Sherry cooper handout

1-800-613-0205 www.bmocm.com/economics

PARTLY CLOUDY: CHANCE OF SHOWERS

September 23, 2010

Dr. Sherry Cooper Executive Vice President & Chief Economist, BMO Financial Group

Partly Cloudy: Chance of ShowersDr. Sherry Cooper Executive Vice President and Chief Economist, BMO Financial Group

© BMO Financial Group www.bmocm.com/economics

Global Recovery Cooling

Sovereign Debt Risks Trigger Fiscal Restraint

US Jobs Crisis

Second-half Slowdown

Emerging Countries Dominate Growth

Page 1-2


Momentum Slows

Economic Recovery in North America

December ’07 December ’08

07 08 09 10 11

-9

-6

-3

0

3

6

07 08 09 10 11

-9

-6

-3

0

3

6

Real GDP

07 08 09 10 11

-9

-6

-3

0

3

6

US recessionUS recession

V-shaped

08 09 10 11CanadaUS

0.50.0

-2.5-2.6

3.02.6

2.52.2

(q/q % chng : ar)

Canadian recession forecast

Canada

US2.0%

1.6%

No Double Dip


Economic Downturn Less Severe in CanadaPeak to Trough (% chng)

Employment

Germany Canada UK Japan France US-7

-6

-5

-4

-3

-2

-1

0

-0.4

-2.4 -2.5-3.3 -3.5

-6.1

-4


US Jobless Rates Will Fall, But Gradually

SpainIrelandGreecePortugalFranceBelgiumFinlandSwedenGermanyIsraelJapanAustraliaUKNorway

20.313.611.010.810.08.98.38.26.96.25.25.14.53.3

04 05 06 07 08 09 10 11

4

5

6

7

8

9

10

11

Canada

US

forecast

33-year Low

9.6%

5.9%

4.4%

Lagging Indicator8.1%

US Job Creation Slow

Unemployment Rate (percent)


United States (2007:Q4 = 100)

US Profits Have Recovered, Jobs Have Not

07:4 08:1 09:1 10:160

70

80

90

100

110

120

Payrolls

Corporate Profits

Page 5-6


Global Deflation Risk

Core Inflation Higher in Canada

United States

07 08 09 10 11

-3

0

3

6

Consumer Price Index (y/y % chng)

Core

Total

Canada

07 08 09 10 11

-3

0

3

6

Core

Total

forecast

1.1%1.7%

[Total]1.6%[Core]

0.9% ...and Falling


CurrentSpread31 bps

10-year Bonds

07 08 09 10 11

0

1

2

3

4

5

6

Bond Yields Will Rise... EventuallyBoC Tightens

Fed Still Easy... Monetary Policy Tightens in Canada First

Fixed Mortgage Rate

07 08 09 10 11

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0Overnight Rate

05 07 09 11

0

1

2

3

4

5

6

(% : as of September 22, 2010)

US forecast

Canada

0% - 0.25%USCanada 1.00%

3.50%

2.55%

’10)(Year-end

US

Canada 2.80%

US(30-yr)

Canada (5-yr)

Canada 4.82%US 4.37%

[Current]Canada 2.87%US 2.56%

[Current]

3.50%

’11)(Year-end

Page 7-8


US Conundrum

Fiscal Stimulus

vs

Budget Deficits

During Election Season


Canada

France

US

Germany

UK

Italy

Japan

-8 -6 -4 -2 0

-2.5

-2.5

-2.6

-4.7

-4.9

-5.1

-5.2

Germany

Canada

Japan

US

UK

France

Italy

0 2 4 6 8

3.1

3.0

2.9

2.6

1.6

1.5

1.1

Canada

US

Germany

UK

France

Japan

Italy

0 2 4 6 8

2.5

2.2

2.2

2.2

1.9

1.7

1.6

Real GDP – G7 (y/y % chng)

G7 Recovers... Barely for Some

2009 2010 2011

Europe to Suffer Big Fiscal Drag in 2011Source: [2010-11] BMO Capital Markets forecasts

Page 9-10


Emerging Markets Lead

Real GDP

China India Brazil Asia Latin Canada Japan US Europe-6

-3

0

3

6

9

12

08 09 10 11World 3.0 -0.6 4.2 3.7

(ann % chng)

10 1109

China’s Growth SlowsRanked by 2010 Source: [2010-11] BMO Capital Markets forecasts

Japan & India) (excl Brazil)(excl China, America


(as of September 22, 2010)

US Dollar Still on a Downtrend

Broad Trade-weighted US$

00 02 04 06 08 10

90

100

110

120

130

140February 27,

2002 Peakforecast

July 15, 2008 Trough

March 9,2009

2010Y-T-D

Peak toPresent

Feb ’02

% Chng (vs US$)

Japanese YenAustralian $Swiss FrancMexican PesoCanadian $Chinese YuanTrade-weighted US$UK PoundEuro

59.385.373.1-28.056.123.7-21.810.655.0

10.06.54.93.62.22.00.2-3.1-6.5

Sovereign Risks

Page 11-12


Canada and Europe: Separate Ways

Canadian Dollar(US$ per currency)

05 06 07 08 09 10 11

0.7

0.8

0.9

1.0

1.1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

(as of September 22, 2010)

China Eases Currency Peg

C$ Parity

C$(lhs)

Euro(rhs)

C$ Range

97.06¢

[Current]1.339

First Change SinceJuly 15, 2008

US$ Trough

Chinese Yuan(yuan/US$ : inverted scale)

