THE ECONOMICS OF CHANGE WARREN JESTIN l CHIEF ECONOMIST

2015 Economic & Market Outlook

December 2014

2 Warren Jestin | Chief Economist

The U.S. Gears Up

Source: Statistics Canada, BEA, Bloomberg, Scotiabank Economics.

-6

-4

-2

0

2

4

6

2007 08 09 10 11 12 13 14e 15f 16f

annual % change

Real GDP Growth

U.S.

Japan

Euro zone

Canada

Forecasts at December 2, 2014

U.S boosted by consumer

revival, lower energy costs &

less fiscal drag.

Oil price decline & softer

housing market temper

Canadian growth outlook.

Euro zone in fragile recovery,

as Russian shock erodes

benefits of lower energy costs.

Japan struggles to exit

recession, despite huge policy

stimulus & yen depreciation.

3 Warren Jestin | Chief Economist

China Gears Down

Source: Bloomberg, Scotiabank Economics.

-2

0

2

4

6

8

10

12

14

16

2007 08 09 10 11 12 13 14e 15f 16f

annual % change

Real GDP Growth

Brazil

China

India

Forecasts at December 2, 2014

Uneven emerging market

activity as oil producers &

consumers hit by lower prices.

China’s growth hovers near 7%

as domestic and external

demand moderate.

Better news in India leads to

gradual convergence of

China-India growth rates.

Slow recovery in Brazil should

be visible by late 2015.

4 Warren Jestin | Chief Economist

Unemployment Rate

Source: Statistics Canada, BLS, Scotiabank Economics.

U.S. Labour Market Moves from Laggard to Leader

0

2

4

6

8

10

12

2007 08 09 10 11 12 13 14 15f 16f

U.S.

Canada

%

Forecasts at December 2, 2014

U.S. job growth leads Canada,

with unemployment rate below

6% for first time since 2008.

Weak oil prices undercut job

gains in Canada’s energy-rich

provinces…

… while the lower loonie and

U.S. recovery benefit many

industries, including

manufacturing…

… leading to a more balanced

growth performance across

Canada.

5 Warren Jestin | Chief Economist

60

70

80

90

100

110

120

2007 08 09 10 11 12 13 14e 15f 16f

Motor Vehicle Sales

Source: Statistics Canada, BEA, Scotiabank Economics.

Pent-Up Demand Puts U.S. Shoppers In A Buying Mood

U.S.

Canada

index, 2007 = 100

Forecasts at December 2, 2014

Low borrowing costs & record

employment push Canadian

vehicle sales to record levels…

… but moderating job gains &

high household debt temper

the Canadian outlook.

Buoyant job gains, pent-up

demand & low interest rates

drive U.S. consumers…

… pushing U.S. vehicle sales

to pre-recession levels, with

further gains likely into 2016.

6 Warren Jestin | Chief Economist

Housing Starts

Source: CMHC, U.S. Commerce Department, Scotiabank Economics.

40

50

60

70

80

90

100

110

2007 08 09 10 11 12 13 14e 15f 16f

U.S.

Canada

index 2007 = 100

Housing Activity Underpins U.S. Outperformance

Forecasts at December 2, 2014

Increase in U.S. housing

activity as job gains boost

confidence & unleash pent-up

demand.

The revival in U.S. residential

construction is good news for

Canadian lumber exporters.

Canada’s housing market

softens alongside record home

ownership rates & high debt

levels …

… but a sudden reversal is

unlikely with employment at

record highs & borrowing

costs near generational lows.

7 Warren Jestin | Chief Economist

-12

-10

-8

-6

-4

-2

0

2

2007 08 09 10 11 12 13 14e 15f 16f

Federal Fiscal Balance

Source: Finance Canada, U.S. Treasury, Scotiabank Economics.

Gradual Improvement in the Federal Fiscal Balance

Canada

% of GDP

Forecasts at December 2, 2014

U.S. ex.

Social

Security

Stronger growth & previous

fiscal cutbacks have led to a

sharp improvement in

Washington’s deficit...

… allowing the government to

turn down fiscal drag & offer

more support to U.S. growth.

Sharply lower oil prices reduce

but won’t forestall Ottawa’s

return to fiscal balance…

… but new energy market

realities pose big challenges

for producing provinces.

8 Warren Jestin | Chief Economist

40

50

60

70

80

90

100

110

120

130

07 08 09 10 11 12 13 14

Autos & Parts

Canadian Exports

Energy

Products

Source: Statistics Canada, Scotiabank Economics.

Energy Has Become Canada’s Export Leader

$ bns, annualized,

4-quarter moving average

Forecasts at December 2, 2014

U.S. sales account for roughly

three-quarters of Canadian

exports.

While a weaker loonie & U.S.

revival will boost our non-

commodity exports…

... sharply lower oil prices will

frustrate an improvement in

Canada’s trade balance…

… because energy accounts

for one-quarter of Canada’s

overall exports.

9 Warren Jestin | Chief Economist

The Loonie Swoons on Weak Commodity Prices

Source: Bloomberg, Scotiabank Economics.

50

60

70

80

90

100

110

0.50

0.60

0.70

0.80

0.90

1.00

1.10

2007 08 09 10 11 12 13 14 15f 16f

CADUSD

Loonie Moves Below Parity

WTI Oil

(RHS)

Canadian Dollar

(LHS)

USD/barrel

4QMMA

Forecasts at December 2, 2014

The Canadian dollar is

expected to gravitate towards

85 cents(US) into 2016.

Lower commodity prices,

particularly oil, have undercut

commodity currencies…

… the U.S. revival & investor

risk aversion have bolstered

the greenback …

… & soft growth suggests the

Bank of Canada will lag the

Fed in raising interest rates.

10 Warren Jestin | Chief Economist

-1

0

1

2

3

4

2007 08 09 10 11 12 13 14e 15f 16f

Inflation

Source: Statistics Canada, BLS, Scotiabank Economics.

Inflation Interrupted … Once Again

U.S.

Canada

average annual % change

Forecasts at December 2, 2014

Lacklustre global growth &

sharply lower oil prices have

dragged down global inflation.

Even with some rebound in

energy prices & a revival in

global demand, inflation will

remain subdued into 2016.

For central banks, reviving &

sustaining growth will be the

top priority beyond mid-

decade.

11 Warren Jestin | Chief Economist

0

1

2

3

4

5

6

2007 08 09 10 11 12 13 14 15f 16f

Source: Bank of Canada, U.S. Federal Reserve, Scotiabank Economics.

Central Bank Rates

U.S.

%

Canada

Monetary Policy On Hold For Now

Forecasts at December 2, 2014

While the U.S. Fed may raise

rates by mid-2015, sustaining

growth is the top priority…

… signs of reduced economic

momentum will push the Fed

to the sidelines …

Weak commodity prices & soft

domestic growth will keep the

Bank of Canada from raising

rates into 2016.

Low inflation & uneven global

growth will limit the back-up in

U.S. & Canadian bond yields.

12 Warren Jestin | Chief Economist

Disclaimer

TM Trademark of The Bank of Nova Scotia. Used under license, where applicable. This report has been prepared by Scotiabank Economics as a resource for the clients of Scotiabank. Opinions, estimates and projections contained herein are our own as of the date hereof and are subject to change without notice. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. Neither Scotiabank nor its affiliates accepts any liability whatsoever for any loss arising from any use of this report or its contents.