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THE ECONOMIC OUTLOOK Presentation by Derek Burleton Associate Vice President & Senior Economist TD Economics provides analysis of economic performance and the implications for investors. The analysis covers the globe, with emphasis on Canada, the United States, Europe and Asia. Contact Information Phone: 416 982 8065 Email: [email protected] U.S. ECONOMY TO NARROWLY AVOID RECESSION U.S. REAL GROSS DOMESTIC PRODUCT 6.0 Annualized quarter/quarter per cent change Forecast Y/Y % Chg. (Q4/Q4 % growth) 2007 2.2% (2.5) 2008 1.6% (1.4) 2009 2.2% (2.5) Potential growth 2.8% 5.0 4.0 3.0 2.0 1.0 0.0 Q1-06 Q1-07 Q1-08 Q1-09 F: Forecast by TD Economics as at February 2008; Source: Bureau of Economic Analysis/Haver Analytics U.S. HOUSING DOWNTURN MUCH LIKE THE OTHERS… PEAK TO TROUGH MOVEMENTS IN U.S. DETACHED HOME SALES 0 Per cent change -10 -20 -30 -40 -50 -60 Existing home sales -70 New home sales Housing Starts -80 1978-1980 1988-1991 Source: U.S. Census Bureau, NAR 2005-2007 …BUT PRICE DECLINES COMING IN STEEPER PEAK TO TROUGH: U.S. DETACHED EXISTING HOME PRICES 70 Per cent Run-up in prices 4 years prior 60 Peak to trough 50 40 30 20 10 0.0 0 -3.4 -10 -7.4 -20 1978-1980 1988-1991 Source: U.S. Census Bureau, NAR 2005-2007 BAD NEWS IS STILL ROLLING IN U.S. FORECLOSURES 0.9 % started in the month 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 79 81 83 85 87 89 Source: Economy.com, MBA 91 93 95 97 99 01 03 05 07 HOUSING MARKET WOES AFFECTING CONSUMER BEHAVIOUR RETAIL SALES AND HOME PRICES 9 Y/Y % change Y/Y % change 20 16 8 12 7 Home prices, 6 month lead (right scale) 8 6 4 Core retail sales* (left scale) 5 0 4 -4 3 -8 05 06 *Retail sales excluding autos and gas Source: U.S. Census Bureau, NAR 07 08 U.S. EXPORTS OFFER PARTIAL OFFSET TO HOUSING TROUBLES CONTRIBUTION TO REAL GDP GROWTH 1.2 Percentage points 1.0 0.8 0.6 0.4 0.2 0.0 -0.2 -0.4 Residential Investment -0.6 Exports -0.8 04 05 06 07e 08f Source: BEA; Forecasts by TD Economics (December-07) 09f WORLD GROWTH TO GEAR DOWN WORLD GROWTH Per cent change Japan 2008 Euro Zone 2007 U.S. Canada World Asian NICs India China 0 2 4 6 Forecasts by TD Economics, December 2007 8 10 12 CANADIAN DOLLAR LIKELY TO SLIP, BUT REMAIN STRONG CRUDE OIL AND THE CANADIAN DOLLAR 1.05 US$/C$ US$ per barrel 100 90 1.00 80 0.95 70 0.90 Forecast 60 0.85 50 Crude Oil (right scale) 0.80 40 0.75 30 Canadian dollar (left scale) 0.70 20 0.65 10 0.60 0 01-Q1 02-Q1 03-Q1 04-Q1 05-Q1 06-Q1 07-Q1 Source: Haver Analytics; Forecast by TD Economics as at January 2008. 08-Q1F MANUFACTURING WOES TO CONTINUE… MANUFACTURING EMPLOYMENT AND THE CDN $ 17 US$ per C$ As a share of total employment Canadian dollar (right scale) 16 1.7 1.6 1.5 15 1.4 14 1.3 13 1.2 12 1.1 Share of mfg. sector (left scale) 11 1.0 10 0.9 87 89 91 93 95 97 99 01 03 05 07e Source: Statistics Canada, FRBNY. F: Forecast by TD Economics as at Dec. 2007. 09f CANADIAN HOUSING TO LAND SOFTLY CANADIAN RESALE HOME PRICES Y/Y % chg., 3-month M.A. 14 14 National Forecast 12 12 10 10 8 8 6 6 Central & Atlantic 4 4 2 2 0 0 00 01 02 03 04 05 06 07 08 09 Source: CREA / Conf. Board of Canada. Forecast by TD Economics as at Dec. 2007 CANADIAN ECONOMIC GROWTH TO WEAKEN CANADIAN REAL GDP 6.0 Annualized quarter/quarter per cent change Potential growth 2.8% 5.0 4.0 Forecast Y/Y % Chg. (Q4/Q4 % growth) 2007F 2.5% (2.5) 2008F 1.9% (2.0) 2009F 2.5% (2.6) 3.0 2.0 1.0 0.0 Q1.06 Q1.07 Q1.08 Q1.09 F: Forecast by TD Economics as at December 2007; Source: Statistics Canada/Haver Analytics WESTERN OUTPERFORMANCE TO NARROW REAL GDP GROWTH FORECAST 2008 Annual average per cent change in real GDP 3.1 Sask. 2.8 B.C. 2.5 N.B. 2.4 N.S. 2.3 Manitoba 2.0 Alberta 1.9 CANADA 1.7 Québec 1.6 P.E.I. 1.5 Ontario 1.3 N. & L. 0.0 0.5 1.0 1.5 Forecast by TD Economics as at Dec. 2007 2.0 2.5 3.0 3.5 BANK OF CANADA TO CUT LESS THAN FED BANK OF CANADA RATE AND FED FUNDS RATE 8 % % Forecast 7 6 8 7 6 5 Bank of Canada Overnight Target Rate 4 5 4 3 3 2 2 1 U.S. Federal Funds Rate 0 1 0 Jan. 00 Jan. 01 Jan. 02 Jan. 03 Jan. 04 Jan. 05 Jan. 06 Jan. 07 Jan. 08 Jan. 09 Actual data to Jan 22, 2008; Forecast by TD Economics as at January 2008; Source: Bank of Canada, U.S. Federal Reserve Board. U.S SUMMARY • We still view the risk of a protracted U.S. recession low – U.S. exports should keep growing – Federal Reserve aggressive in lowering interest rates – Corporate balance sheets, outside financial sector, in good shape CANADA SUMMARY • Canadian economy doesn’t face the same risks as the United States • Still, business conditions at home to become more challenging in 2008 • Autos and other manufacturing exports to face particularly difficult markets • As a result, Ontario and Quebec will remain in the slow lane CANADA SUMMARY CONT. • Saskatchewan only provincial economy to record 3%+ growth in 2008 • Bank of Canada to take out some insurance by lowering rates • Growth across the country should improve moderately in 2009 TD Economics www.td.com/economics The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.