The Global Economic & Financial Outlook

Neil Shankar Economist

TD Economics

January 6, 2016

Economic & Financial Themes

Global

• Weaker potential growth = thin cushion for data or event risk = to absorb market volatility

• Laundry list of risks: post-Brexit uncertainty, China slowdown, other geopolitical factors

• Implicit central bank backstop means bad news can be good news

Canada

• Positive: Benefits from stronger U.S. growth and weaker currency in the near-term

• Negative: Potential trade barriers = increased business uncertainty

US

• The Federal Reserve caught in a dual world

domestic economy resilient; inflation diverging with global peers

global instability and disinflation can undermine the US cyclical advantage

2

Running Speed Of Key Economies: Slowing Down

3

2.5 2.5 2.3

1.7

4.0

1.7 1.5

1.7

1.1

3.3

U.S. Canada UK Euro Area Global Growth

What potential GDP is believed to have been, 2002-07, %

What economists think potential GDP is, 2015-20, %

Source: OECD November 2007 & 2016 June Economic Outlook & May 2014 Long-Term Baseline Projection.

Calculations by TD Economics.

Global Outlook Maintains Low And Slow Path

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

U.S. Canada UK Eurozone EMs ex-China Global

2016 2017 2018

Real GDP growth, y/y %

Source: TD Economics. Forecast as at December 2016.

4

China's Economy Not What It Used To Be

5

10 11

8 8

18

25

2001-2005 2006-2010 2011-2015 2016-2020**

Actual GDP growth (Avg. Y/Y % Chg. for period)

Middle class as a % of total population*

Source: China National Bureau of Statistics, Haver Analytics.*Note: 2011-2015 figure for middle class as a share of total population is estimate as of

2011. **Forecast by TD Economics/IMF.

6-6.5

China's Two World Economy

6

-10

-5

0

5

10

15

20

ElectricityConsumption -Manufacturing

Freight Traffic (Tons) ElectricityConsumption -Services andHouseholds

Civil AviationPassenger Traffic

(Persons)

Retail Sales

Old Economy New Economy

2014 2015 2016 *

Y/Y % Chg.

Source: Haver Analytics. As of November 2016.

7

What Does This New Economy Mean?

0

10

20

30

40

50

60

70

80

90

100

Primary Secondary Tertiary

Industry sector share of total output, %

Source: China National Bureau of Statistics, TD Economics

China Is Following The Evolution Of Others Into Services

8

0

10,000

20,000

30,000

40,000

50,000

60,000

30 40 50 60 70 80 90

China

South Korea

Taiwan

United States

Japan

Source: National statistical agencies via Haver Analytics, TD Economics.

Real GDP per capita, $2010 U.S. dollars

Services share of GDP, %

2015

1987 2015

1992

2015

1980

2014

1947

2015

1987

Why Canada Matters For Vermont

9

0 5 10 15 20 25 30 35 40 45

UK

Mexico

China

Malaysia

AsianTigers

Canada

Source: U.S. Census Bureau, TD Economics. As of October 2016.

Asian Tigers are the highly developed economies of Hong Kong, Singapore, South Korea and Taiwan

Share of total exports, %

Vermont's Manufacturing More Outward Focus

10

40

60

80

100

120

140

160

180

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Vermont U.S.

Source: U.S. BEA, U.S. Census Bureau, TD Economics.

Manufacturing exports as a share of total manufacturing output, %

Exports as a share of GDP

VT U.S.

2005 16.4% 6.4%

2015 11.8% 9.3%

Beneath The Surface: Soft Underbelly In Canadian Economy

-0.8%

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

Jun-2015 Dec-2015 Jun-2016

GDP GDP ex. Energy

Canada Real GDP, M/M % Chg.

Source: Statistics Canada, TD Economics

GDP Forecasts, Y/Y % Chg.

