Patricia Croft, Vice President & Chief Economist

Phillips, Hager & North Investment Management Limited

Global Economic Outlook:Global Economic Outlook:

Shifting Tectonic PlatesShifting Tectonic Plates

October 2008October 2008

The Greatest Credit Bubble of All Time

The Greatest Credit Bubble of All Time

1. Liquidity – too much and too cheap

2. Trend to deregulation

3. Boom in securitization

� Democratized credit provision but disconnected lender and

borrower

4. Overconfidence in financial models

Result: A fundamental change to world financial system

Third Banking Crisis Since 1930sThird Banking Crisis Since 1930s

U.S. Bank and Thrift Failures

Today

0

100

200

300

400

500

600

1934 1942 1950 1958 1966 1974 1982 1990 1998 2006

Source: Federal Deposit Insurance Corp., The Mortgage Lender Implode-O-Meter.com

9 banks and 265 major

U.S. lenders have

"imploded" since late

2006

(Un)Happy Anniversary(Un)Happy Anniversary

� Problem confined to

sub prime

� Problem confined to the US

� Minimal losses

� No impact on the real economy

� Global decoupling

� Cross product contagion to ABCP, MBS, SIVs, monoline insurers, auction rate securities, LIBOR financing

� Problem now global

� Writedowns to date $500 bn – estimates of $1 trillion ++

� US in recession – UK, Japan and Europe heading that way

� Global recoupling – China, India slowing

Unprecedented ActionsUnprecedented Actions

December – Fed allows banks to borrow using wider range of collateral

January – Fed makes emergency ¾% cut in fed funds

March – Fed and Treasury broker sale of Bear Stearns to JP Morgan

July – SEC curbs improper short selling of Fannie/Freddie

September – Federal government takes control of F&F pledging to provide up to $200 billion

WHAT’S NEXT??

The Credit Crisis Is Not OverThe Credit Crisis Is Not Over

� Bailout of Fannie/Freddie will reduce the cost of

borrowing but will not end the credit crisis nor

rescue the US economy

� European/UK banks under pressure

� Emerging market stock markets plunge – risk

appetite goes into reverse

� Deleveraging is a painful prolonged process

� China now world’s fourth largest economy

� Potential growth in China and India far superior

� Lower labour costs

� Growing middle class & market reforms

� Long-term potential growth rate in G-7 is falling due to

demographics – 2% or lower

� Canada risks falling further behind

The World is ChangingThe World is Changing

“There is a fundamental shift in global economic tectonic plates”The Conference Board of Canada

Globalization – An Integrated World Economy

World Trade as Share of World GDP

Source: IMF, Economist Intelligence Unit

0

10

20

30

40

50

60

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

%

Chindia: Bigger than U.K. & France on a

Nominal GDP Basis

Proportion of world GDP, % (2005, nominal)

0 5 10 15 20 25 30

U.S.

Japan

Germany

China

U.K.

France

12. India

Source: World Bank

Advanced

Emerging

Emerging Economies Key to Global Growth Outlook

Emerging Economies Key to Global Growth Outlook

63

55

60

43

37

45

40

57

25

30

35

40

45

50

55

60

65

70

75

2000 2008 2000 2008

Share of World GDP Share of World GDP growth

%

Source: International Monetary Fund

Catching UpCatching Up

Year that India overtakes individual economies

Year that China overtakes individual economies

2005 20352010 2015 2020 20402025 2030

Germany Japan U.S.A.

