Global Economic Research July 23, 2010

Highlights Index
2 Forecasts
The Week — A happy, though subdued global anniversary.
3 The Week
Canada — Retail sales take a dip to start the summer,
however growth is expected to continue through the year. 4 Canada

United States — Housing acts as a drag on second-quarter 5 United States

GDP growth.
6 Mexico & Developing Americas
Mexico — Domestic demand gains captured in recently
published data. 7 Europe

Latin America — Puerto Rico's successful implementation 8 Asia / Oceania

of fiscal austerity and economic recovery.
9 Industry & Commodity
Europe — Markets require time to digest EU bank stress
test results; seven out of 91 banks require more capital. 10 Market Metrics / Fiscal Policy

Asia / Oceania — Indian central bank expected to increase 11 Economic Tables

interest rates once again next week.
12 Financial Tables
Industry — Grain prices are poised for recovery.

New Releases
Scotiabank Commodity Price Index (07/21)

Scotia Economics
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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
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 Global Economic Research July 23, 2010

Forecasts
Economic Performance (annual % change unless otherwise indicated)
2000-08 2009 2010f 2011f 2000-08 2009 2010f 2011f
Canada United States
Real GDP 2.6 -2.5 3.4 2.6 2.4 -2.4 3.2 2.6
Consumer Prices 2.3 0.3 1.9 2.3 2.9 -0.3 1.8 1.7
Pre-tax Profits 7.8 -32.3 26.0 12.5 5.3 -3.8 25.0 11.0
Federal Budget Balance ($bn) 8.4 -48.0 -43.0 -28.0 -197 -1413 -1380 -1220
Current Account Balance ($bn) 20.5 -43.5 -31.3 -29.2 -596 -378 -434 -477
Merchandise Trade Balance ($bn) 58.1 -4.6 6.5 7.5 -648 -507 -617 -685
Motor Vehicle Sales (000s)* 1,605 1,461 1,525 1,570 16.4 10.4 11.5 12.2
Motor Vehicle Production (000s)* 2,590 1,425 2,200 2,300 11.5 5.6 7.8 8.1
Housing Starts (000s)* 207 149 190 175 1.65 0.55 0.65 0.95
Employment 1.9 -1.6 1.4 1.5 0.7 -4.3 -0.2 2.2
Jobs Created (000s)* 301 -272 237 251 0.86 -5.87 -0.23 2.84
Unemployment Rate (%) 6.9 8.3 8.1 7.9 5.1 9.3 9.6 9.1

Mexico Euro zone

Real GDP 2.8 -6.5 4.8 3.5 1.9 -4.1 0.8 1.0
Consumer Prices 5.1 3.6 4.9 4.6 2.2 0.9 1.3 1.7

Latin America (Excl. Mexico) Asia

Real GDP 3.8 -0.4 4.6 3.7 5.2 1.4 5.4 4.8
Consumer Prices 8.1 7.0 7.9 4.5 1.6 0.8 2.0 2.0
*In the United States, millions.

Commodity Prices (US$ annual average)

2000-08
2000-08 2009
2009 2010f
2010f 2011f
2011f
Pulp (tonne) 662
662 720
720 970
970 815
815
Newsprint (tonne) 574
574 560
560 600
600 680
680
Lumber (mfbm)
Lumber (mfbm) 286
286 178
178 235
235 240
240
Copper (lb)
Copper (lb) 1.72
1.72 2.34
2.34 3.10
3.05 3.10
3.05
Zinc (lb)
Zinc (lb) 0.73
0.73 0.75
0.75 0.88
0.88 0.85
0.85
Nickel (lb)
Nickel (lb) 7.16
7.16 6.50
6.50 8.95
8.95 8.95
8.95
WTI Oil
WTI Oil (bbl)
(bbl) 49.93
49.93 62
62 79
79 80
80
Nymex Natural Gas (US$/mmbtu) 6.15 4.15 4.75 4.75
Nymex Natural Gas (US$/mmbtu) 6.15 4.15 4.75 4.75
Wheat (tonne) 223 454 305 290
Wheat (tonne) 223 454 305 290

Financial Markets (end of period, % unless otherwise indicated)

10Q1 10Q2f 10Q3f 10Q4f 11Q1f 11Q2f 11Q3f 11Q4f
CANADA
3-month T-bill 0.30 0.61 1.05 1.20 1.70 2.15 2.35 2.30
5-year Canada 2.90 2.33 2.50 2.70 2.85 3.05 3.20 3.50
10-year Canada 3.57 3.08 3.15 3.25 3.45 3.55 3.65 3.95
UNITED STATES
3-month T-bill (Yield) 0.15 0.17 0.20 0.22 0.40 0.95 1.55 1.85
5-year Treasury 2.54 1.77 1.95 2.15 2.35 2.45 2.65 3.15
10-year Treasury 3.83 2.93 3.00 3.10 3.25 3.45 3.80 4.25
CANADIAN-US SPREADS
3-month T-bill 0.15 0.44 0.85 0.98 1.30 1.20 0.80 0.45
5-year 0.36 0.56 0.55 0.55 0.50 0.60 0.55 0.35
10-year -0.26 0.15 0.15 0.15 0.20 0.10 -0.15 -0.30
Canadian Dollar (USDCAD) 1.02 1.06 1.01 1.00 0.99 0.98 0.97 0.97
Canadian Dollar (CADUSD) 0.98 0.94 0.99 1.00 1.01 1.02 1.03 1.03
Yen (USDJPY) 93 88 93 95 97 98 99 100
Euro (EURUSD) 1.35 1.22 1.17 1.19 1.21 1.22 1.24 1.26
Sterling (GBPUSD) 1.52 1.49 1.48 1.50 1.51 1.52 1.54 1.55
Mexican Peso (USDMXN) 12.4 12.9 12.7 12.8 12.9 13.0 13.1 13.2

