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Excerpts from RBC’s  Economic Updates

U . S . H I G H L I G H T S

The U.S. economy grew at a 3.5% annualized pace in the third quarter backed by a rebound in consumer spending and surging residential investment, which ended 14 quarters of decline.

Early reports on fourth-quarter activity point to another increase in output, with the ISM manufacturing
index driving solidly into expansionary territory in October and housing indicators pointing to firming sales against a shrinking inventory overhang.  However, emerging from the deepest recession since the Great Depression, the U.S. economy remains fraught with uncertainty about the health of the financial system and pockets of weakness outside of housing.

Our forecast is that the first rate increase will come late next year with the funds target ending 2010 at 75 basis points and then rising to 2.75% by yearend 2011.

G L O B A L   H I G H L I G H T S

The tide has turned for the global economy with U.S. real GDP posting a strongerthan-expected increase in the third quarter, the Reserve Bank of Australia (RBA) citing Australia’s good economic performance as a reason for raising the policy rate and China recording a breathtaking 8.9% increase in third-quarter output.

Canada, the United Kingdom and the Eurozone have yet to produce clear indications that their economies are out of recession, but conditions are improving and we expect reports of positive growth soon. Central banks are cautious, however, with only the RBA of the major central banks we cover starting to unwind monetary policy stimulus. Given the deep hole in economic activity, it is likely to be a long time before other banks will be in a position to follow the RBA’s lead, with hikes expected to come in the latter part of 2010 and continuing in 2011.

C A N A D A ‘ S   E C O N O M I C    P I C T U R E 

Unlike the United States where the data point to the end of recession, Canada’s numbers are less clear-cut. The third quarter showed stronger-than-expected gains in employment and housing, but both July and August’s GDP reports disappointed.  Our estimate that the economy expanded in September will skate GDP
back into positive territory, but the risks are that the rebound will fall short of the consensus forecast for a 2% annualized gain. Our reckoning is that on an expenditure basis,real GDP growth was 0.5% to 1% at an annual rate in the quarter.

The rebound in U.S. growth, low rates combined with government spending augur well for an improving trend to emerge in quarterly growth rates in the latter

C A N A D A    H I G H L I G H T S

Unlike the United States where the data point to the end of recession, Canada’s numbers are less clear-cut.
The economy shrank by 0.1% in August after posting no growth in July.  We think that the economy will
skate back into positive territory in September, but the risks are that the rebound will fall short of the consensus forecast for a 2% annualized gain.

Our reckoning is that on an expenditure basis, real GDP growth was 0.5% to 1% at an annual rate in the third quarter.  For the Bank of Canada, the road to the normalization of interest rates will be long. Our forecast is that the Bank will boost the overnight rate to 1.25% by the end of 2010 with further increases in 2011, yielding a policy rate of 3.5% by year-end.

L O O K    A H E A D    T O    2 0 1 0    A N D    2 0 1 1

While near-term indicators signal an end to the global recession, markets remain worried about the durability of the upturn as fiscal and monetary policy support subsides. In Canada, the recovery started with a whimper rather than a bang, but we expect the momentum to build, spurred by a strengthening U.S. economy, low interest rates and a steady influx of government spending. Consumer confidence increased for seven months and, although the index edged down in October, it remained near the highest level since early 2008. With asset values recouping part of their losses and interest rates extraordinarily low, we expect consumer spending will recover in 2010, helped early in the year by government programs like the Renovation Tax Credit. We forecast that the economy will grow by 2.6% in 2010 with the unemployment rate peaking early in the year and then drifting lower.

I N T E R E S T    R A T E   F O R E C A S T S

Quarter	Q4-09	Q1-10	Q2-10	Q3-10	Q4-10	Q1-11	Q2-11
Overnight Lending Rate	.25	.25	.25	.75	1.25	2.75	3.50
5 Yr GoC bonds	2.75	2.80	2.85	3.10	3.40	3.70	4.05