Global Economic Research

August 5, 2011

Global Forecast Update

Annus Interruptus
Once again, we are lowering our forecast for output growth in many of the advanced nations in 2011, outside of Japan which is mounting a strong recovery from its early-year catastrophe, and maintaining a belowconsensus forecast for next year. We have left unchanged our growth expectations in the major developing countries because of the continuing strength of domestic demand, notwithstanding the likelihood of reduced exports to the struggling economies in Europe and the United States. Overall, global growth is now pegged modestly lower at 4.0% this year and 4.3% in 2012. We have lowered our real GDP forecast for the United States by threequarters of a percentage point this year to 1.8% (versus 3% in 2010). The pace of output was much weaker-than-expected in the first half of the year, owing in part to substantial downward revisions to the Q1 estimate as well as the generally softer tone to Q2 reports. With July indicators pointing to a more moderate Q3 rebound, the slower transition into the second half of the year brings down our estimate for 2012 growth by about a quarter of a percentage point to 2.5%. The compounding effects of a number of factors affecting the United States the early-year spike-up in gasoline and other commodity prices, the supply chain disruptions triggered by Japans temporary production shutdowns, the slump in hiring, the renewed debt crisis in Europe, and more recently, the U.S. debt ceiling controversy have conspired to further undermine consumer confidence and spending power. The compromise reached over the debt ceiling woes results in very modest additional federal spending restraint for fiscal 2012 given the framework of more significant mid-term spending cutbacks. Congress, however, is unlikely to rubber stamp the extension through 2012 for all of Washingtons varied economic support initiatives. We are also lowering our forecast for the euro zone because of the intensifying pace of fiscal consolidation, not only in the peripheral countries, but in the big economies as well. The regions growth remains highly delineated, with Germany and France continuing to outperform both on a domestic demand and external trade basis. As expected, production in the Asia-Pacific region is rebounding from the Japanese supply chain disruptions that began in mid-March and extended throughout the second quarter. We continue to forecast that China will remain a very strong performer despite ongoing efforts to control inflation and slow the pace of credit expansion. The weaker U.S. performance will have a ripple effect on Canada through reduced trade and increased financial market volatility. However, domestic demand remains relatively strong compared to other developed countries, with spending supported by comparatively firmer job and income growth. Solid demand and high prices for commodities, underpinned by favourable conditions in the higher-growth developing nations, should continue to support resource-related developments, trade, and investments across Canada.
Index Overview Forecasts North America International Commodities Provincial Financial Markets 1-2 3 4 4 5 6

Global Manufacturing PMI Global Manufacturing PMI

60 55 50 45 40 35 30 00 01 02 03 04 05 06 07 08 09 10 11 Source: JP Morgan, Bloomberg. index

Global Forecast Update is available on: www.scotiabank.com, Bloomberg at SCOE and Reuters at SM1C

Global Economic Research

August 5, 2011

Global Forecast Update

The reduced growth prospects, primarily in some of the debt-heavy developed economies, will likely take a toll on domestic business plans. However, corporate balance sheets are in relatively good shape, and profits have been supported by increasing productivity-enhancing investments and a sharp eye on costs. Firms will continue to focus on capital spending in the current uncertain marketplace, and take advantage of government incentives for machinery & equipment purchases. Headline inflation is peaking for the time being around the world, alongside the modest retreat in key commodity prices. At the same time, the upward trend in core prices will be constrained by the slower pace of recovery. In an environment where many of the largest economies internationally are having difficulty maintaining economic traction, and where business and consumer confidence is being aggravated by intensifying financial market volatility, central banks will find it hard to begin, or in some cases resume, the process of normalizing interest rates. Instead, short-term borrowing costs can be expected to remain low for longer. Government bond yields have retreated substantially in recent weeks amid slowing growth and increased fiscal stress. However, as the pace of economic activity begins to generate stronger momentum, bond yields are expected to resume their upward drift. Heightened credit concerns are expected to weigh more heavily on the more highly indebted nations around the world. Although the U.S. dollar has benefitted from the renewed safe-haven inflows, the daunting fiscal challenge that confronts America should eventually re-instate a weakening bias in the currency. In contrast, the less indebted and more commodity-sensitive currencies (such as the Canadian and Australian dollars) should retain their strengthening bias, as will the currencies of the much stronger-growth developing economies, China and Brazil for example. (For a perspective on foreign exchange trends, please refer to our August 2011 Foreign Exchange Outlook at http://www.scotiacapital.com/English/bns_econ/fxout.pdf.)