2
Global Economic Research
The Week Past, Present & Prospects
Aron Gampel
(416) 866-6259
aron_gampel@scotiacapital.com
Anniversary
A year ago, there were few if any meaningful signs that the global
economy was emerging from a steep recession and credit crisis, even
though financial markets were flashing green for go. A year later and
a year of comparatively good if not great growth internationally, there
are increasing signs that the global economy is losing some
momentum, and that credit problems in certain markets persist, with
financial markets signalling yellow for caution.
A year ago, consumers were in hibernation. A year later, households are
opening up their wallets and buying again, although the overall pace of
expenditures remains on the sluggish side outside of the rapidly
expanding emerging economies. Many of the large, advanced nations
that have been saddled with major-league housing corrections, the U.S.,
the U.K., Ireland, and Spain, for example, are witnessing a concerted
effort by households to pay down debt, save more, and spend less.
A year ago, inventories had been driven down to extraordinary levels
as production was curtailed, plants shuttered, and employees cut. A
year later, production has ramped up and inventory shelves are being
restocked, though private sector hiring is generally lagging in the
advanced nations outside of Canada and Australia.
A year ago, commodity prices were rocketing higher on the back of a
renewed boom in the emerging economies, notably China, but India
and Brazil as well. A year later, commodity prices have either
steadied or slipped back a notch alongside a slowing in some of
China’s high growth real estate markets, and the trade repercussions
associated with the moderation in global demand.
A year ago, global stock markets were already climbing sharply
higher from their recession depths, on their way to recording
impressive rebounds in anticipation of improving corporate revenues.
Investors increasingly became less risk averse, recycling their savings
out of the perceived safety of U.S.-dollar Treasury assets. A year later,
many companies around the world are reporting solid results, though
equities are giving back some of their gains, likely in anticipation of
more challenging times ahead. Investors have once again become
more defensive and risk averse.
July 23, 2010
A year ago, inflation pressures were gradually
unwinding in most regions. A year later, inflation
pressures are still unwinding in most regions
around the world, a response to the excess capacity
that the recession built up in labour, product and
real estate markets. A few countries, Spain and
Japan for example, are experiencing deflationary
conditions, though some nations, India for
example, are experiencing high and/or rising
inflation.
A year ago, policymakers had significantly opened
their monetary and fiscal taps. A year later, some
higher-growth nations have already begun the
process of closing the taps. Higher-growth and less
debt-burdened countries among both the advanced
and emerging nations have begun the process of
raising borrowing costs. Interest rates are rising in
India, Brazil, South Korea, Canada, Australia, and
Norway, for example. Fiscal consolidation is already
underway in the U.K. and on the continent, with the
G20 nations, including the United States, committed
to begin the process of restoring budgetary
discipline now that the recovery has taken hold.
China has implemented credit tightening initiatives
and is allowing the yuan to creep higher.
A year ago, financial institutions were beginning to
slowly reopen the credit taps as the global downturn
was arrested and began to turn around. A year later,
the rebuilding of balance sheets is well underway,
with the forthcoming capital deepening and
regulatory overhaul expected to reinforce the more
cautious lending environment.
A year ago, confidence was low and slow to turn to
the upside. A year later, confidence is higher, but
has been relatively fast to turn to the downside. In
this ‘unusually uncertain’ environment, expect
policymakers to ‘gradually’ normalize their policy
settings, businesses to pursue moderate expansion
plans and fortify their revenue streams, and
households to remain cautious shoppers and bigger
savers. ■
3
Global Economic Research July 23, 2010

Canada

Alex Koustas
Neil Tisdall (416) 866-6252
(416) 866-4212
neil_tisdall@scotiacapital.com
alex_koustas@scotiacapital.com
Review
BoC Policy Announcement — The Bank of Canada
Retail Sales Take A Dip To Start The Summer
(BoC) increased its overnight rate 25 basis points this
Strong employment gains and a booming housing market led to a week to 0.75%, following a June 1st hike of the same
vigorous rebound in retail sales earlier in the year, as consumer amount. Canada is the first G7 nation to embark on a
policy tightening cycle, reflecting the relatively stronger
confidence improved dramatically. However, after a period of
pace of domestic demand. Nonetheless, the BoC
significant consumer credit expansion amid stimulative monetary revised lower its forecast for Canadian GDP growth for
conditions, Canadians have started to ebb their expenditures this year and next, to 3.5% and 2.9% respectively,
somewhat. The Bank of Canada’s gradual withdrawal of given a weaker profile for global growth and more
accommodative policy measures, coupled with increased volatility in modest consumer spending here at home.
Notwithstanding price distortions caused by recent or
financial markets, and cooling housing markets, have served to take upcoming changes in provincial indirect taxes, the BoC
some of the steam out of consumer expenditure growth. expects total and core inflation to remain near its 2.0%
inflation target through the forecast period, consistent
SALES & CONFIDENCE Retail sales slipped for a second straight with ‘gradual’ rate hikes. However, given a high degree
REMAIN STRONG month in May — down 0.2% m/m — of uncertainty with respect to the outlook for inflation
index:
10 y/y % change 2002=100 100 marking the first consecutive sales decline and growth, BoC Governor Mark Carney said in a press

8 since 2008. Nonetheless, sales on a year- conference following the rate hike that there ‘is no
CONSUMER preordained path for interest rates in this country’. We
6 CONFIDENCE
90 to-date basis still remain quite strong, up
continue to forecast a further 25 basis point hike in
4 (RHS) 6.7% over the same five-month period as September.
80
2 last year.
0 CPI — Consumer inflation pressures eased in June,
70
-2 RETAIL A decline in gasoline and auto sales once with the headline index up 1.0% y/y (from 1.4% in
May), and the BoC’s core measure of CPI slowing to
-4 SALES again weighed on overall purchases. Lower
60
(LHS) 1.7% y/y (from 1.8%). On a monthly (seasonally-
-6 prices at the pump depressed receipts for adjusted) basis, total CPI fell 0.2% m/m, primarily due
-8 50
gasoline, down 2.4%, while a 0.5% to a sharp drop in energy prices, though core prices
Jan-09 Jul-09 Jan-10
pullback in auto sales was mainly edged up only by a modest 0.1% m/m.
attributable to lower volumes. The Preview
expiration of the home renovation tax credit has been particularly
IPPI & RMPI (07/29)
difficult for building material & garden centres, with a 4.3% m/m
decline marking yet another disappointing month for the segment. Real GDP (07/30)

