Inflation Risk Now, More Later

-1

0

1

2

3

4

5

04 06 08 10 12 14

U.S.

Average annual % change

Canada

Euro zone

Source: Statistics Canada, U.S. BLS, Bloomberg, Scotiabank Economics.

Consumer Price Inflation

forecast

* index 2005Q3=100, Q3/Q3, NSA. Source: Statistics Canada, U.S. BLS, Eurostats, Bloomberg, Scotiabank Economics.

98

100

102

104

106

108

110

04 06 08 10 12

Employment

index, 2004 Q1=100

0

2

4

6

8

10

12

14

Germany Canada U.K. U.S. Euro zone

Unemployment Rate

%

U.S.

Canada

Germany

Euro zone (ex. Germany)*U.K.

Canada – Solid Fundamentals, Better Long-Term Growth Prospects

(ex. Germany)

Source: Statistics Canada, IMF, Scotiabank Economics.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Germany U.K. Euro zone U.S. Canada

Population Growthpopulation growth rate, 2000-2011

0%

Canada – Solid Fundamentals, Better Long-Term Growth Prospects

020406080

100120140

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

Western Canada Quebec

Net Immigration000s

-25

0

25

50

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

Net Interprovincial Migration

000s

Atlantic

Ontario

Western Canada

Quebec

Atlantic

Ontario(ex. Germany)

-10

-5

0

5

10

15Ca

nada

Aust

ralia

U.K.

U.S.

Switz

erla

nd

Ger

man

y

Japa

n

5-year 10-year

Source: Bloomberg, Scotiabank Economics.

Bank Share Price Performance

% change

• Canada’s banking system ranked the world’s soundest for the 5th consecutive year -- World Economic Forum’s Global Competitiveness Report, 2008-11.

• Canadian financial institutions make up 7 of the world’s 50 safest banks -- Global Finance’s World’s 50 Safest Banks, 2012.

• Canada is one of 11 countries (in addition to Australia, Denmark, Norway, Singapore, Sweden and Switzerland) whose sovereign debt is ‘AAA’ rated with a stable outlook, and one of 13 ‘AAA’ countries which includes The Netherlands with either stable or negative outlooks.

• Scotiabank named 2012 Bank of the Year by FT’s The Banker.

Canada – Solid Fundamentals, Better Long-Term Growth Prospects

0

5

10

15

20

25

30

35

40

45 2012, %

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

Marginal Effective Tax Rates on Capital

Source: Finance Canada, Finance Ontario, Scotiabank Economics.

0

5

10

15

20

25

30

35

40

45

Corporate Income Tax Rates*

Japan

France

U.S.

Germany

CanadaItaly

U.K.

* Central plus sub-central rates. Source: OECD, Scotiabank Economics.

2012, %

Canada

Small Developed Countries

OECD

U.S.

Canada – Solid Fundamentals, Better Long-Term Growth Prospects

Source: Statistics Canada, Scotiabank Economics.

300

400

500

600

700

800

900

1000

00 02 04 06 08 10

International Investment In Canada

C$ billions

Commodities Dominate Exports

Portfolio Inflows

Foreign Direct Investment

Canada – Solid Fundamentals, Better Long-Term Growth Prospects

% share of total export receipts, 2012.

Commodities 55%

All Other Goods35%

Vehicles & Parts 14%

Energy24%

Mining14%

Forest Products 5%

Agri-Food 7%

* Excluding Mexico. Source: WTO, IMF, Strategis, Scotiabank Economics.

0

20

40

60

80

U.S. Asia WesternEurope

Other LatinAmerica*

Canadian Exports% share of total exports, 2012

Canada Must Focus More On Global Markets For Long-Term Growth …

0

10

20

30

40

50

U.S. Japan Canada U.K. Germany

World Exports% of GDP, 2011

-2 0 2 4 6 8 10

Germany

Canada

U.S.

2000-2011 % change, compound annual

growth

Source: U.S. BLS, Scotiabank Economics.

… But Competitive Challenges Persist …

Wages

Wages

Wages

Productivity

Productivity

Productivity

Unit Labour Costs (local currency)

Unit Labour Costs (local currency)

Unit Labour Costs (local currency)

Currency (against USD)

Currency (against USD)

Unit Labour Costs (USD)

Unit Labour Costs (USD)

Unit Labour Costs (USD)

0

¹ volumes, real GDP. ² volumes of goods & services. Source: IMF, Scotiabank Economics.

... Will Likely Narrow

… And Trade Prospects Internationally May Be Slightly Tempered

The 3 Percentage Point Gap ...