Global Economic Research

August 5, 2011

Global Forecast Update

North America
Canada Real GDP Consumer Spending Residential Investment Business Investment Government Exports Imports Nominal GDP GDP Deflator Consumer Price Index Core CPI Pre-Tax Corporate Profits Employment thousands of jobs thousands of jobs (Q4/Q4) Unemployment Rate (%) Current Account Balance (C$ bn.) per cent of GDP Merchandise Trade Balance (C$ bn.) Federal Budget Balance (C$ bn.) per cent of GDP Housing Starts (thousands) Motor Vehicle Sales (thousands) Motor Vehicle Production (thousands) Industrial Production United States Real GDP Consumer Spending Residential Investment Business Investment Government Exports Imports Nominal GDP GDP Deflator Consumer Price Index Core CPI Pre-Tax Corporate Profits Employment millions of jobs millions of jobs (Q4/Q4) Unemployment Rate (%) Current Account Balance (US$ bn.) per cent of GDP Merchandise Trade Balance (US$ bn.) Federal Budget Balance (US$ bn.) per cent of GDP Housing Starts (millions) Motor Vehicle Sales (millions) Motor Vehicle Production (millions) Industrial Production Mexico Real GDP Industrial Production Consumer Price Index (year-end) Current Account Balance (US$ bn.) per cent of GDP

2000-09

2010

2011f

2012f

(annual % change) 2.1 3.2 3.8 2.0 3.5 -0.7 2.1 4.5 2.4 2.1 1.9 3.0 1.6 241 229 7.0 13.8 1.2 51.7 2.0 0.3 201 1,591 2,481 -0.6 3.2 3.3 10.2 7.3 4.7 6.4 13.1 6.3 2.9 1.8 1.7 21.2 1.4 231 279 8.0 -50.9 -3.1 -9.0 -36 -2.2 190 1,557 2,100 4.6 2.6 2.0 2.9 14.4 1.5 5.0 6.1 5.5 2.8 2.9 1.6 13.0 1.7 283 287 7.5 -40.7 -2.4 1.4 -30 -1.8 183 1,590 2,250 5.0 2.4 2.4 2.2 8.4 -0.8 6.0 4.9 4.2 1.8 2.1 1.9 11.0 1.1 191 174 7.3 -36.7 -2.1 4.3 -20 -1.1 175 1,605 2,400 4.5

Forecast Changes
Canada & United States

We have lowered our forecast of U.S. GDP growth by 0.7 percentage points to 1.8% in 2011, and by 0.2 percentage points to 2.5% for 2012. Much of the 2011 downgrade reflects a weaker first-half performance. Growth remains constrained by cautious consumer sentiment, modest hiring activity, and ongoing deleveraging. Business investment and exports will continue to lead growth. We have lowered our expectations for Canadian GDP growth given a weaker U.S. economic performance and a more cautious consumer. Output growth is now expected to average 2.6% this year and 2.4% in 2012, down 0.1 percentage points in each year from our prior forecast. Despite the recent slowdown, an end to supply disruptions caused by the Japanese earthquake and tsunami will lift North American vehicle production and industrial activity in the second half of 2011. Rising vehicle output will add at least a percentage point to economic growth across North America in the third quarter. This represents a sharp reversal from recent months, when parts shortages contributed to the latest soft patch in economic activity. Supporting Canada's growth is the gradual unwinding of the two-year federal fiscal stimulus, including the completion of a number of infrastructure projects during the first half of fiscal 2011-12. The projected U.S. federal deficit for fiscal 2012 is slightly narrower, with slower economic growth offsetting some of the savings from several expiring federal initiatives and the modest firstyear impact of the Budget Control Act. We have adjusted our expectations for Mexican economic growth in 2011 from 4.4% to 3.9%, and from 3.8% to 3.5% for 2012. This adjustment primarily reflects the impact of the slowdown in the United States, rather than in local economic conditions.