Overall, six of the eleven retail segments experienced declines, with core
sales (ex-autos) dropping 0.1%.
However, sales did increase 0.4% in volume terms, as lower gasoline
prices and discounts at clothing and footwear retailers likely generated
increased consumer activity. Retailers continue to be proactive in their
efforts to lure cautious shoppers, all while keeping a close eye on
inventories. Employee pricing initiatives by a number of auto
manufacturers are likely to lead to increased sales postings over the
summer months.
Overall, the upward trend in retail sales growth is
expected to continue, though at a more modest pace,
alongside healthy gains in employment and the slow
recovery of the U.S. economy. Strength in
consumer confidence numbers — up roughly 15%
y/y — suggests a healthy outlook for retailers. ■

4
Global Economic Research July 23, 2010

United States Neil Tisdall (416) 866-6252

neil_tisdall@scotiacapital.com

Gorica Djeric Review

(416) 866-4214 Existing Home Sales — Existing home sales fell 5.1%
gorica_djeric@scotiacapital.com m/m in June, the second drop in as many months,
reversing solid gains in March and April. The decline
was slightly less than market expectations. With a still-
high unemployment rate, and homebuying tax
Housing Market Continues To Struggle incentives long passed, weak resale figures in the
Headline housing starts disappointed already-weak expectations. housing market will likely extend through the summer,
and into the fall.
However, the fact that permits were up — and all of the decline in
June’s starts was focused on lower value-added multiple-family units Leading Indicators — The U.S. composite leading
indicator fell 0.2% m/m in June, dragged down by
— makes the drop in headline starts somewhat less disconcerting.
building permits and stock prices. This follows a 0.5%
gain in May, and a 0.1% decline in April. April’s decline
200
HOUSING STARTS - PERMITS Single-family homes retreated only 0.7%
was the first since March 2009, when the economy was
(000, SAAR)
m/m from a rate of 457,000 in May to first coming out of recession.
150
SINGLES ONLY 454,000 in June. It was multiple-family
100 units that accounted for the headline drop Preview
50 in total starts, falling 21.5% m/m. New Home Sales (07/26)

S&P Case-Shiller Home Price Index, Consumer

0 Building permits rose 2.1% m/m, posting
Confidence, Richmond Fed Index (07/27)
-50 their first increase since March. However,
Durable Goods Orders, Beige Book (07/28)
-100 it was condos that led the gain — up 19.6%
m/m — offsetting the 3.4% fall in single- Employment Cost Index, GDP, Chicago PMI,
-150
ALL family issuance, its third straight monthly Consumer Sentiment (07/30)
-200
decline.
00 02 04 06 08 10

The most recent homebuilders’ sentiment

survey was a disappointment, with the overall index now only slightly
stronger than the record low set in January 2009. What’s more, the
number of prospective homebuyers touring model homes fell again,
signaling the likelihood of further declines in builder confidence, as
falling foot traffic precedes a likely further decline in sales.
Housing will be a clear drag on second-quarter GDP growth. It is
worth noting that it is not existing or pending home sales that need to
be used in judging the impact of the housing market activity on the
U.S. economy, since it is primarily new home construction that
represents how housing flows into GDP.
Resales are mostly just paper swaps between parties, with little value
added in the transaction from a GDP accounting standpoint. Value
added to the economy comes from incremental increases in the
housing stock. Housing starts are now back to the lowest level since
last October, but not as low as October’s 529,000 print. On a quarterly
basis, starts fell 2.4% q/q in the second quarter, or 10% at an
annualized rate. Further, it is single-family home construction that is
taking it hard, as relatively cheap and lower value-
added multiples stand up stronger, and that worsens
the hit to GDP.
That said, housing is half the share of GDP today
than it was five years ago. While it carries influence
as a confidence factor applied to consumer
spending, it has fallen sharply in its importance to
overall GDP growth compared to, say, business
investment, which now accounts for about triple
housing’s weight. Global retooling by businesses
now matters more to GDP growth.
In the years ahead, we expect generally flat house
prices to result from the gradual release of shadow
inventories. Basel III will amplify this risk, as a
greater emphasis gets placed on capital
preservation. ■

