The document summarizes recent economic developments in Canada and provides projections. It finds that while global growth has weakened, emerging economies continue to lead growth. Domestic demand is projected to be the main driver of growth in Canada, with exports and business investment remaining strong. Real GDP growth is expected to pick up in Canada through 2012 as excess capacity is absorbed.

1. Recent Developments in the Canadian
Economy
December 2011
Dr. Farid Novin
Bank of Canada

2. Outline
 World Economy
 The United States
 Canada and BC
2

3. The World Economy
3

4. Global economic growth has weakened
considerably in recent months
World manufacturing purchasing Balance of
managers’ index opinion
60
55
50
45
40
35
30
2007 2008 2009 2010 2011
Sources: JP Morgan and Markit
4

5. Emerging economies continue to lead global growth
Real GDP (y/y % change) 14
12
10
8
6
4
2
0
2006
2000
2001
2002
2003
2004
2005
2007
2008
2009
2010
2011
China India
Source: IMF
5

6. The recovery among major economies continues to
be uneven
Real GDP Q/Q % at annual rate 10
5
0
-5
-10
-15
2011
2005
2006
2000
2001
2002
2003
2004
2007
2008
2009
2010
UK USA Japan Germany Canada
Source: IMF, Stats Canada
6

7. The euro area is projected to enter a mild recession at the end of
2011, followed by a modest recovery in mid-2012
Euro-area real GDP across economic cycles; start of
recession = 100 Index
135
Start of the recession 130
Years before the
125
Years after the start of
start of the the recession
120
115
110
105
100
95
90
-2 -1 0 1 2 3 4 5 6
Range of past recessions (1980 onward)
The Big Five modern financial crises
Current cycle

8. Policy rates remain at or near historic lows in most
advanced economies
%
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2008 2009 2010 2011
Canada United States Euro area Japan
Source: Bank of Canada, US Federal Reserve, European Central Bank, Bank of Japan
8

9. Large deficits remain a problem for many
countries...
Deficit as a % of GDP, all levels of government
-5
-15
-25
2008 2009 2010 -35
Source: IMF
9

10. Euro-area sovereigns, even some larger core
countries, are facing rising funding costs
10-year sovereign yield spreads
over German bonds, basis points
Basis points Basis points
2400 1400
2000 1200
1600 1000
800
1200
600
800 400
400 200
0 0
2008 2009 2010 2011
Greece (left scale) Ireland Portugal Spain Italy France
Source: Bloomberg Last observation: 21 October 2011
10

11. US economy
11

12. US GDP and Final Domestic Demand
(volume, y/y % change) 8
6
4
2
0
-2
-4
-6
1990
1991
1992
1993
1995
1997
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
1994
1996
1998
2009
2011
GDP Final Domestic Demand
12

13. U.S. real GDP growth is projected to remain
modest, consistent with the historical experience after
financial crises
U.S. real GDP across economic cycles;
Index
start of recession = 100, quarterly data
135
130
Start of the recession 125
120
Years before Years after the start 115
the start of the of the recession 110
recession 105
100
95
90
-2 -1 0 1 2 3 4 5 6
Range of past U.S. recessions (1948 onward)
The Big Five modern financial crises
U.S. current cycle
Base-case projection
13

14. Quantitative easing has led to an increase in the Federal
Reserve’s balance sheet
Federal Reserve Assets, Trillions of US$ Federal Reserve Liabilities, Trillions of US$
3 3
2 2
1
1
others
TALF Swaps GA
Depository Institutions
CP loan facility TAC SFA
MBS Other Reverse Repo
Treasury's 0 Federal Reserve notes
other liabilities
2008
0
2…
14

15. Canada and B.C.
15

16. Canadian GDP and Final Domestic Demand
(volume, y/y % change)
6
4
2
0
-2
-4
-6
2011
2010
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
GDP FDD
Source: Statistics Canada 16