1.7 2.2 -5.0 0.6 2.1 3.2 2.5 4.1 2.4 2.6 2.2 4.8 0.1 0.18 -0.09 5.5 -573 -4.7 -632 -318 -2.4 1.54 15.8 10.9 -0.3

3.0 2.0 -4.3 4.4 0.7 11.3 12.5 4.2 1.1 1.6 1.0 32.2 -0.7 -0.97 0.70 9.6 -471 -3.2 -646 -1,294 -8.9 0.58 11.6 7.7 5.3

1.8 2.0 -1.9 7.1 -1.9 7.7 5.3 3.8 2.0 2.8 1.5 7.0 1.1 1.37 1.71 9.0 -485 -3.2 -753 -1,340 -8.9 0.59 12.7 8.5 3.8

2.5 2.0 3.7 5.8 -0.5 7.2 3.8 4.2 1.7 2.0 1.7 6.0 1.7 2.29 2.64 8.5 -465 -3.0 -775 -1,150 -7.3 0.73 13.5 9.1 3.7

Mexico

1.7 1.0 4.9 -10.4 -1.3

5.4 6.0 4.4 -5.6 -0.5

3.9 3.9 3.6 -10.9 -0.9

3.5 3.5 3.8 -19.0 -1.5

Global Economic Research

August 5, 2011

Global Forecast Update

International
Real GDP (annual % change) World United Kingdom Euro zone Germany France Italy Spain Japan Australia China India Korea Brazil Chile Peru Consumer Prices (y/y % change, year-end) United Kingdom Euro zone Germany France Italy Spain Japan Australia China India Korea Brazil Chile Peru Current Account Balance (% of GDP) United Kingdom Euro zone Germany France Italy Spain Japan Australia China India Korea Brazil Chile Peru Commodities (annual average) WTI Oil (US$/bbl) Brent Oil (US$/bbl) Nymex Natural Gas (US$/mmbtu) Copper (US$/lb) Zinc (US$/lb) Nickel (US$/lb) Gold, London PM Fix (US$/oz) Pulp (US$/tonne) Newsprint (US$/tonne) Lumber (US$/mfbm)