5
Global Economic Research
Mexico
Oscar Sánchez
(416) 862-3174
oscar_sanchez@scotiacapital.com
Several Indicators Point To Domestic Demand Gains
Slowly but surely Mexico’s local demand is starting to climb out of
the slump that resulted from last year’s recession. Notwithstanding the
stellar recovery in foreign demand observed since the second half of
2009 — which has led to a rebound in manufacturing sector activity
back to pre-crisis levels — activity in domestically oriented sectors
has been lagging the country’s economic comeback.
In fact, while latest industrial output figures (seasonally adjusted)
already show the manufacturing sector having returned within a
whisker of the level observed at the top of the previous cycle in mid-
2008, the domestically oriented construction sector still lies close to
10% below that peak.
This picture, however, has been changing painstakingly with output in
construction slowly creeping up by 2% so far in 2010. The incipient
recovery in the building sector has manifested in investment figures as
well, with edification expanding by over 2% so far this year, as the
recovery in the seasonally adjusted index has already retraced more
than half the loss that resulted from the collapse in capital formation
during 2009. Yearly comparisons of construction sector performance
can only track these developments with a lag as the change in the
trend is only captured until the second quarter.
Retail sales indicators published earlier in the week follow a similar
script as the higher frequency data, as seasonally adjusted sales
figures registered a 0.7% pickup during May, having expanded in four
out of the five months reported so far this year. This is in a way
noteworthy as consumer confidence gauges have lagged the recovery
with perceived future employment and income prospects improving
slowly. This coincides with recently noted monthly increases in bank
credit flows to consumers which had been contracting for over a year.
Inflation indicators for June are also indicative of improving domestic
demand. Within a context of subdued overall price pressures, an
upward trend in core-services inflation can be detected starting in May
and continuing through the June figures (this trend was further
supported in this week’s CPI report for the first two weeks of July).
July 23, 2010
Developing Americas
Puerto Rico’s Dramatic Economic Turn
The Puerto Rican economy has experienced a
dramatic turnaround after three years of uninterrupted
economic decline. Consumer spending and
manufacturing activity are leading the way,
underpinned by improving labour market conditions
and an uptick in international trade.
The nascent recovery is being supported by an
ambitious and aggressive fiscal plan implemented by
the government of the Commonwealth backed by the
fiscal stabilization package instituted last year in the
United States. Although the near-term outlook for
Puerto Rico will still be shaped by sizeable
disbursements from the government’s fiscal
stabilization plan that are programmed to amount to
US$1.5 billion in the next six months, recent evidence
already supports a successful implementation of the
fiscal impulse.
Having bottomed back in February, value added within
the island, as approximated by the economic activity
index, increased by 0.8% q/q (not annualized and
seasonally adjusted) so far in the second quarter with
data up to May. Although seasonally adjusted figures
are not readily available, an advance in retail sales of
over 13% on a yearly basis during the first quarter was
significant. The improvement in spending indicators
has come on the back of persistent employment gains,
as over 18,000 jobs have been created since January.
Notwithstanding the surprising economic comeback,
the most impressive performance has come out of the
public sector balance, as government revenues for
FY2010 were over 2% larger than the previous year,
having surpassed budgeted estimates for the second
fiscal year in a row, after at least four years of
overestimations (fiscal years run July/June).
The recent developments continue to support our
February 2010 estimation of a 2.5% economic
expansion during FY2011, which would represent the
first yearly expansion in five years.
This in our view points as well to domestic demand
pressures starting to come into play. In summary,
the Mexican economy is gearing back towards a
sustainable recovery path with spare capacity still
conditioning the inflationary outlook. ■
6
Global Economic Research
Europe
Tuuli McCully Sarah Howcroft
(416) 863-2859 (416) 607-0058
tuuli_mccully@scotiacapital.com sarah_howcroft@scotiacapital.com
Markets Require Time To Digest EU Bank Stress Test
Results
The process of financial stabilization in Europe is gathering speed
following today’s release of the European bank stress test results by
the Committee of European Banking Supervisors (CEBS). While the
results imply that the banking sector in the European Union (EU) is
fairly resilient, they revealed some weaknesses as well. The CEBS
together with the European Central Bank and national supervisory
authorities conducted stress tests on 91 European financial institutions
that together represent 65% of the EU’s banking sector. In addition to
testing major cross-border banking groups, the coverage also included
many domestic credit institutions, such as the Spanish cajas. The
objective of the exercise was to assess the banking sector’s resilience
in 2010 and 2011, and specifically its capacity to weather possible
credit shocks, such as those stemming from sovereign risks related to
highly-indebted euro zone countries, and to assess the banks’
dependence on public support measures. If a bank’s financial strength
— i.e. its ability to sustain future losses — is not adequate, as
measured by a Tier 1 capital ratio (core equity capital / total assets) of
at least 6% (the current regulatory minimum is 4%), it will need to
raise more capital.
The tests included two macro-economic scenarios: the benchmark
scenario assumed a modest economic recovery in the euro zone (GDP
growth at 0.7% in 2010 and 1.5% in 2011) while an adverse scenario
was based on a double-dip recession (with real GDP growth of -0.2%
in 2010 and -0.6% in 2011). The adverse scenario had two
components: the first included a global confidence shock affecting
demand worldwide, and the second added an EU-specific shock
stemming from a worsening of the sovereign debt crisis. An upward
shift was implemented for the yield curve at both the short-end — to
capture interbank liquidity problems — and the long end of the curve
— to depict deteriorated perceptions regarding the countries’
sovereign creditworthiness. The tests also included valuation haircuts
to sovereign bond holdings for each country, ranging between 4.2%
(Slovenia) and 23.1% (Greece), however an outright sovereign default
was not considered. In addition, sovereign-debt losses were mapped
July 23, 2010
for those bonds that banks trade, rather than those
that are held to maturity.
The impact of the sovereign debt shock varied by
country, reflecting their respective international
public sector exposure. With the addition of the
sovereign shock, seven European banks saw their
Tier 1 capital ratios fall below 6% in 2011, up from
five in the case with the global demand shock only.
Furthermore, there were 10 institutions with capital
ratios that fell in the 6.0-6.9% range under the initial
adverse scenario, increasing to 17 with the inclusion
of the sovereign debt shock. One of the failed
institutions is German, and is already owned by the
government, while one is a Greek bank, and the
remaining five are Spanish (one bank and four
cajas). To date, the Spanish government has already
promised sizable funds for recapitalization purposes.
Transparency of the testing mechanism is a key
element in building credibility and investor
confidence; with plenty of details published
regarding testing procedures, investors will be able
to scrutinize the credibility of the tests easily.
Nevertheless, investor concerns regarding the
stringency of the tests will likely remain in place;
macro-economic assumptions fall short of the
economic contraction of more than 4% in 2009,
though two consecutive years of economic decline
can be considered a fairly pessimistic assumption.
Following a relatively neutral initial market reaction
to the stress test results, we expect that the European
sovereign debt crisis has now passed one of the key
hurdles and signs of stabilization will start to
emerge. Nevertheless, with the turmoil mainly
driven by rapidly changing investor confidence,
uncertainty remains high at least in the near term.
While financing conditions for many of the
countries in the euro zone periphery remain tough
and achieving fiscal sustainability is vital in order to
maintain investor confidence, the stress test results
support our view that sovereign debt issues will not
cause any unprecedented difficulties for the
European banking sector. ■
7
Global Economic Research
Asia / Oceania
