Sherry cooper handout

PARTLY CLOUDY: CHANCE OF SHOWERS September 23, 2010 Dr. Sherry Cooper Executive Vice President & Chief Economist, BMO Financial Group 1-800-613-0205 www.bmocm.com/economics

Partly Cloudy: Chance of Showers Dr. Sherry Cooper Executive Vice President and Chief Economist, BMO Financial Group Global Recovery Cooling US Jobs Crisis Second-half Slowdown Emerging Countries Dominate Growth Sovereign Debt Risks Trigger Fiscal Restraint © BMO Financial Group www.bmocm.com/economics Page 1-2

Economic Recovery in North America (q/q % chng : ar) 08 09 10 11 Real GDP Canada 0.5 -2.5 3.0 2.5 US 0.0 -2.6 2.6 2.2 6 V-shaped 3 2.0% US 1.6% 0 Canada -3 No Double Dip -6 US recession Canadian recession forecast -9 07 08 09 10 11 December ’07 December ’08 Momentum Slows © BMO Financial Group www.bmocm.com/economics Economic Downturn Less Severe in Canada Peak to Trough (% chng) Employment 0 -1 -0.4 -2 -3 -2.4 -2.5 -4 -3.3 -3.5 -5 -6 -6.1 -7 Germany Canada UK Japan France US © BMO Financial Group www.bmocm.com/economics Page 3-4

US Jobless Rates Will Fall, But Gradually Unemployment Rate (percent) Spain 20.3 11 Ireland 13.6 10 9.6% Greece 11.0 Portugal 10.8 9 US France 10.0 8 Lagging Indicator Belgium 8.9 8.1% Canada Finland 8.3 7 5.9% Sweden 8.2 6 Germany 6.9 33-year Low 5 Israel 6.2 4.4% forecast Japan 5.2 4 Australia 5.1 04 05 06 07 08 09 10 11 UK 4.5 US Job Creation Slow Norway 3.3 © BMO Financial Group www.bmocm.com/economics US Profits Have Recovered, Jobs Have Not United States (2007:Q4 = 100) 120 110 Corporate Profits 100 90 Payrolls 80 70 60 07:4 08:1 09:1 10:1 © BMO Financial Group www.bmocm.com/economics Page 5-6

Core Inflation Higher in Canada Consumer Price Index (y/y % chng) Canada United States 6 6 [Core] [Total] 3 1.7% 1.6% 3 Core 1.1% Core 0 0 Total Total 0.9% ...and Falling forecast -3 -3 07 08 09 10 11 07 08 09 10 11 Global Deflation Risk © BMO Financial Group www.bmocm.com/economics Fed Still Easy... Monetary Policy Tightens in Canada First (% : as of September 22, 2010) Overnight Rate 10-year Bonds Fixed Mortgage Rate 6 6 7.0 US forecast 5 5 6.5 US 6.0 4 4 2.80% 3.50% Canada Canada 5.5 3.50% (5-yr) 3 3 (Year-end ’11) 5.0 2 Canada 2 2.55% [Current] (Year-end 4.5 US Canada 2.87% ’10) [Current] 1 Canada 1.00% 1 US 2.56% Current 4.0 Canada 4.82% (30-yr) Spread US 0% - 0.25% 31 bps US 4.37% 0 0 3.5 05 07 09 11 07 08 09 10 11 07 08 09 10 11 BoC Tightens Bond Yields Will Rise... Eventually © BMO Financial Group www.bmocm.com/economics Page 7-8

US Conundrum Fiscal Stimulus vs Budget Deficits During Election Season © BMO Financial Group www.bmocm.com/economics G7 Recovers... Barely for Some Real GDP – G7 (y/y % chng) 2009 2010 2011 Canada -2.5 Germany 3.1 Canada 2.5 France -2.5 Canada 3.0 US 2.2 US -2.6 Japan 2.9 Germany 2.2 Germany -4.7 US 2.6 UK 2.2 UK -4.9 UK 1.6 France 1.9 Italy -5.1 France 1.5 Japan 1.7 Japan -5.2 Italy 1.1 Italy 1.6 -8 -6 -4 -2 0 0 2 4 6 8 0 2 4 6 8 Europe to Suffer Big Fiscal Drag in 2011 Source: [2010-11] BMO Capital Markets forecasts © BMO Financial Group www.bmocm.com/economics Page 9-10