2000-09

2010

2011f

2012f

Forecast Changes
International

3.6 1.7 1.1 0.9 1.4 0.5 2.6 0.6 3.1 9.4 7.4 4.4 3.3 3.6 5.2

5.1 1.4 1.7 3.5 1.4 1.3 -0.1 4.0 2.7 10.4 9.0 6.2 7.5 5.8 8.8

4.0 1.2 1.7 3.3 1.9 0.8 0.7 0.3 3.4 9.3 8.3 5.0 4.0 6.5 6.0

4.3 1.5 1.5 2.1 1.4 0.9 1.0 3.5 3.0 9.5 8.5 5.3 4.5 5.5 5.8

1.9 2.0 1.7 1.9 2.3 3.0 -0.3 3.2 2.0 6.2 3.1 6.7 3.5 2.5

3.7 2.2 1.9 2.0 2.1 2.9 0.0 2.7 4.6 9.5 3.5 5.9 1.4 2.1

4.4 2.5 2.6 2.5 2.7 2.8 0.8 2.8 5.0 7.5 3.7 6.5 4.0 4.0

2.1 2.1 1.8 1.5 2.1 2.2 1.3 2.5 4.5 6.0 3.3 5.5 3.5 3.7

As global growth prospects remain uncertain and euro zone inflation eases towards the European Central Banks (ECB) target of below, but close to, 2% by the end of 2012, the ECB will likely take a break from monetary tightening after raising its benchmark rate to 2.0% by the end of Q1 2012. Following measures against the strong Swiss franc that took the Swiss National Banks target rate for the threemonth Libor to as close to zero as possible, we expect Swiss policymakers to maintain the current policy stance until the third quarter of 2012 when a symbolic rate hike to 0.25% will likely take place. Asian economies are muddling through, with the expedited recovery in Japan a sign of the regions industrial momentum. The value of Japanese exports jumped in the second quarter, averaging barely 4% less than the level of the previous three months. We are maintaining our relatively optimistic expectation of a 0.3% y/y real GDP gain in 2011. Elsewhere in the region, high price pressures led us to raise South Korean inflation for 2011 to 3.7% y/y. As inflation trends down but remains elevated by historical standards, we foresee monetary tightening giving way to a pause sometime towards year-end. Spot gold prices reached a new record high of US$1,681 per ounce in intraday trading on August 3 amid lingering financial market concern over high government deficits and debt in the United States and peripheral euro-zone countries. Given recently weak U.S. economic indicators and a loss of faith in the U.S. dollar and the euro, investors are turning to fiat currencies with intrinsic value like gold. The opportunity cost of holding gold is low, given negative real short-term interest rates. Gold prices will likely climb to the US$1,700 mark by late 2011. Gold has been a strong asset class in 2011, rising 18% since late 2010 compared with a 7.9% decline in the S&P/ TSX Composite and a 4.6% decline in the S&P500.

-2.2 -0.2 3.6 -0.4 -1.7 -5.9 3.3 -4.7 5.4 -0.6 2.3 -0.7 0.9 -0.7

-3.2 -0.4 5.4 -2.3 -3.5 -4.6 3.6 -2.7 5.2 -2.6 2.8 -2.2 1.9 -1.5

-2.0 -0.4 5.4 -2.3 -3.3 -3.4 2.6 -2.9 4.3 -3.0 2.1 -2.4 -0.5 -2.5

-1.6 -0.2 5.4 -2.4 -3.1 -3.1 2.8 -3.1 3.5 -2.7 1.3 -2.8 -1.0 -2.6

Commodities

51 50 5.95 1.78 0.73 7.11 522 668 572 275

79 80 4.40 3.42 0.98 9.89 1,225 960 607 254

97 111 4.40 4.35 1.05 11.25 1,540 984 650 265

100 114 4.75 4.30 1.06 9.35 1,650 1,045 715 270

Global Economic Research

August 5, 2011

Global Forecast Update

Provincial

2000-09

2010 2011f 2012f

2000-09

2010

2011f

2012f

Forecast Changes
Provincial

Real GDP* (annual % change) Canada Newfoundland & Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia 2.1 3.1 1.7 1.7 1.8 1.8 1.7 2.1 1.6 2.7 2.5 3.2 6.0 2.0 2.1 3.3 2.7 3.4 2.0 4.4 3.8 4.0 2.6 4.0 2.0 1.8 1.7 2.2 2.4 2.3 3.5 4.0 2.8 2.4 2.5 2.1 1.9 2.0 2.4 2.1 2.5 3.2 3.3 3.0

Budget Balances*, FY March 31 ($millions) 9,024 99 -26 52 52 -115 -722 -55,598 -36,000 -30,000 -33 -74 -269 -738 485 -54 569 * -740 59 -42 -390 -449

-3,174 -4,200 -3,800 -19,262 -16,686 -16,315 -467 48 * 0* -309 * -438 383 0 -925

Central Canada will be most affected by the slowdown in U.S. industrial activity. GDP accounts show that ex-autos, Ontarios manufacturing sector continues to struggle, with exporters facing the twin challenges of low consumer demand in the United States and a high Canadian dollar. Quebec has been similarly affected, but will see a boost from aerospace production ramping up in 2012. Sluggish retail sales underline a slowdown in consumer spending in British Columbia, in part reflecting some moderation after the boost provided by the Olympic Games during the first half of 2010. Underperformance in the labour market is another factor, as the pace of job growth, though improving, has trailed the national average. Wildfires in Northern Alberta weighed on Canadas GDP for the month of May, indicating that the effect was more widely spread than initial reports. A restart in production will boost thirdquarter results in 2011. Despite emerging challenges, resource sector activity, including major hydro-electricity developments, is underpinning growth in a number of regions. Several upside events are anticipated, such as the awarding of the major federal shipbuilding contract. Final results to date for fiscal 2010-11 from the three westernmost Provinces and Nova Scotia leave the aggregate provincial deficit slightly wider than $21 billion (1.2% of GDP), an improvement of more than $1 billion from the spring Budget estimates.

