The Economic & Financial Outlook

Brian DePrattoEconomistTD Economics

Economic & Financial ThemesGlobal

• Weaker global potential growth = thin cushion for data or event risk = market volatility

• Bad news is good news in financial markets with implicit central bank backstop. And now,

governments increasingly open the spigots

US

The Federal Reserve caught in a dual world

domestic economy resilient; inflation diverges with global peers

global instability can undermine the US cyclical advantage

Canada• Economy struggles to rotate away from housing towards export led growth

• Vancouver fires shot over bow with foreign property transfer tax; Is Ontario next?

2

Running Speed Of Key Economies Has Slowed

3

2.5 2.52.3

1.7

3.5

1.7 1.51.7

1.1

3.3

U.S. Canada UK Euro Area Global Growth

What potential GDP is believed to have been, 2002-07, %

What economists think potential GDP is, 2015-20, %

Source: OECD November 2007 & 2016 June Economic Outlook & May 2014 Long-Term Baseline Projection.Calculations by TD Economics.

Risks Embedded with Rise In Emerging Market Portfolio Flows As Investors Search For Higher Returns

4

-30

-20

-10

0

10

20

30

Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16

Daily portfolio flows to EMs* since Aug. 1 2015, $ U.S. billion

Source: IIF, TD Economics. Last observation September 6, 2016. *Includes daily portfolio flows for Indonesia, India, Thailand, Korea, South Africa, Brazil, Hungary, Turkey, Mexico.

Fiscal Policy Finally Enters Into Global Growth Equation After Monetary Policy Pushed To Its Limits

5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Change in government fiscal balances, % of GDP

Source: OECD June 2016 (No. 99) Economic Outlook, TD Economics. * Chart shows the GDP weighted average of the inverted change in the ratiofor the cyclically-adjusted primary budget balance with potential output for Japan, U.S., UK, and the Euro Area.

Forecast

Federal Reserve Maintains Bias For Higher Rates

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Current 2016 2017 2018 Longer Term

Fed Expectation as of mid-June

TD Forecast

Source: Federal Reserve Board, Bloomberg, TD Economics.

Median FOMC participant projection & market expectation; %

6

U.S. Consumer Spending Rivals Pre-Recession Days

7

-4

-3

-2

-1

0

1

2

3

4

5

6

2002 2004 2006 2008 2010 2012 2014 2016

Real Consumer Nondiscretionary Spending

Real Consumer Discretionary Spending

Source: Haver Analytics, TD Economics. *Nondiscretionary: food, clothing, energy, and housing.

Y/Y % Chg. (3-month mov. avg. )

Labor Market Dash Board Flashing Green

8

• Layoffs are at record lows

• The U-6 unemployment rate – measures underutilization – is back at 2004 levels

• The number of available jobs within firms are at record highs

• Atlanta Fed measure of wage growth at 3.5% -- similar to the pre-recession period

US Inflation Dynamics Not Like The Others

9

0.4

0.8

1.2

1.6

2.0

2.4

2.8

2012 2013 2014 2015 2016

UK* EZ* US

Core CPI, Y/Y % Chg.

Source: Haver Analytics, TD Economics. *12-month mov. avg.

Weak Investment A Key Source Of GDP Underperformance

10

-20

-15

-10

-5

0

5

10

15

2000 2002 2004 2006 2008 2010 2012 2014 2016

Total non-residential fixed investment

Excluding energy investment

Y/Y % chg.

Source: Bureau of Economic Analysis, TD Economics.

Upcoming U.S. Election and Potential Financial Market Impacts

11

Market volatility increases as outcome of the election becomes more certain• Markets start to anticipate the leader actually implementing their policies • But, corporate performance in earnings still dominant impact

Impact on Federal Reserve: • Little evidence that the Fed deviates from its rate cycle pattern during an election year • Major changes in policy appear less likely to occur in the FOMC meeting immediately prior to

the election• Fed Chair Yellen's term expires Feb 2018• Trump has indicated preference not to re-nominate Yellen; Clinton more likely to do so

Estimates Of Presidential Candidate Policy Proposals

12

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2017 2018

Trump Face value Trump realistic

Clinton Face value Clinton realistic

U.S. Real GDP Growth versus baseline forecast (%-pts)

Source: Moody's Analytics, TD Economics

Canadian Economy Falls Flat In First Half Of The Year, Rebound In Store Following Alberta Fires

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

TD BoC TD BoC TD BoC TD BoC

H1-2016* Q3-2016* Q4-2016* 2017 2018

Current GDP ForecastApril Monetary Policy Report

Source: Bank of Canada July 2016 MPR, TD Economics forecast as at September. *Q/Q annualized growth rate.

Real GDP, Y/Y % Change

13

Consumption Key Contributor To Growth

14

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2016H1 2016H2 2017 2018

Net Exports Residential Investment

Consumption Growth

GDP Growth and contributions, % and p.p.

Source: Statistics Canada, TD Economics

Housing Remains Catalyst For Economy's Growth

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Oil + Gas Manufacturing Retail Trade Real Estate + Res.Construction

All Other Industries

Contribution to growth, 2015 to 2016 YTD

Source: Statistics Canada, TD Economics.

15

Disappointing Exports Raise Concern Over Rotation In Growth Drivers

9095

100105110115120125130135140145

2012 2013 2014 2015 2016

Non-energy exports

FX sensitive

Non FX sensitive

Sources: Statistics Canada, Bank of Canada, TD Economics.Note: 3-month moving average of exports are expressed in nominal terms.

Index, (Jan-2012 = 100)

16

Canadian Dollar Offers Only Moderate Trade Advantage At This Point

17

0.050

0.055

0.060

0.065

0.070

0.075

0.080

0.65

0.70

0.75

0.80

0.85

0.90

0.95

Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-2017 Jul-2017

CAD/USD MXN/USD

CAD/USD MXN/USD

Source: Federal Reserve Board, Forecast by TD Economics as at September 2016.

Forecast

But, Loonie Is Driving Stronger Momentum In Tourism-Related Sectors

-50

-40

-30

-20

-10

0

10

20

30

40

50

Manufacturing Commodities FIRE* Others Information,Culture +

Recreation

Total Accommodation+ Food Services

Source: Statistics Canada, TD Economics. *FIRE stands for Finance, Insurance and Real Estate.

Employment Growth, YTD 2016, '000s.

18

B.C. Economy Has Become Highly Leveraged To Housing

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

2006 2008 2010 2012 2014 2016 2018

Canada B.C.

Residential investment; contribution to GDP growth (pp)

Source: Statistics Canada, TD Economics

Forecast

19

Housing Supported By Hefty Demand; Supply Remains Low…

20

-5 0 5 10 15 20 25 30 35 40

Rest of B.C. and Ontario

Rest of Canada

Vancouver

Toronto

Sales Listings

Two Year % Change, Jan 2014 to July 2016

Source: Canadian Real Estate Association, TD Economics.

…But Housing Developers Are Now Responding

0

10

20

30

40

50

60

70

80

90

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Ontario B.C.

Housing Starts; thsd (6-month mov. avg.)

Source: CMHC, TD Economics.

21

Vancouver Market Historically Susceptible To Price Corrections

-20

-15

-10

-5

0

5

10

15

20

25

30

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Toronto Vancouver

Existing Home Prices , Y/Y % Chg.

Forecast

Source: Canadian Real Estate Association, TD Economics. Forecast as of August 2016.

22

Bank of Canada: Nowhere To Go

23

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013 2014 2015 2016 2017 2018

3-Month Yield 5-Year Yield

Canadian Yields, %.

Source:

Forecast

24

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