Oscar Sánchez
(416) 862-3174
oscar_sanchez@scotiacapital.com
Further Monetary Tightening Expected In India
The Reserve Bank of India (RBI) is expected to raise the benchmark
repo rate once again after its July 27th monetary policy decision.
While economic growth prospects in India remain encouraging —
the RBI anticipates an 8% rise in GDP in the current fiscal year
(ending March 31st, 2011) “with an upside bias”— central bank
governor Duvvuri Subbarao has already described inflationary
conditions as “worrisome”. The closely watched wholesale price
index is rising at an annual rate of 10.5% (some measures of
consumer price inflation show even larger gains) with the central
bank currently targeting a rate of 5.5% a year hence. The central
bank has already increased the benchmark repo rate three times so
far this year.
Within the context of the solid economic recovery, the administration
of Prime Minister Manmohan Singh decreed late in June a cut in fuel
subsidies. Fuel price controls represented roughly 1% of GDP out of
the government budget for fiscal year ended in March 2010, with the
reduction in subsidies expected to contribute to the government’s
efforts to tackle an elevated fiscal imbalance. The authorities are
facing an urgent need to cut the general government deficit that blew
out to 11% of GDP in FY2009 (April/March) from 4.8% in the
preceding 12 months. The authorities are aiming to take the shortfall
down to 5.5% of GDP in FY2010.
The Indian government thus permitted state refiners to raise prices of
gasoline by about 3.5 rupees a litre and those of diesel by 2 rupees.
The fiscal policy moves were made with a high degree of caution as
authorities initially stated that gasoline prices would be freed fully.
After the decision, however, its apparent that diesel prices will remain
subject to official curbs for now, to be liberated at a later stage.
Highly subsidized prices of kerosene and cooking gas were also
raised, but only modestly, remaining as well under official control for
the time being.
The policy decision provoked a nationwide strike called by the
opposition parties. However, the strikes were effective only in the
provinces dominated by the opposition, while business went on within
July 23, 2010
Malaysia Follows In India’s Fiscal Footsteps
The Malaysian government announced an adjustment
in fuel and sugar subsidies effective July 16th, 2010.
Although relatively elevated fuel prices can be sourced
as a rationale for the measure, the policy decision will
likely further improve general perceptions of sound
government finances.
Malaysia was one of the first countries within Asia to
announce spending cuts for 2010. This indicated early
on the government’s determination to address the poor
fiscal position as economic stimulus measures
implemented in 2009 widened the public deficit to 7% of
GDP, from 4.8% in 2008. The recently enacted lapse in
fuel and sugar subsidies leaves this year’s 5.6% of GDP
target for the public deficit highly achievable.
Economic activity in Malaysia is in line to continue to
advance in the second quarter after the record 10.1%
yearly gain in the first. Manufacturing output expanded
by 3.3% m/m in May, recovering from the previous
month slowdown. The recovery in industrial output has
been supported by strong export performance, with the
value of foreign shipments picking up at a 22% y/y rate
during May. Although the country’s solid performance
has not permeated into significant price pressures, the
monetary policy committee of Bank Negara Malaysia
decided last week to raise interest rates for the third
time this year. The overnight policy rate was increased
by 25 basis points to 2.75%. Although the abolition of
fuel and sugar subsidies are likely to have an
inflationary impact, the effect is likely to be minimal as
CPI inflation has remained below its 10-year average,
reaching 1.6% y/y in May.
Malaysia is on track to grow by at least 4% this year,
following a relatively moderate 1.7% contraction in
2009. With interest rates trending higher and economic
conditions on the mend, we expect the ringgit’s
appreciating bias to persist through the balance of the
year, taking the exchange rate (currently 3.2 per US
dollar) to 3.1 by end-2010.
normal conditions in regions controlled by the ruling
Congress Party. There is therefore a low probability
at this stage of a rollback in the fuel price increases,
as government perceptions of the need for fiscal
prudence clearly dominate perceptions of benefits
that more populist measures could entail. As some
inflationary effects of the higher fuel costs are
likely to continue to be felt in coming months, the
RBI will have no option but to remain in monetary
policy tightening mode. ■
8
Global Economic Research
Industry & Commodity
Patricia Mohr
(416) 866-4210
pat_mohr@scotiacapital.com
Reduced Investor Risk Appetite Pushes Down
Commodity Prices
After tumbling in May, Scotiabank’s Commodity Price Index lost
further ground in June, declining 1.9% m/m, but remained 21.4%
above the April 2009 cyclical low. Prices retreated alongside the
spectre of slowing growth in China — of critical importance to raw
material demand — ongoing concern over the sovereign debt crisis in
Europe and little financial market confidence in the sustainability of
the U.S. industrial recovery (+8.2% y/y in June), once restocking and
fiscal stimulus fades.
SCOTIABANK COMMODITY After surging in early April — likely the
PRICE INDEX
300 high-water mark for 2010 — the Metal &
(INDEX: JAN 2000=100)
250
Mineral Index declined in June for the
second consecutive month, falling 3.6%
200 m/m. Base metal prices moved lower
alongside concern over the outlook for
150
China — which accounts for almost 40% of
100 world consumption of the four key base
metals — due to bank credit curbs,
50
government measures to prevent a
property-market bubble in Tier 1 cities and
0
00 02 04 06 08 10 decelerating output gains in some industries
(currently operating near full capacity). The
release of economic statistics for China on July 15 confirmed a
slowing economy, with GDP up 10.3% y/y in Q2 after explosive
growth of 11.9% in Q1. China’s economy will likely wane further in
Q3, though growth should still advance by 10% in 2010, slowing to
9% in 2011. In our view, China will reflate its economy quickly
should growth slow more than desired.
While edging down following release of China’s Q2 data, industrial
metal prices remain quite lucrative, reassured by China’s still-solid
growth. LME copper prices at US$3.14 per pound on July 22 yield
57% profit margins over average world mine break-even costs.
Spot gold prices reached an all-time record high of US$1,265.30 per
ounce in intraday trading on June 25 and are currently US$1,194 —
July 23, 2010
Grain Prices Poised For Recovery
After sliding in recent years, world grain prices appear
poised for improvement. Global ending stocks of
coarse grains are projected to drop to 16% of
consumption in 2010-11, down from 17% in 2009-10
and 18% in 2008-09 — the result of lower U.S. corn
stocks and severe drought in Russia’s Volga & Urals
regions and in Kazakhstan, cutting barley output.
Canadian barley plantings last spring were also low.
Estimates of world wheat production are being pared
due to excessive rain in Canada (-23% in 2010-11) and
severe dryness across Russia’s entire ‘spring wheat
belt’ in the FSU-12 during the planting season. CBOT
traders are increasing their long positions in corn and
soybeans and cutting short positions in wheat.
supported by high government deficits relative to
GDP in many euro zone countries as well as in the
United States and Japan, calling into question the
integrity of paper currencies. However, gold prices
moderated in early July, as China’s State
Administration of Foreign Exchange stated that
there will be a limit on gold holdings within its
foreign exchange reserves due to the relatively small
size of the gold market and the potential for China to
push up prices should it buy on the open market.
The Forest Products Index pulled back sharply in
June (-7.1% m/m). While NBSK pulp prices reached
a new record high of US$1,020 per tonne and U.S.
newsprint, uncoated freesheet and supercalendered-A
paper also strengthened, lumber and OSB prices
plunged from recent very profitable levels. Prices
faltered with an end to inventory restocking by U.S.
dealers and in reaction to weaker U.S. new home
sales and housing starts, following expiry of the first-
time homebuyers’ tax credit in April.
On a more positive note, the Oil & Gas Index firmed
up in June (+3.4%). Light and heavy crude oil prices
in Alberta rallied back, after a sharp correction in
May, and natural gas export prices were bolstered by
a heat wave in the United States. The exodus of
drilling rigs has begun in the U.S. Gulf of Mexico, in
response to the current moratorium on new
exploration and development activity, pointing to
tighter U.S. domestic supplies in 2011. The
Agricultural Index also rebounded in June (+3.3%). ■
9
 Global Economic Research July 23, 2010