05 06 07 08 09 10 11

8.5

8.0

7.5

7.0

6.5

6.0

forecast


Consumers Wary

Increase Savings

Hiring Sluggish in US

Retail Sales Stumble

Canadian Housing Softens

Page 13-14


Consumer Confidence Up From Lows

Consumer Confidence Index – Conference Board

07 08 09 10

20

40

60

80

100

120

Record Low

...But Wobbly

Canada

US


HouseholdResidential Equity

95 00 05 1030

40

50

60

70

80

Delinquent Residential Mortgages = > 90 Days in Arrears

DelinquentResidential Mortgages

(% of total mortgages)

95 00 05 100

1

2

3

4

5

Net Worth(% of disposable income)

90 95 00 05 10400

450

500

550

600

650

Canadian Households in Better Shape

Canada

US US

Canada

US

Subprime Malaise

Record Highs

Canada

(% of value ofresidential property)

Page 15-16


Canadians Over-leveraged?(ratio to personal disposable income)

Household credit and mortgages plus unincorporated business mortgages

Household Liabilities

95 97 99 01 03 05 07 090.8

1.0

1.2

1.4

1.6

Canada

US


US Housing Slump

Canadian Housing Slowing

Housing AffordabilityIndex

03 05 07 09

80

100

120

140

160

180

200

Existing Home Prices(1995:Q1 = 100)

03 05 07 09

125

150

175

200

225

250

Housing Starts(000s : ar)

03 05 07 09

500

1,000

1,500

2,000

2,500

3,000

50

100

150

200

250

300

Existing Home Sales(mlns : ar)

03 05 07 09

3

4

5

6

7

8

0.2

0.3

0.4

0.5

0.6Canada(rhs)

US(lhs)

US(lhs)

Canada(rhs)

US

Canada

Change from Peak

-27.3%

US

Canada

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


Vacancy/Availability Rates = (percent) Price Indexes = (2000:Q1 = 100)

US Commercial Real Estate: Still Shaky

07 08 09 10100

120

140

160

180

200

07 08 09 106

8

10

12

14

16

18

Office Vacancy

Rate

Industrial Availability

Rate

United States

Retail Vacancy Rate

S&P/Case-Shiller Home Price Index

Commercial Real Estate Price Index

17.7%

13.5%

10.6%

Prices Bottoming

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


05 06 07 08 09 100

5

10

15

20

05 06 07 08 09 100

5

10

15

20

Office Vacancy Rate (percent)

Canada in Better Shape than US... Overbuilding Pushes Calgary Vacancy Rate Up

Source: CB Richard Ellis

17.7%

10.1%

Vancouver

Calgary

Toronto

US

Canada

10.1%

15.7%

9.6%

Page 21-22


Toronto: Commercial Real Estate Boom

Coming Soon:Southcore Financial CentreBremner Tower (+ Delta Hotel)18 York

Completed:Telus House, RBC Centre, Bay-Adelaide Centre... 4 mln sq ft

Others Renovate

Banks Take On More Space


Toronto’s Luxury Hotels Continue Construction

Opening Soon:

Ritz-Carlton ... (2010)

Trump Tower ... (2011)

Four Seasons ... (2012)

Shangri-La ... (2012)

Page 23-24


Stocks Volatile Because of Uncertainty

Dividend Yields

TSX

S&P 500 2.0%

2.7%

TSXDJIANasdaqS&P 500

GoCsUS Treasuries

CRB IndexGoldOil

Y-T-D 2010

3.4% 3.0% 2.9% 1.7%

7.2% 11.1%

-1.6% 17.8% -8.4%

-19% -24% -18% -28%

-1% -1%

-41% 0%

-50%

31% 19% 44% 23%

-2% -5%

23% 24% 78%

-35% -34% -41% -38%

13% 15%

-36% 6%

-54%+67.7%

+60.5%

Stocks

Bonds

Commodities

Financial Market Returns – Local Currency (% chng : as of September 22, 2010)

2008 2009 Since Peak

Returns SinceMarch 9, 2009

(local currency)

TSX

S&P 500


TSX Outperforms

Local Currency

02 03 04 05 06 07 08 09 1050

100

150

200

250

300

350

US$-terms

02 03 04 05 06 07 08 09 1050

100

150

200

250

300

350

(January 1, 2002 = 100 : as of September 22, 2010)

S&P 500

TSX

S&P 500

TSX

Page 25-26


REITs Fare Better in CanadaReal Estate Investment Trusts

Local Currency

07 08 09 1020

40

60

80

100

120

140

US$-terms

07 08 09 1020

40

60

80

100

120

140

S&P 500

TSX

S&P 500

TSX

(January 1, 2007 = 100 : as of September 21, 2010)


Global Equities: New Challenges(y-t-d % chng : as of September 22, 2010)

Equity MarketsGermany

TSXDJIA

UKS&P 500

BrazilAustralia

JapanSpainChina

Greece

-35 -30 -25 -20 -15 -10 -5 0 5

4.23.4

3.02.6

1.7-0.4

-4.3-9.3

-11.6-20.1

-31.1

Page 27-28


Challenges to Growth

Fiscal Restraint

Private Deleveraging

Confidence

Jobless US

Canada Subject to Global Downdraft


Opportunities for Canada

Emerging Market Growth

Demand for Food andIndustrial Materials

Canadian Banks Strong

Foreign Demand

Strong Currency

Page 29-30

Sherry cooper handout

Real Estate

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