2020 Economic Outlook

N N 2000 2001 2001 2002 2003 2004 2005 2006 2006 Slower global growth and capacity constraints will keep a lid on economic growth • ■ The U.S and China recently signed the 'phase 1' trade deal that prevents the introduction of further tariffs and includes a partial repeal of existing tariffs. The agreement leaves most existing tariffs still in place, but lessens downside risks to the external growth backdrop for Canada. ■ Recent domestic data has been soft in Canada. By our counts, Q4/2019 GDP growth is on track to decelerate to 0.3% from an already below-trend 1.3% increase in Q3. Transitory factors, a week-long rail transportation strike in November, for example, explain some but not all of the slowing. The pace of job growth has slowed, on balance, but labour markets still look solid. The unemployment rate was right around multi-decade lows at 5.5% in January and wage growth remained solid. This alongside lower market interest rates have eased the headwind on household spending growth from higher debt-servicing costs. Uncertainty from slower global growth, geopolitical risk and transportation capacity issues in the oil & gas sector will continue to restrain business investment. For Q1/2020, we expect the reversal of several transitory factors to be dampened by some negative spillovers to the Canadian economy from the COVID-19 outbreak. Looking ahead, we expect GDP increases of 1.4% in 2020 and 1.8% in 2021. - The blockades disrupting rail transportation in February represent some downside risk to our current quarter Canadian GDP projections. At this point, we expect the impact in Q1 will be relatively modest with a rebound in Q2 assuming that the disruptions end in the next week or two. Canadian inflation trends have been firmly anchored around the Bank of Canada's 2% target. Headline inflation and the Bank of Canada's preferred measures of underlying inflation trends both averaged 2.1% in Q4/2019. Canadian Inflation (YoY) (1) 5 4 3 2 1 0 -1 Ари Canadian Labour Markets (YoY) (2) 13 12 11 10 32208 165 9 7 543210 -1 -2 -3 Headline 2007 2008 2009 2010 2011 2011 2012 BoC Target 2013 2014 2015 2016 2016 2017 2018 2019 (1) Statistics Canada, RBC Economics Research. (2) Statistics Canada, Bureau of Labor Statistics, RBC Economics Research. 32 ECONOMIC BACKDROP 1991 Employment growth (YoY%- RHS) 1992 1993 1994 1996 1997 1998 1999 2001 2002 2003 2004 2006 2007 2008 2009 2011 2012 2013 2014 2016 2017 2018 2019 Unemployment rate (% - LHS) RBC

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