Emerging Markets Lead (ann % chng) 08 09 10 11 Real GDP World 3.0 -0.6 4.2 3.7 12 10 11 09 9 6 3 0 -3 -6 China India Brazil Asia Latin Canada Japan US Europe (excl China, America Japan & India) (excl Brazil) China’s Growth Slows Ranked by 2010 Source: [2010-11] BMO Capital Markets forecasts © BMO Financial Group www.bmocm.com/economics US Dollar Still on a Downtrend (as of September 22, 2010) Feb ’02 Broad Trade-weighted US$ Peak to 2010 % Chng (vs US$) Present Y-T-D 140 February 27, forecast Japanese Yen 59.3 10.0 2002 Peak 130 Australian $ 85.3 6.5 Swiss Franc 73.1 4.9 120 March 9, Mexican Peso -28.0 3.6 2009 Canadian $ 56.1 2.2 110 Chinese Yuan 23.7 2.0 100 Trade-weighted US$ -21.8 0.2 July 15, 2008 Trough UK Pound 10.6 -3.1 90 Euro 55.0 -6.5 00 02 04 06 08 10 Sovereign Risks © BMO Financial Group www.bmocm.com/economics Page 11-12

Canada and Europe: Separate Ways (as of September 22, 2010) Canadian Dollar Chinese Yuan (US$ per currency) (yuan/US$ : inverted scale) 1.1 1.7 6.0 C$ First Change Since (lhs) July 15, 2008 C$ Range 1.6 6.5 US$ Trough 1.0 C$ Parity 1.5 7.0 0.9 97.06¢ 1.4 7.5 1.3 0.8 Euro 1.339 [Current] 1.2 8.0 (rhs) forecast 0.7 1.1 8.5 05 06 07 08 09 10 11 05 06 07 08 09 10 11 China Eases Currency Peg © BMO Financial Group www.bmocm.com/economics Consumers Wary Hiring Sluggish in US Retail Sales Stumble Canadian Housing Softens Increase Savings © BMO Financial Group www.bmocm.com/economics Page 13-14

Consumer Confidence Up From Lows Consumer Confidence Index – Conference Board 120 100 Canada 80 60 US 40 Record Low 20 07 08 09 10 ...But Wobbly © BMO Financial Group www.bmocm.com/economics Canadian Households in Better Shape Net Worth Household Delinquent (% of disposable income) Residential Equity Residential Mortgages 650 Record Highs (% of value of (% of total mortgages) Canada 80 residential property) 5 600 Subprime Malaise 70 Canada 4 550 US 60 3 US 500 US 50 2 450 40 1 Canada 400 30 0 90 95 00 05 10 95 00 05 10 95 00 05 10 Delinquent Residential Mortgages = > 90 Days in Arrears © BMO Financial Group www.bmocm.com/economics Page 15-16

Canadians Over-leveraged? (ratio to personal disposable income) Household Liabilities 1.6 US 1.4 1.2 Canada 1.0 0.8 95 97 99 01 03 05 07 09 Household credit and mortgages plus unincorporated business mortgages © BMO Financial Group www.bmocm.com/economics US Housing Slump Housing Starts Existing Home Sales Existing Home Prices Housing Affordability (000s : ar) (mlns : ar) (1995:Q1 = 100) Index 3,000 Canada 300 8 0.6 250 (rhs) Canada 200 (rhs) Canada 2,500 250 7 225 180 0.5 2,000 200 6 160 200 US US 0.4 140 1,500 US 150 5 (lhs) 175 US (lhs) -27.3% 120 1,000 100 4 0.3 Change 150 from 100 Peak Canada 500 50 3 0.2 125 80 03 05 07 09 03 05 07 09 03 05 07 09 03 05 07 09 Canadian Housing Slowing © BMO Financial Group www.bmocm.com/economics Page 17-18