Market Metrics Markets — The TSX improved on last week’s close

thanks to price gains in the commodities sector, and
although the index gave back some of its gains on
Wednesday, it rebounded and stabilized on Thursday
Neil Tisdall Mary Webb and Friday. The S&P 500 followed a similar pattern,
(416) 866-6252 (416) 866-4202 thanks not to gains in commodities, but to gains in the
neil_tisdall@scotiacapital.com mary_webb@scotiacapital.com telecom sector.

Perhaps expected to, but not having a large effect on

the markets, were the results of European bank stress
EURO tests – which were largely successful. All the banks
CANADIAN DOLLAR 1.65
1.10 (EURUSD)
(CADUSD) tested in France, the Netherlands, the United Kingdom
1.60
1.05 and Portugal passed the tests, while one German, one
1.55
Greek, and five Spanish banks didn’t meet the
1.00 1.50 standards. In all, 91 banks were tested, and despite
1.45 having only seven fail, the test did little to calm fears
0.95
1.40 that the European banking system is potentially
0.90 1.35 unstable. (For further details on the EU stress tests,
1.30
please see page 7.)
0.85
1.25 Perhaps due to risk and investor uncertainty, both WTI
0.80 oil and gold experienced price increases over the week,
1.20
with gold moving up US$9.50/oz to $1190.50 on Friday,
0.75 1.15
7/25/08 7/24/09 7/23/10 7/25/08 7/24/09 7/23/10
and oil increasing US$2.05/bbl to $78.59.

CANADIAN INTEREST U.S. INTEREST RATES Note: Latest observation taken at time of writing.
6.0 6.0
RATES (%)
(%)
5.0 5.0
10-YEAR
10-YEAR Fiscal Policy — New Brunswick, after the sale of
4.0 4.0 T-BOND
GOC power generation assets from NB Power to Hydro-
Québec did not proceed last spring, plans to re-integrate
3.0 3.0
NB Power’s generation, nuclear, transmission and
distribution subsidiaries, after dividing the utility in 2004.
2.0 2.0
The re-integrated utility is expected to provide potential
1.0 3-MONTH 3-MONTH annual savings of $8 million plus greater transparency
1.0
BA LIBOR and accountability on issues such as rates regulation.
0.0 0.0 NB Power’s new mandate includes developing, with a
7/25/08 7/24/09 7/23/10 7/25/08 7/24/09 7/23/10 sustainable rate structure, a long-term electricity supply
plan and a debt management strategy, alongside annual
investments in electricity efficiency.
S&P/TSX HYDRO ELECTRIC POWER
15000 (INDEX) GENERATION N.B. and Nova Scotia are two of several provinces
(2009, % SHARE OF TOTAL challenged to competitively service new power demand
14000
GENERATION) without extensive hydro-electricity capacity. Following the
13000
NL Atlantic Premiers’ recent commitment to greater energy
12000 NS co-operation, NB Power and Nova Scotia Power Inc. are
NB exploring a second transmission connection of up to 500
11000
QC MW, adding to the existing 300 MW connection, to raise
10000 ON system reliability and support renewable energy. N.S. is
MB targeting 25% renewable energy generation by 2015 and
9000
SK 40% by 2020, co-operating on one option, tidal power,
8000 AB
with N.B. and Maine.
BC
7000
7/25/08 7/24/09 7/23/10 0 20 40 60 80 100
Source: Statistics Canada