Italy Germany Japan

Source: Globe & Mail

2050: A Different World2050: A Different World

World’s Ten Largest Countries in Population (millions)

1 China 1,318

2 India 1,132

3 U.S. 302

4 Indonesia 232

5 Brazil 189

6 Pakistan 169

7 Bangladesh 149

8 Nigeria 144

9 Russia 142

10 Japan 128

Canada 32.9

1 India 1,747

2 China 1,437

3 U.S. 420

4 Indonesia 297

5 Pakistan 295

6 Nigeria 282

7 Brazil 260

8 Bangladesh 231

9 Dem Rep of Congo 187

10 Philippines 150

Canada 41.6

Source: Population Reference Bureau

2007 Rank Country Population

2050 Rank Country Population

The World is ChangingThe World is Changing

Largest shopping mall? China

World’s tallest building? Dubai

World’s largest publicly traded company? China

Largest roller coaster? Singapore

Largest casino? Macao

World’s largest investment fund? Abu Dhabi

Biggest movie industry? Bollywood

World’s Top Ten - 2008World’s Top Ten - 2008

3. Bill Gates US $58 bn

2. Carlos Slim Helu Mexico $60 bn

1. Warren Buffet US $62 bn

4. Lakshmi Mittal India $45 bn

5. Mukesh Ambani India $43 bn

6. Anil Ambani India $42 bn

8. KP Singh India $30 bn

7. Ingvar Kamprad Sweden $31 bn

9. Oleg Deripaska Russia $28 bn

10. Karl Albrecht Germany $27 bn

Show Me the Money!Show Me the Money!

0

5

10

15

20

25

30

35

40

2005 2006 2007

($'0

00

bn

)

Africa 14.9%Middle East 17.5%

Latin America 20.4%

Asia-Pacific 12.5%

Europe 5.3%

North America 4.4%

High net-worth Individuals, wealth by region

Total 9.4%

% Change

Sources: Capgemini; Merrill Lynch

� World’s largest debtor nation – sizeable current

account and federal budget deficits

� A consuming society that is running out of steam

� Political power waning?

Why is the World So Pessimistic About the US?

Why is the World So Pessimistic About the US?

“The US economy is on a road to disaster and the dollar along with it”Jim Rogers

US is World’s Largest Debtor NationUS is World’s Largest Debtor Nation

U.S. Credit Market Liabilities, % of GDP

50

100

150

200

250

300

350

400

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

%

Source: U.S. BEA

Personal Savings Rate Near Record LowPersonal Savings Rate Near Record Low

Personal Savings Rate

% o

f d

isp

osab

le in

co

me

Mean

Two standard deviations

Source: US Bureau of Economic Analysis, NBF Financial

-2

0

2

4

6

8

10

12

14

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

2%

1%

House Prices to Fall FurtherHouse Prices to Fall Further

US Real House Prices: Projections

Source: Office of Federal Housing Enterprise Oversight, Bureau of Labor Statistics, PH&N

Ind

ex

Return to trend

1989-92 crash: 25% decline

1979-82 crash: 40% decline

85

95

105

115

125

135

145

155

165

175

1975 1980 1985 1990 1995 2000 2005 2010

US Has Greater Income Inequality Than Other Developed Countries

US Has Greater Income Inequality Than Other Developed Countries

60

51

47

46

41

40

39

37

28

25

Bolivia (2002)

Zambia (2004)

China (2004)

Mexico (2004)

U.S. (2000)

Burkina Faso (2003)

Israel (2001)

India (2004)

Ukraine (2003)

Sweden (2000)

Gini Index of Income Distribution – Zero = Perfect Equality

Source: 2007 Population Reference Bureau

Greater income

inequality Is

associated with

worse health status

31Canada (2003)

Obesity Has Become A Global ProblemObesity Has Become A Global Problem

Percent of adults who are obese (2005)

24

13

4

24

7

37

2

10

13

21

34 35

42

Japan South Korea

Italy Morocco Mexico South Africa

United States

Source: 2007 Population Reference Bureau

Canada

2323

Males aged 15+

Females aged 15+

Health Care & Defense Will Put Pressure Health Care & Defense Will Put Pressure

on the Deficiton the Deficit

Educ, Training & Soc. Svcs. 3%

Veterans Benefits 2%

Transportation 2%

Justice 1%

Natural Resources & Environment 1%

International Affairs 1%Science, Space & Tech 1%

Agriculture 1%

Others include:

National Defense17%

Off-budget14%

Income Security

11%

Medicare11%

Health 8%

Social Security 18%

Debt Interest 7%

Others14%

Drop in US Dollar Reflects Global Drop in US Dollar Reflects Global

PessimismPessimism

U.S. Current Account Balance & Dollar Index

-7

-6

-5

-4

-3

-2

-1

0

1

2

1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006

% o

f G

DP

70

80

90

100

110

120

130

140

150

Ind

ex

CA balance, % of GDP (left)

Trade-weighted value of US dollaragainst major currencies (right)

Source: U.S. BEA, Federal Reserve

Europe

JapanChina

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

% o

f G

DP

Source: IMF, Datastream

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

% o

f G

DP

Source: IMF

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

% o

f G

DP

Source: IMF

World Happy to Cover US Shortfall for NowWorld Happy to Cover US Shortfall for Now

Current Account Balances, % of GDPCurrent Account Balances, % of GDP

United States

% o

f G

DP

Source: Bureau of Economic Analysis

Demographics Suggest Shrinking Labour Supply

Demographics Suggest Shrinking Labour Supply

Working-Age Population, % of Total

50

52

54

56

58

60

62

64

66

68

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

%

G7

North America

Japan

Source: US Census Bureau, PH&N

Fertility Rates – 2.1 Is The Magic NumberFertility Rates – 2.1 Is The Magic Number

Fertility Rates, 2007

United States 2.1

France 2.0

UK 1.8

Canada 1.5

Aboriginal 2.6

Italy 1.4

Spain 1.4

Japan 1.3

Germany 1.3

Source: 2007 Population Reference Bureau, Statistics CanadaFertility Rate = average number of children born to a woman in her lifetime

Pakistan 4.1

Saudi Arabia 4.1

India 2.9

Brazil 2.3

China 1.6

Russia 1.3

US In Better Shape Than JapanRatio of 65+ To Working Age Population: Dependency Ratio

US In Better Shape Than JapanRatio of 65+ To Working Age Population: Dependency Ratio

0

10

20

30

40

50

60

70

80

1950

1955

1960

1965

1970

1975

1980

1985

1990

1990

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

Rati

o

Canada

Japan

US

Germany

Source: U.S. Census Bureau

Dependency Ratios

US Growth Could be Sub Par for Some Time

US Growth Could be Sub Par for Some Time

� Housing market will be a multi-year work out process

� Consumer spending set to slow but…

� …it has been a mistake to short the US consumer

� Don’t underestimate the willingness of the rest of the

world to invest in the US

Instead of Decline of the American Empire…

What about the rise of the rest?

Every few decades a significant shift occurs in the world economy with far reaching implications

Another Way to Look At This IssueAnother Way to Look At This Issue

Today it could be the BRICs

Youthful BRICsYouthful BRICs

Source: Goldman Sachs

Working-age Population, % of Total

55

57

59

61

63

65

67

69

71

73

75

2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

% o

f to

tal

G7 Brazil

China Russia

India

Working-age = ages 15-65 G7

Brazil’s Potential Growth Rate Much HigherBrazil’s Potential Growth Rate Much Higher

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1992-2000 2000-2025 2025-2050

%

Labour Force

Productivity

8.8%

4.9%4.5%

Figures show potential growth rate

Canada’s Long Term Potential Just 1.25%Canada’s Long Term Potential Just 1.25%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1990 - 2000 2000 - 2025 2025 - 2050

%

Labour Force

Productivity

2.4%

2.0%

1.25%

Source: BCA Research

Figures show potential growth rate

China’s Demographics Negative China’s Demographics Negative -- Consumer Consumer

Potential EnormousPotential EnormousChina's Working-Age Population,% of Total

Source: Goldman Sachs Research "Dreaming with BRICs: The Path to 2050", U.S. Census Bureau, PH&N