US Commercial Real Estate Still Weak High Vacancies Values Rise A Bit From Lows Construction-loan Deterioration Canadian Commercial Real Estate Activity Strong © BMO Financial Group www.bmocm.com/economics US Commercial Real Estate: Still Shaky United States 18 200 Commercial 17.7% Real Estate Price Index 16 180 Office 14 Vacancy Rate 13.5% 160 12 Industrial Availability 10.6% 140 S&P/Case-Shiller 10 Rate Home Price Index 8 Retail 120 Vacancy Rate Prices Bottoming 6 100 07 08 09 10 07 08 09 10 Vacancy/Availability Rates = (percent) Price Indexes = (2000:Q1 = 100) © BMO Financial Group www.bmocm.com/economics Page 19-20

Canadian Commercial Real Estate Deals Rebound in Early 2010 REITs and Private Investors +22.8% Y-T-D Gain Rise in Transaction Values Consistent Strength Across All Major Cities © BMO Financial Group www.bmocm.com/economics Canada in Better Shape than US... Overbuilding Pushes Calgary Vacancy Rate Up Office Vacancy Rate (percent) 20 20 17.7% 15.7% 15 US 15 Calgary 10 10.1% 10 Toronto 10.1% 9.6% 5 Canada 5 Vancouver 0 0 05 06 07 08 09 10 05 06 07 08 09 10 Source: CB Richard Ellis © BMO Financial Group www.bmocm.com/economics Page 21-22

Toronto: Commercial Real Estate Boom Coming Soon: Southcore Financial Centre Bremner Tower (+ Delta Hotel) 18 York Completed: Telus House, RBC Centre, Bay-Adelaide Centre... 4 mln sq ft Others Renovate Banks Take On More Space © BMO Financial Group www.bmocm.com/economics Toronto’s Luxury Hotels Continue Construction Opening Soon: Ritz-Carlton ... (2010) Trump Tower ... (2011) Four Seasons ... (2012) Shangri-La ... (2012) © BMO Financial Group www.bmocm.com/economics Page 23-24

Stocks Volatile Because of Uncertainty Financial Market Returns – Local Currency (% chng : as of September 22, 2010) Dividend Yields 2010 Since 2009 2008 TSX Stocks Y-T-D Peak 2.7% TSX 3.4% -19% 31% -35% DJIA 3.0% -24% 19% -34% S&P 500 Nasdaq 2.9% -18% 44% -41% 2.0% S&P 500 1.7% -28% 23% -38% Returns Since Bonds March 9, 2009 GoCs 7.2% -1% -2% 13% (local currency) US Treasuries 11.1% -1% -5% 15% TSX Commodities +60.5% CRB Index -1.6% -41% 23% -36% S&P 500 Gold 17.8% 0% 24% 6% Oil -8.4% -50% 78% -54% +67.7% © BMO Financial Group www.bmocm.com/economics TSX Outperforms (January 1, 2002 = 100 : as of September 22, 2010) Local Currency US$-terms 350 350 300 300 250 250 TSX 200 200 TSX 150 150 100 100 S&P 500 S&P 500 50 50 02 03 04 05 06 07 08 09 10 02 03 04 05 06 07 08 09 10 © BMO Financial Group www.bmocm.com/economics Page 25-26

REITs Fare Better in Canada Real Estate Investment Trusts (January 1, 2007 = 100 : as of September 21, 2010) Local Currency US$-terms 140 140 120 120 100 100 80 80 TSX TSX 60 60 40 S&P 500 40 S&P 500 20 20 07 08 09 10 07 08 09 10 © BMO Financial Group www.bmocm.com/economics Global Equities: New Challenges (y-t-d % chng : as of September 22, 2010) Equity Markets Germany 4.2 TSX 3.4 DJIA 3.0 UK 2.6 S&P 500 1.7 Brazil -0.4 Australia -4.3 Japan -9.3 Spain -11.6 China -20.1 Greece -31.1 -35 -30 -25 -20 -15 -10 -5 0 5 © BMO Financial Group www.bmocm.com/economics Page 27-28

Challenges to Growth Fiscal Restraint Private Deleveraging Confidence Jobless US Canada Subject to Global Downdraft © BMO Financial Group www.bmocm.com/economics Opportunities for Canada Emerging Market Growth Demand for Food and Industrial Materials Canadian Banks Strong Foreign Demand Strong Currency © BMO Financial Group www.bmocm.com/economics Page 29-30

Sherry cooper handout

by Chris Fyvie on Oct 18, 2010

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