17. Growth in Canadian real GDP stalled in the second
quarter as net exports plunged
Contributions to real GDP growth %
8
6
4
2
0
-2
-4
-6
-8
-10
2006 2007 2008 2009 2010 2011
Real gross domestic product Real final domestic demand Net exports
Source: Statistics Canada

18. Real GDP growth is expected to pick up through
2012, resulting in a gradual absorption of excess
supply
%
6
3
0
-3
-6
-9
2007 2008 2009 2010 2011 2012 2013
Quarter-over-quarter percentage change in real GDP, at annual rates
Base-case projection
Year-over-year percentage change in real GDP
Sources: Statistics Canada and Bank of Canada projections
18

19. Domestic demand is projected to remain the primary
driver of growth
Percentage
Contributions to real GDP growth points
6
4
2
0
-2
-4
-6
2009 2010 2011 2012 2013
Inventories Net exports Government
Business fixed investment Housing Consumption
Sources: Statistics Canada and Bank of Canada calculations and projections

20. Business fixed investment is projected to remain
robust
Comparison of real business fixed investment across economic cycles;
quarter before the downturn in real GDP = 100, quarterly data
Index
115
Years before
the downturn in
110
real GDP 105
100
95
90
Years
before the
85
Years after
downturn the downturn 80
75
-1 0 1 2 3 4 5
Current cycle 1990-92 cycle 1981-82 cycle
Sources: Statistics Canada and Bank of Canada calculations and projections
20

21. Private and Public Sector Investment
(y/y % change) 20%
15%
10%
5%
0%
-5%
-10%
-15%
-20%
2011*
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
BC Canada
* Intentions
Source: Stats Canada

22. Employment has nearly returned to pre-recession
levels in B.C.
Index 2006Q1=100 110
108
106
104
102
100
98
96
94
2006 2007 2008 2009 2010 2011
B.C. Canada
Source: Statistics Canada
22

23. Commodity prices
Index 2006=100 250
200
150
100
50
0
2006
2007
2008
2009
2010
2011
Oil Copper Lumber Nat. Gas
Source: Bank of Canada
23

24. BC’s forestry industry has been severely affected
by the US housing recession
Exports ($millions) 12,000
10,000
8,000
6,000
4,000
2,000
0
2011YTD
2002
2010
2000
2001
2003
2004
2005
2006
2007
2008
Wood products Pulp & paper products 2009
Source: BC Stats

25. However, efforts to grow Chinese demand for BC’s
softwood lumber have been very successful
Growth in value of softwood Share of BC softwood
lumber exports to China lumber exports by value
120
(y/y% change) (%) 80
100 70
60
80 50
40
60
30
40 20
10
20
0
2011YTD
2004
2008
2000
2001
2002
2003
2005
2006
2007
2009
2010
0
2011YTD
2006
2007
2008
2009
2010
Source: BC Stats
United States Japan China 25

26. Capacity pressures have eased in recent months
% %
3
70
60 2
50 1
40 0
30 -1
20 -2
10 -3
0 -4
2006 2007 2008 2009 2010 2011
Some and significant difficulty* (left scale)
Labour shortages** (left scale)
Conventional measure of the output gap*** (right scale)
26

27. Table 1: Projection for global economic growth
Share of real Projected growth (per cent)b
global GDPa
(per cent) 2010 2011 2012 2013
United States 20 3.0 (2.9) 1.7 (2.4) 1.7 (3.2) 3.3 (3.3)
Euro Area 15 1.7 (1.7) 1.5 (2.0) 0.2 (1.6) 1.5 (1.9)
Japan 6 4.0 (4.0) -0.6 (-0.6) 2.0 (2.9) 2.5 (3.0)
China 13 10.4 (10.3) 9.1 (9.3) 8.2 (8.6) 8.2 (8.1)
Rest of the world 46 5.7 (5.5) 4.3 (4.2) 3.3 (3.8) 3.4 (3.6)
World 100 5.1 (5.0) 3.8 (3.9) 3.1 (4.0) 3.7 (3.9)
a. GDP shares are based on IMF estimates of the purchasing-power-parity (PPP) valuation of country GDPs for 2010.
Source: IMF, WEO, September 2011
b. Numbers in parentheses are projections used for the July 2011 Monetary Policy Report. Source: Bank of Canada