312 ** -201 425 425 4,268 0 870 -1,864

** FY04-FY09.

* For 2010, Statistics Canada's preliminary estimates of GDP at basic prices by industry.

* Final result; other FY11-FY12 data: Provinces' estimates.

Employment (annual % change) Canada Newfoundland and Labrador Prince Edward Island Nova Scotia New Brunswick Quebec Ontario Manitoba Saskatchewan Alberta British Columbia 1.6 0.5 1.3 1.1 1.0 1.5 1.4 1.2 1.0 2.8 1.6 1.4 3.3 2.9 0.2 -0.9 1.7 1.7 1.9 0.9 -0.4 1.7 1.7 3.1 0.8 0.1 -0.7 1.4 1.9 1.0 0.8 2.9 1.0 1.1 1.0 0.9 0.8 0.9 1.1 1.1 1.1 1.1 1.8 1.3 7.0 15.3 11.3 8.8 9.4 8.3 6.8 4.8 5.0 4.6 6.6

Unemployment Rate (annual average, %) 8.0 14.4 11.2 9.3 9.3 8.0 8.7 5.4 5.2 6.5 7.6 7.5 12.4 11.0 9.4 10.1 7.7 7.9 5.1 5.1 5.2 7.5 7.3 12.1 10.6 9.1 9.7 7.5 7.8 5.0 5.0 4.9 7.3

Housing Starts (annual, thousands of units) Canada Atlantic Quebec Ontario Manitoba Saskatchewan Alberta British Columbia 201 12 44 74 4 4 35 27 190 13 51 60 6 6 27 26 183 12 47 65 5 6 23 25 175 11 44 57 5 5 27 26

Motor Vehicle Sales (annual, thousands of units) 1,591 113 404 607 44 40 205 178 1,557 122 414 576 44 46 200 155 1,590 123 420 586 46 48 210 157 1,605 124 423 592 46 49 212 159

Global Economic Research

August 5, 2011

Global Forecast Update

Financial Markets
Canada BoC Overnight Target Rate 3-month T-bill 2-year Canada 5-year Canada 10-year Canada 30-year Canada Real GDP (q/q, ann. % change) Real GDP (y/y, % change) Consumer Prices (y/y, % change) Core CPI (y/y % change) United States Fed Funds Target Rate 3-month T-bill 2-year Treasury 5-year Treasury 10-year Treasury 30-year Treasury Real GDP (q/q, ann. % change) Real GDP (y/y, % change) Consumer Prices (y/y, % change) Core CPI (y/y % change) Spreads Target Rate 3-month T-bill 2-year 5-year 10-year 30-year Central Bank Rates European Central Bank Bank of England Swiss National Bank Bank of Japan Reserve Bank of Australia Exchange Rates Canadian Dollar (USDCAD) Canadian Dollar (CADUSD) Euro (EURUSD) Euro (EURGBP) Sterling (GBPUSD) Yen (USDJPY) Australian Dollar (AUDUSD) Chinese Yuan (USDCNY) Mexican Peso (USDMXN) Brazilian Real (USDBRL)