55

57

59

61

63

65

67

69

71

73

75

05 10 15 20 25 30 35 40 45 50

% o

f to

tal

Working-age = ages 15-65

Peaks in 2010- 11

2005

20152025

0

10

20

30

40

50

60

70

80

90

100

Brazil China India RussiaSource: UN

Population with income above U.S. $3,000 as % of total

At Some Point China Will Move from Supplier

Of Labour to Demander of Consumer Goods

Bond Market Trend Intact Bond Market Trend Intact –– For NowFor Now

10-year Treasury bond yield

10-year average

Source: U.S. Federal Reserve

2

4

6

8

10

12

14

16

1953 1963 1973 1983 1993 2003 2007

%

China Is A Trading GiantChina Is A Trading Giant

0

3

6

9

12

15

18

21

24

27

30

1981 1985 1989 1993 1997 2001 2005

Ind

ex,

1981 =

1

China's Exports

China's Imports

World Trade

Source: IMF International Financial Statistics

China Now World’s Second Largest China Now World’s Second Largest

ExporterExporter

Share of World Exports

China United States Germany

Source: IMF Direction of Trade Statistics

0

2

4

6

8

10

12

14

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

%

A Made In Canada DichotomyA Made In Canada Dichotomy

� It’s Canada’s time to shine…

� Strong domestic demand

� Lowest unemployment rate in almost 30 years

� Near record labour force participation rate

� Only G-7 country with twin surpluses

� But beneath the surface….

� Productivity growth is weak

� Face growing competition from Asia and others

� Soaring C$ weighs on exports

C$ Driven by Oil and Economic OutlookC$ Driven by Oil and Economic Outlook

Canadian dollar and WTIMonthly since 1995

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1995 1997 1999 2001 2003 2005 2007

US

$ p

er

C$

0

20

40

60

80

100

120

140

US

$/b

arr

el

USD per CAD (left)

Crude Oil - WTI Spot (right)

Correlation since

1995 = 0.89

Source: Bank of Canada, Datastream

Average Annual Growth Rate in Labour Productivity (2000-2005)

0

1

2

3

4

5

6

Czech

Rep

ub

lic

Hu

ng

ary

Ko

rea

Po

lan

d

Irela

nd

U.S

.

Jap

an

Fin

lan

d

UK

Au

str

ali

a

Fra

nce

Can

ad

a

Au

str

ia

Sw

itzerl

an

d

Sp

ain

Mexic

o

Ita

ly

Canada Lags In Labour Productivity Growth – Parity Not Justified

Canada Lags In Labour Productivity Growth – Parity Not Justified

% c

ha

ng

e,

Source: The Conference Board of Canada

The Impact of Globalization?

United States

Canada

Canada & US Manufacturing Employment

Source: Statistics Canada, US BLS

75

80

85

90

95

100

105

110

115

120

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Ind

ex,

Jan

. 1987

= 1

00

Exports to China

Exports to the US 73.4% 76.5%

Imports from US 69.2 65.0

Exports to China 1.0 2.0

Imports from China 1.0 9.3

1990 2007

Canadian Trade Still Regional Not GlobalCanadian Trade Still Regional Not Global

The Changing Nature of Canadian TradeThe Changing Nature of Canadian TradeC

$ m

illio

ns

Surplus on energy

Surplus on autos and parts

Source: Statistics Canada

-2000

-1000

0

1000

2000

3000

4000

5000

6000

7000

97 98 99 00 01 02 03 04 05 06 07 08

China Has Surpassed Canada In Terms of China Has Surpassed Canada In Terms of

US Market ShareUS Market Share

Canada & China Share of US Imports

% o

f U

S i

mp

ort

s

China's rank:

Source: US Census Bureau

Canada

China

0

5

10

15

20

25

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

<10 9 8 6 5 4 3 2 1

Canada and China/IndiaRisks and Opportunities

Canada and China/IndiaRisks and Opportunities

� Risks

� Competition and loss of market share

� Outsourcing

� Opportunities

� We have what China wants

� New markets for Canadian products

Est. 1964Est. 1964

Your QuestionsYour Questions