-12

-8

-4

0

4

8

12

16

80 85 90 95 00 05 10 15f

y/y % change

forecast

Growth¹

Trade²

Expansion Periods

Global Output Growth (%)

Global Trade (%)

Differential (percentage

points)

1983-89 3.9 5.9 2.0

1992-00 3.3 7.6 4.3

2002-07 4.5 7.5 3.0

2010-12e 4.1 7.2 3.1

2013-17f 4.0 6.5 2.5

Global Output And Trade

Emerging Market Economies – Consensus Growth Leaders

3.9

4.1

1.4

2.4

4.9

0.5

3.0

2.2

3.1

3.4

2.5

2.1

2.3

3.1

5.4

4.4

3.0

1.5

1.8

4.3

0 1 2 3 4 5 6

Eastern Europe (7%)

Latin America (8%)

Western Europe (27%)

U.S. / Canada (27%)

Asia Pacific (32%)1980s1990s2000s

1980s1990s2000s

1980s1990s2000s

1980s1990s2000s

1980s1990s2000s

Bracketed figures represent percent share of the global economy.Source: Consensus Forecasts Global Outlook, October 2012.

Real GDP, average annual % change

2010s

2010s

2010s

2010s

2010s

020406080

100120140160180

Greece Italy U.S. Canada Emerging*

Gross DebtNet Debt

Gross & Net Debt

-4

-2

0

2

4

China Japan Eurozone

Brazil U.S. Canada India

Current Account Balance

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

China Japan Brazil India Eurozone

Canada U.S.

Foreign Reserves

0

10

20

30

40

50

60

China India Japan Canada Eurozone

Brazil U.S.

Gross National Savings2012, % of GDP

General Gov’t, 2012, % of GDP

2012 Q4, US$ trillions

2012, % of GDP

Emerging Market Economies Have More Financial Flexibility

* Emerging and Developing markets. Source: IMF, Bloomberg, Scotiabank Economics.

Euro zone

Germany

Per Capita GDP*

Motor vehicles per 1000 people

Number of Airports

Health Care Expenditure

% of GDP

Services Share % of

GDP

India 1,514 20 352 2 65

China 5,417 70 497 5 44

Brazil 12,789 174 4,105 9 67

Canada 50,496 621 1,453 11 70

United States 48,328 793 15,079 16 80

*Market exchange rate, USD.Source: IMF WEO October 2012 (estimates), Ward’s Automotive Reports, CIA World Factbook.

Emerging Market Economies’ Have Stronger Growth Dynamics

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision. *IMF estimate.

Demographics Will Continue To Drive Emerging Market Economies …

0.0

0.3

0.6

0.9

1.2

1.5

Rest ofAsia

China India

Populationbillions, 2010*

Euro area

Japan

Brazil

Mexico

Russia

U.S.Restof Asia

(ex. Japan)

Indonesia

Vietnam

KoreaThailand

Canada

Demographic Trends

0200400600800

1000120014001600

2011-2030

More DevelopedRegions

Less DevelopedRegions

millions of people

Change in Urbanized Population

15-24 yrs 25-64 yrs 65+ yrsIndia 12 218 73China -63 47 136Brazil -4 21 20Mexico -1 17 10U.S. 4 8 37Canada -1 1 5Japan -2 -10 14Russia -3 -11 9Europe -9 -33 58

Change in Population 2011 – 2030 (millions)

100

125

150

175

200

225

04 05 06 07 08 09 10 11

… Spending Power …

0.0

0.3

0.6

0.9

1.2

1.5

Rest ofAsia

China India

Populationbillions, 2010*

Euro area

Japan

Brazil

Mexico

Russia

U.S.Restof Asia

(ex. Japan)

Indonesia

Vietnam

KoreaThailand

Canada

China (Urban)

U.S.Euro zone

index: 2004=100

Canada

U.K.

Growth In Personal Disposable Income

Germany

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision. *IMF estimate.

Source: Bloomberg, IMF, Statistischen Bundesamtes, Scotiabank Economics.

… And Oil Consumption …

0.0

0.3

0.6

0.9

1.2

1.5

Rest ofAsia

China India

Populationbillions, 2010*

Euro area

Japan

Brazil

Mexico

Russia

U.S.Restof Asia

(ex. Japan)

Indonesia

Vietnam

KoreaThailand

Canada

Global Oil Consumption

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2010 Revision. *IMF estimate.

90

110

130

150

170

190

210

230

99 01 03 05 07 09 11 13f

Index, 1999=100

Emerging Asia

China

United States

Source: Statistics Canada, Bloomberg, Scotiabank Economics.

0

5

10

15

20

25

04 06 08 10 12 14

… Reshaping The Global Manufacturing Landscape

Auto Sales

0

5

10

15

20

25

04 06 08 10 12 14

millions of units

North America*

Europe

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

China

forecast

millions of units

Motor Vehicle Production

North America*

Europe

China

forecast

Source: Industry Canada, Scotiabank Economics.