28. Table 2: Contributions to average annual real GDP growth
Percentage pointsa
2010 2011 2012 2013
Consumption 2.0 (2.0) 1.0 (1.3) 1.2 (1.6) 1.4 (1.1)
Housing 0.7 (0.7) 0.1 (0.1) 0.0 (0.0) 0.1 (0.0)
Government 1.2 (1.2) 0.3 (-0.1) -0.1 (-0.3) 0.3 (0.2)
Business fixed investment 0.8 (0.8) 1.4 (1.6) 0.7 (1.1) 1.0 (0.7)
Subtotal: Final domestic demand 4.7 (4.7) 2.8 (2.9) 1.8 (2.4) 2.8 (2.0)
Exports 1.8 (1.8) 1.2 (1.3) 0.9 (1.1) 1.1 (1.1)
Imports -4.0 (-4.0) -2.1 (-1.7) -0.7 (-0.8) -1.0 (-1.0)
Subtotal: Net exports -2.1 (-2.1) -0.9 (-0.4) 0.2 (0.3) 0.1 (0.1)
Inventories 0.6 (0.6) 0.2 (0.3) -0.1 (-0.1) 0.0 (0.0)
GDP 3.2 (3.2) 2.1 (2.8) 1.9 (2.6) 2.9 (2.1)
Memo items:
1.6 (1.6) 1.6 (1.8) 2.0 (2.0) 2.1 (2.1)
Potential output
Real gross domestic income (GDI) 5.0 (5.0) 2.8 (4.1) 1.1 (2.9) 3.6 (2.2)
a. Figures in parentheses are from the base-case projection in the July 2011 Monetary Policy Report.
Those for potential output are from Technical Box 2 in this Report.

29. Table 3: Summary of the base-case projection for Canadaa
2010 2011 2012 2013
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Real GDP 3.1 3.6 -0.4 2.0 0.8 1.9 2.5 3.0 3.0 3.0 3.0 3.0 3.0
(quarter-over-quarter
percentage change
at annual rates) (3.1) (3.9) (1.5) (2.8) (2.9) (2.9) (2.6) (2.5) (2.1) (2.1) (2.1) (2.1) (2.1)
Real GDP 3.3 2.9 2.2 2.1 1.5 1.1 1.8 2.1 2.6 2.9 3.0 3.0 2.9
(year-over-year
percentage change) (3.3) (2.9) (2.7) (2.8) (2.8) (2.5) (2.8) (2.7) (2.5) (2.3) (2.1) (2.1) (2.1)
Core inflation 1.6 1.3 1.6 1.9 2.0 1.8 1.7 1.7 1.6 1.8 1.9 1.9 2.0
(year-over-year
percentage change) (1.6) (1.3) (1.7) (1.9) (2.0) (2.1) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0)
Total CPI 2.3 2.6 3.4 3.0 2.7 1.9 1.0 1.2 1.5 1.8 1.9 1.9 2.0
(year-over-year
percentage change) (2.3) (2.6) (3.4) (2.8) (2.6) (2.3) (1.9) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0)
Total CPI excluding
the effect of the 1.9 2.1 2.9 3.0 2.6 1.9 1.0 1.2 1.5 1.8 1.9 1.9 2.0
HST and changes in
other indirect taxes
(year-over-year (1.9) (2.1) (2.9) (2.8) (2.5) (2.3) (1.9) (2.0) (2.0) (2.0) (2.0) (2.0) (2.0)
percentage change)
WTIb 85 94 103 90 85 87 87 87 88 88 88 88 88
(level) (85) (94) (103) (97) (98) (100) (101) (102) (102) (103) (103) (103) (103)
a. Figures in parentheses are from the base-case projection in the July Monetary Policy Report.
b. Assumptions for the price of West Texas Intermediate crude oil (US$ per barrel), based on an average of futures contracts over the two weeks ending 21 October 2011