10
Global Economic Research July 23, 2010

Economic Tables
Canada 2009 09Q4 10Q1 Latest United States 2009 09Q4 10Q1 Latest
Real GDP (annual rates) -2.5 4.9 6.1 Real GDP (annual rates) -2.4 5.6 2.7
Current Acc. Bal. (C$B, ar) -43.5 -40.8 -31.3 Current Acc. Bal. (US$B, ar) -378 -404 -436
Merch. Trade Bal. (C$B, ar) -4.6 1.7 4.8 -6.0 (May) Merch. Trade Bal. (US$B, ar) -507 -560 -605 -653 (May)
Industrial Production -10.0 -7.7 -0.4 3.6 (Apr) Industrial Production -9.3 -3.7 2.7 8.4 (Jun)
Housing Starts (000s) 149 180 198 193 (Jun) Housing Starts (millions) 0.55 0.56 0.62 0.55 (Jun)
Employment -1.6 -1.4 0.5 2.2 (Jun) Employment -4.3 -4.0 -2.4 -0.1 (Jun)
Unemployment Rate (%) 8.3 8.4 8.2 7.9 (Jun) Unemployment Rate (%) 9.3 10.0 9.7 9.5 (Jun)
Retail Sales -2.9 2.3 7.3 -0.6 (May) Retail Sales -7.1 2.1 6.3 5.0 (Jun)
Auto Sales (000s) 1459 1509 1557 1468 (May) Auto Sales (millions) 10.3 10.8 11.0 11.1 (Jun)
CPI 0.3 0.8 1.6 1.0 (Jun) CPI -0.4 1.4 2.4 1.1 (Jun)
IPPI -3.4 -3.4 -0.6 -4.8 (May) PPI -2.6 1.4 4.9 2.8 (Jun)
Pre-tax Corp. Profits -32.3 -12.1 16.8 Pre-tax Corp. Profits -2.4 53.9 48.2

Mexico Brazil
Real GDP -6.5 -2.3 4.3 Real GDP -0.1 3.9 8.0
Current Acc. Bal. (US$B, ar) -5.5 -1.1 -2.2 Current Acc. Bal. (US$B, ar) -24.3 -49.0 -48.6
Merch. Trade Bal. (US$B, ar) -4.6 0.1 1.5 -4.1 (Jun) Merch. Trade Bal. (US$B, ar) 25.4 16.5 3.5 27.3 (Jun)
Industrial Production -7.3 -1.9 5.5 -2.8 (May) Industrial Production -7.3 6.2 17.3 -0.3 (May)
CPI 5.3 4.0 4.8 3.7 (Jun) CPI 5.2 3.9 3.9 5.2 (Jun)

Argentina Italy
Real GDP 0.9 2.6 6.8 Real GDP -5.1 -2.8 0.5
Current Acc. Bal. (US$B, ar) 11.5 6.0 -1.5 Current Acc. Bal. (US$B, ar) -0.07 -0.07 -0.10 -0.07 (May)
Merch. Trade Bal. (US$B, ar) 16.9 14.3 8.5 22.9 (May) Merch. Trade Bal. (US$B, ar) -6.9 -8.1 -46.9 -29.5 (May)
Industrial Production 0.1 5.4 9.0 9.8 (Jun) Industrial Production -18.3 -9.3 3.1 -17.1 (May)
CPI -26.9 -9.4 35.7 11.0 (Jun) CPI 0.8 0.8 1.4 1.3 (Jun)

Germany France
Real GDP -4.9 -2.2 1.5 Real GDP -2.8 -0.5 1.4
Current Acc. Bal. (US$B, ar) 168.1 279.5 173.9 33.8 (May) Current Acc. Bal. (US$B, ar) -52.2 -86.6 -22.2 -126.4 (May)
Merch. Trade Bal. (US$B, ar) 190.3 273.5 187.1 159.1 (May) Merch. Trade Bal. (US$B, ar) -31.0 -35.3 -33.2 -52.5 (May)
Industrial Production -15.5 -8.0 6.0 -7.7 (May) Industrial Production -13.1 -4.3 5.5 -9.0 (May)
Unemployment Rate (%) 8.2 8.2 8.1 7.7 (Jun) Unemployment Rate (%) 9.4 9.8 9.9 9.9 (May)
CPI 0.3 0.4 0.8 0.9 (Jun) CPI 0.1 0.4 1.3 1.5 (Jun)

Euro Zone United Kingdom

Real GDP -4.1 -2.1 0.6 Real GDP -4.9 -2.9 -0.2
Current Acc. Bal. (US$B, ar) -77.5 40 -141 -252 (May) Current Acc. Bal. (US$B, ar) -23.7 9.4 -72.1
Merch. Trade Bal. (US$B, ar) 54.9 121.5 15.3 9.4 (May) Merch. Trade Bal. (US$B, ar) -127.8 -137.4 -136.6 -141.7 (May)
Industrial Production -14.9 -7.3 4.8 -9.7 (May) Industrial Production -10.2 -6.1 0.0 -9.0 (May)
Unemployment Rate (%) 9.4 9.8 9.9 9.9 (May) Unemployment Rate (%) 7.6 7.8 8.0 7.8 (Apr)
CPI 0.3 0.4 1.1 1.4 (Jun) CPI 2.2 2.1 3.3 3.2 (Jun)