TD

Economics

Bank of

Canada

2016 1.4 1.1

2017 1.8 2.0

2018 1.7 2.1

11

Investment And Export Swing Needed To Drive Growth

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2014 2015 2016 2017 2018

Consumption + InventoriesNet ExportsResidential InvestmentBusiness InvestmentGovernmentGDP

Q4/Q4 % Chg; p.p. Contribution to GDP Growth.

Source: Statistics Canada, Forecast by TD Economics as at December 2016.

Forecast

12

Silver Lining: Canadian Investment Trough Within Sight

-450

-350

-250

-150

-50

50

150

250

350

450

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2014 2015 2016 2017 2018

Contribution to GDP growth; Engineeringstructures (LHS); Canada

Oil & Gas Rotary Rigs; Canada (RHS)

Percentage Points

Source: BEA, Baker Hughes. Forecast By TD Economics as at November 2016.

Forecast

Units

13

Tourism-Related Sectors Underpin Job Gains

-100.0

-50.0

0.0

50.0

100.0

150.0

200.0

250.0

300.0

2011 2012 2013 2014 2015 2016 YTD

Other

Information Culture & Recreation

Educational Services & Health Care

Professional, Scientific & Technical Services

Manufacturing, Oil & Gas Extraction

Change in Employment, 000's

Source: Statistics Canada, TD Economics.

14

No Lack Of European Political Uncertainty On Deck For 2017

2017

German Elections

Dutch General Election

French Elections Norwegian

General Election UK exit from

EU?

December 2016

Austrian Presidential Election Italian constitutional referendum

15

Central Banks Rely On Negative Rate Policy

0

10

20

30

40

Q2-2014 Q3-2014 Q4-2014 Q2-2016 Current

Source: Bloomberg, TD Economics. *Includes 21 developed countries. As at January 2016.

%, Government bonds with a negative yield as a percentage of total outstanding

16

In Search of Yields: Investors Flood Into Emerging Markets

17

-30

-20

-10

0

10

20

30

Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16

Daily portfolio flows to EMs* since Aug. 1 2015, $ U.S. billion

Source: IIF, TD Economics. Last observation December 7, 2016. *Includes daily portfolio flows for Indonesia, India, Thailand, Korea, South Africa, Brazil,

Hungary, Turkey, Mexico.

U.S. Dollar Strength Has Triggered EM Capital Outflows

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

Oct-05-16 Oct-20-16 Nov-04-16 Nov-19-16 Dec-04-16 Dec-19-16

Total Equity* Debt**

Daily portfolio flows to EMs since October 5, 2016, $U.S. billion

Source: IIF, TD Economics. *Includes daily equity flows for Indonesia, India, Korea, Thailand, South Africa, Brazil, Philippines, Turkey. **Includes daily debt flows for

Indonesia, India, Thailand, South Africa, Hungary, Turkey, Mexico.

Last observation: December 20, 2016.

18

Market Expectations for Fed Hikes Moved Higher Post-Election

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Current 2016 2017 2018 2019 Longer Term

Federal Reserve Expectations (As of December 14, 2016 Meeting)

TD Forecast (Forecast as of December 2016)

Market Expectations Pre-Election

Current Market Expectations*

Source: Federal Reserve Board, Bloomberg, TD Economics. *OIS curve: December 22, 2016.

Median FOMC participant projection & market expectation; %

19

U.S. Dollar Likely To Remain Elevated Due To Global Adjustment

20

90

95

100

105

110

115

120

125

130

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

vs. Other Trading Partners

vs. Major Trading Partners

Nominal trade-weighted US dollar (Q2-2014=100)

Source: Haver Analytics. Forecast by TD Economics as at December 2016.

Forecast

Some EMs More Vulnerable Than Others

21

0

5

10

15

20

25

30

35

40

Increased vulnerability

Source: IIF EM debt monitor database. Last observation: 2016Q2

Total U.S. dollar denominated debt, % share of GDP

22

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