Trends In Canadian Exports By Product

2012 2009-12 2008-09 2000-08Total Exports 1.6 8.2 -25.6 2.3 100.0 5.0

Oil & Gas 1.0 12.2 -38.5 13.6 25.5 UnderperformMotor Vehicles 17.0 16.8 -28.8 -6.6 13.5 UnderperformMachinery & Equipment 5.3 3.2 -17.8 0.3 7.2 OverperformPrecious Stones & Metals -13.3 20.7 -6.8 14.8 5.0 UnderperformElectronic Equipment -1.4 -2.5 -15.5 -6.8 3.3 UnderperformPlastics -0.7 5.2 -22.6 2.7 2.7 UnderperformAircrafts & Aerospace 6.2 -1.9 8.0 0.2 2.3 OverperformWood 10.3 10.4 -24.3 -9.6 2.2 OverperformMining -1.7 15.2 -14.6 14.8 1.9 OverperformAluminum -12.7 4.4 -35.6 5.8 1.9 UnderperformPaper -13.3 -7.7 -18.1 -4.2 1.9 UnderperformOil Seeds 23.2 15.3 -8.2 16.7 1.8 OverperformCereals 7.7 2.0 -19.2 10.3 1.7 OverperformFertilizers -7.6 15.5 -38.9 13.7 1.6 UnderperformIron & Steel -5.6 12.6 -43.3 13.1 1.6 Underperform

Sub-Total 2.4 9.7 -27.9 2.5 74.0

Canada's Top 15 Merchandise Exports - Product PerformanceCompound Annual Growth Rates, % % Share of 2012

Exports Outlook for 2013

Source: Industry Canada, Scotiabank Economics.

Trends In Canadian Imports By Product

2012 2009-12 2008-09 2000-08Total Imports 3.5 8.1 -15.8 2.8 100.0

Motor Vehicles 11.2 12.7 -21.9 0.3 15.3Machinery & Equipment 5.9 8.4 -16.8 -0.6 14.6Oil & Gas -3.0 14.4 -36.0 16.4 11.1Electronic Equipment 0.7 5.7 -9.6 -2.2 9.8Precious Stones & Metals -12.1 17.5 4.4 21.6 3.3Plastics 4.8 7.5 -13.8 2.8 3.3Medical Equipment 7.8 6.2 -3.5 -1.1 2.9Pharmaceutical Products -0.8 -2.4 15.9 12.0 2.7Articles of Iron & Steel 11.2 13.5 -22.9 6.2 2.6Furniture 10.9 8.3 -14.5 5.3 1.9Iron & Steel 0.0 16.0 -41.5 6.5 1.8Rubber 4.3 10.6 -4.9 1.3 1.6Organic Chemicals -0.7 -1.1 -18.4 6.4 1.3Aircrafts & Aerospace -1.6 -3.0 -17.0 2.0 1.2Paper -6.5 -3.1 -4.6 0.4 1.2

Sub-Total 3.3 9.1 -18.2 2.7 74.8

Compound Annual Growth Rates, % % Share of 2012 Imports

Canada's Top 15 Merchandise Imports - Product Performance

Source: Scotiabank Economics, Bloomberg.Forecasts at February 28, 2013

Economic & Market Outlook

12f 13f 14f 12f 13f 14f

REAL GDP, annual average CURRENCY, end of period

U.S. 2.2 2.0 2.7 Canadian Dollar (CADUSD) 1.01 0.99 1.01

Canada 1.9 1.6 2.4 Brazilian Real (USDBRL) 2.05 2.00 1.96

U.K. 0.2 0.9 1.4 Euro (EURUSD) 1.32 1.27 1.25

Euro zone -0.5 -0.3 1.0 Mexican Peso (USDMXN) 12.85 12.93 13.14

Brazil 1.0 3.3 4.0 Chinese Renminbi (USDCNY) 6.23 6.10 6.04

Mexico 4.0 3.6 3.9

China 7.8 8.1 8.3 3-MONTH T-BILLS, end of period

India 5.1 6.0 6.5 Canada 0.93 1.00 1.10

U.S. 0.04 0.10 0.10INFLATION, end of period

U.S. 1.9 2.0 2.0 10-YEAR BONDS, end of period

Canada 0.9 1.7 2.0 Canada 1.80 2.25 3.35

U.K. 2.7 2.9 2.4 U.S. 1.76 2.25 3.50

Euro zone 2.2 1.7 1.7

Brazil 5.8 5.8 5.5 COMMODITIES, annual average

Mexico 3.6 3.8 3.8 WTI Oil (US$/bbl) 94 94 96

China 2.5 3.3 3.9 NYMEX Natural Gas (US$/mmbtu) 2.83 3.75 4.00

India 7.2 7.0 6.1 Gold, London PM Fix (US$/oz) 1,670 1,690 1,650

Disclaimer

• TM Trademark of The Bank of Nova Scotia. Used under license, where applicable.

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