Japan Australia
Real GDP -5.3 -1.4 4.2 Real GDP 1.3 2.8 2.7
Current Acc. Bal. (US$B, ar) 141.7 151.8 222.1 157.3 (May) Current Acc. Bal. (US$B, ar) -40.3 -71.4 -56.5
Merch. Trade Bal. (US$B, ar) 28.3 77.1 83.7 54.3 (May) Merch. Trade Bal. (US$B, ar) -3.2 -22.6 -10.1 27.5 (May)
Industrial Production -21.8 -5.1 27.1 -10.3 (May) Industrial Production -2.8 0.6 3.4
Unemployment Rate (%) 5.1 5.2 4.9 5.2 (May) Unemployment Rate (%) 5.6 5.6 5.3 5.1 (Jun)
CPI -1.4 -2.0 -1.2 -2.4 (May) CPI 1.8 2.1 2.9

China South Korea

Real GDP 9.1 10.7 11.9 Real GDP 0.2 6.0 8.1
Current Acc. Bal. (US$B, ar) 297.1 Current Acc. Bal. (US$B, ar) 42.7 42.2 5.3 45.9 (May)
Merch. Trade Bal. (US$B, ar) 195.7 244.6 57.0 240.3 (Jun) Merch. Trade Bal. (US$B, ar) 42.3 46.0 13.7 77.1 (Jun)
Industrial Production 16.1 16.1 14.8 7.6 (Jun) Industrial Production -1.3 18.0 26.7 12.2 (May)
CPI 1.9 1.9 2.4 2.9 (Jun) CPI 2.8 2.4 2.7 2.6 (Jun)

All data expressed as year-over-year % change unless otherwise noted.

11
Global Economic Research July 23, 2010

Financial Tables
Interest Rates (%, end of period)

Canada 10Q1 10Q2 Jul/16 Jul/23* United States 10Q1 10Q2 Jul/16 Jul/23*
BoC Overnight Rate 0.25 0.50 0.50 0.75 Fed Funds Target Rate 0.25 0.25 0.25 0.25
3-mo. T-bill 0.30 0.61 0.69 0.63 3-mo. T-bill 0.15 0.17 0.15 0.14
10-yr Gov’t Bond 3.57 3.08 3.16 3.22 10-yr Gov’t Bond 3.83 2.93 2.92 2.94
30-yr Gov’t Bond 4.07 3.65 3.73 3.78 30-yr Gov’t Bond 4.71 3.89 3.94 3.97
Prime 2.25 2.50 2.50 2.75 Prime 3.25 3.25 3.25 3.25
FX Reserves (US$B) 54.2 56.5 55.9 (May) FX Reserves (US$B) 119.7 116.5 113.1 (May)

Germany France
3-mo. Interbank 0.49 0.67 0.78 0.82 3-mo. T-bill 0.31 0.30 0.39 0.41
10-yr Gov’t Bond 3.09 2.58 2.61 2.70 10-yr Gov’t Bond 3.42 3.05 2.95 2.99
FX Reserves (US$B) 59.9 60.2 60.9 (May) FX Reserves (US$B) 46.6 48.1 46.1 (May)

Euro-Zone United Kingdom

Refinancing Rate 1.00 1.00 1.00 1.00 Repo Rate 0.50 0.50 0.50 0.50
Overnight Rate 0.40 0.54 0.49 0.52 3-mo. T-bill 4.85 4.85 4.85 4.85
FX Reserves (US$B) 283.1 285.1 283.2 (May) 10-yr Gov’t Bond 3.94 3.36 3.33 3.43
FX Reserves (US$B) 55.7 57.6 60.0 (May)
Japan Australia
Discount Rate 0.30 0.30 0.30 0.30 Cash Rate 4.00 4.50 4.50 4.50
3-mo. Libor 0.18 0.18 0.18 0.18 10-yr Gov’t Bond 5.78 5.09 5.12 5.20
10-yr Gov’t Bond 1.40 1.09 1.09 1.08 FX Reserves (US$B) 39.0 34.9 33.2 (May)
FX Reserves (US$B) 1022.2 1015.3 1015.3 (Mar)

Exchange Rates (end of period)

USDCAD 1.02 1.06 1.06 1.04 ¥/US$ 93.47 88.43 86.57 87.34
CADUSD 0.98 0.94 0.95 0.96 US¢/Australian$ 91.72 84.08 86.89 89.33
GBPUSD 1.518 1.495 1.530 1.542 Chinese Yuan/US$ 6.83 6.78 6.77 6.78
EURUSD 1.351 1.224 1.293 1.286 South Korean Won/US$ 1131 1222 1203 1199
JPYEUR 0.79 0.92 0.89 0.89 Mexican Peso/US$ 12.365 12.941 12.935 12.773
USDCHF 1.05 1.08 1.05 1.05 Brazilian Real/US$ 1.781 1.805 1.782 1.762

Equity Markets (index, end of period)

United States (DJIA) 10857 9774 10098 10344 U.K. (FT100) 5680 4917 5159 5313
United States (S&P500) 1169 1031 1065 1094 Germany (Dax) 6154 5966 6040 6167
Canada (S&P/TSX) 12038 11294 11570 11660 France (CAC40) 3974 3443 3500 3610
Mexico (Bolsa) 33266 31157 31783 32674 Japan (Nikkei) 11090 9383 9686 9431
Brazil (Bovespa) 70372 60936 62339 65669 Hong Kong (Hang Seng) 21239 20129 20250 20815
Italy (BCI) 1138 972 1028 1021 South Korea (Composite) 1693 1698 1738 1758

Commodity Prices (end of period)

Pulp (US$/tonne) 910 1020 1020 1020 Copper (US$/lb) 3.55 2.96 3.04 3.17
Newsprint (US$/tonne) 565 618 618 618 Zinc (US$/lb) 1.07 0.78 0.83 0.86
Lumber (US$/mfbm) 280 188 217 218 Gold (US$/oz) 1115.50 1244.00 1189.25 1190.50
WTI Oil (US$/bbl) 83.76 75.63 76.01 78.54 Silver (US$/oz) 17.50 18.74 18.42 18.17
Natural Gas (US$/mmbtu) 3.87 4.62 4.52 4.62 CRB (index) 273.34 258.52 264.21 266.60
* Note: Latest observation taken at time of writing.

12