Economic Backdrop and Financial Performance Objectives

Central bank interest rate hikes to slow consumer and business spending ■ Inflation is still running above the Bank of Canada's (BOC) 2% target, but the pace has slowed and the breadth of price growth has narrowed after peaking earlier in calendar 2022. Global inflation pressures have dissipated on lower commodity prices and easing supply chain pressures. Three-month average growth in the BoC's preferred median and trim inflation measures are still running above the BoC's 1% to 3% target range. ■The BoC held the overnight rate steady at 5% in January, extending a pause after the last hike in July 2023. But a softening economic backdrop signals further easing in inflation pressures. With the Canadian population growing rapidly, GDP is tracking a sixth consecutive quarterly decline in per-capita output in calendar Q4 2023. The unemployment rate has edged higher over the last calendar year with increased employment counts no longer keeping up with surging population growth. Interest rates are already at levels that are high enough to restrict economic activity, and we expect slower price growth alongside a weakening economic backdrop will push the BoC to start the rate cuts by mid-year. High interest rates are exerting a growing toll on Canada's housing markets. The uptick seen in early results from local estate boards was from depressed levels in most cases and did little to alter the generally soft state of affairs in the housing sector (with a few key exceptions). But it suggests the downturn that started in the spring of 2022 may have run its course. ■ GDP growth is expected to slow in the U.S. in the first half of Calendar 2024, and to remain low in Canada. Contingent on slow economic growth and further easing in inflation pressures, the BoC and U.S. Federal Reserve are expected to pivot to gradual interest rate cuts by mid-year. Canadian Inflation (YoY) (1) Canadian Labour Markets (YoY) (2) 7 -1 -2 89654321012 2000 2001 2002 2003 2004 2005 2006 2007 2008 Headline 2009 2010 2011 2012 2013 2014 2015 BoC Target 2021 2022 2023 (1) Statistics Canada, RBC Economics Research. (2) Statistics Canada, Bureau of Labor Statistics, RBC Economics Research. 41 ECONOMIC BACKDROP 13 9 7 2210 2 8 1654 11 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Employment growth (YOY% - RHS) Unemployment rate (% - LHS) RBC 7 2 -3 -8 -13 12

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