10Q4

11Q1

11Q2

11Q3f

11Q4f

12Q1f

12Q2f

12Q3f

12Q4f

(%, end of period) 1.00 1.05 1.68 2.42 3.12 3.53 3.1 3.3 2.3 1.6 1.00 0.96 1.83 2.78 3.35 3.76 3.9 2.9 2.6 1.3 1.00 0.90 1.59 2.33 3.11 3.55 0.5 2.5 3.4 1.6 1.00 0.90 1.30 1.90 2.60 3.20 2.4 2.5 2.8 1.6 1.00 0.95 1.45 2.00 2.80 3.40 2.7 2.4 2.7 1.7 1.00 1.15 1.80 2.25 3.10 3.50 2.5 2.0 2.2 1.8 1.50 1.70 2.15 2.65 3.30 3.75 2.5 2.6 1.8 1.9 2.00 2.25 2.30 2.80 3.35 3.90 2.3 2.5 2.1 2.0 2.25 2.30 2.50 2.90 3.45 4.10 2.3 2.4 2.2 2.0

0.25 0.12 0.59 2.00 3.29 4.33 2.3 3.1 1.3 0.6

0.25 0.09 0.82 2.28 3.47 4.51 0.4 2.2 2.3 1.1

0.25 0.01 0.46 1.76 3.16 4.37 1.3 1.6 3.5 1.5

0.25 0.05 0.40 1.35 2.50 3.90 2.0 1.5 3.1 1.6

0.25 0.15 0.45 1.50 2.75 4.10 3.0 1.7 2.8 1.7

0.25 0.20 0.65 1.70 3.10 4.25 2.6 2.2 2.0 1.7

0.25 0.40 0.90 2.15 3.40 4.40 2.6 2.5 1.7 1.7

0.75 1.00 1.40 2.45 3.70 4.60 2.4 2.6 2.2 1.8

1.25 1.45 1.80 2.70 4.10 4.90 2.4 2.5 2.2 1.8

0.75 0.93 1.09 0.42 -0.17 -0.80

0.75 0.87 1.01 0.50 -0.12 -0.75

0.75 0.89 1.13 0.57 -0.05 -0.82

0.75 0.85 0.90 0.55 0.10 -0.70

0.75 0.80 1.00 0.50 0.05 -0.70

0.75 0.95 1.15 0.55 0.00 -0.75

1.25 1.30 1.25 0.50 -0.10 -0.65

1.25 1.25 0.90 0.35 -0.35 -0.70

1.00 0.85 0.70 0.20 -0.65 -0.80

1.00 0.50 0.25 0.10 4.75

1.00 0.50 0.25 0.10 4.75

1.25 0.50 0.25 0.10 4.75

1.50 0.50 0.00 0.10 5.00

1.75 0.50 0.00 0.10 5.25

2.00 0.50 0.00 0.10 5.50

2.00 0.75 0.00 0.10 5.75

2.00 1.00 0.25 0.10 6.00

2.00 1.25 0.25 0.10 6.25

1.00 1.00 1.34 0.86 1.56 81 1.02 6.6 12.3 1.66

0.97 1.03 1.42 0.88 1.60 83 1.03 6.5 11.9 1.63

0.96 1.04 1.45 0.90 1.61 81 1.07 6.5 11.7 1.56

0.96 1.04 1.45 0.90 1.61 79 1.08 6.4 12.0 1.57

0.96 1.04 1.50 0.92 1.63 80 1.09 6.3 12.0 1.60

0.95 1.05 1.48 0.90 1.65 82 1.09 6.2 12.1 1.61

0.95 1.05 1.46 0.87 1.67 83 1.10 6.1 12.1 1.62

0.94 1.06 1.43 0.85 1.69 84 1.10 6.0 12.2 1.64

0.94 1.06 1.40 0.82 1.70 85 1.11 5.9 12.4 1.65

Scotia Economics
Scotia Plaza 40 King Street West, 63rd Floor Toronto, Ontario Canada M5H 1H1 Tel: (416) 866-6253 Fax: (416) 866-2829 Email: scotia_economics@scotiacapital.com
This Report is prepared by Scotia Economics as a resource for the clients of Scotiabank and Scotia Capital. While the information is from sources believed reliable, neither the information nor the forecast shall be taken as a representation for which The Bank of Nova Scotia or Scotia Capital Inc. or any of their employees incur any responsibility.