Canadian Economy Posted Modest Gain in November

• November's real GDP 0.1% higher than in October; ongoing patterns re-affirmed

Canadian GDP grew in line with expectations in November, posting an overall gain of 0.1% over October. Broad-based gains in service industries (+0.2%) – which account for about 70% of overall GDP – were enough to offset a contraction in goods industries (-0.2%).

The most notable pocket of weakness remains forestry & logging output, down 2.1% from October and 11.1% lower Y/Y. The sector has been in contraction mode for a full year and a half, battling weaker U.S. demand due to the housing correction. In other primary industry activity, mining and oil & gas extraction also declined for a second consecutive month, when compared to output from a month prior (-0.4%) or a year prior (-0.7%). Lower natural gas drilling activity accounts for the bulk of this drop. The quantity of natural gas in storage in North America remains high, limiting the potential upside to production going forward. The only bright spot in November for primary industries was a slight gain in agriculture of 0.2%. While the revenue outlook is good for crops, activity levels have remained stagnant for the last two years.

After unwinding for most of late 2005 through 2006, manufacturing activity was gradually creeping back up towards plus territory on a Y/Y basis last year, and actually recorded gains in September and October. While it is too early to call an unfortunate trend reversal from one month of data, November's performance is not encouraging. The Y/Y gain in November was only 0.2%. Weaker shipments to the U.S. and an ongoing adjustment to an elevated Canadian dollar put a cloud over the near-term outlook for the sector. The remaining goods sectors of construction and utilities have been faring much better and should continue to do so.

Meanwhile, most service industries continued to see higher levels of activity, with the exception of a 0.1% drop in wholesale trade. On a Y/Y basis, all service sectors are in growth territory and wholesale trade in particular has performed remarkably well, an example of a sector that stands more to gain than to lose from a high Canadian dollar. The finance industry should continue to grow, albeit at a slower pace this year (around 3%), due to weaker market conditions, than the brisk 4-5% experienced in the first half of 2007. While revenues will be challenged due to downward price pressures related to the currency, retail sales volumes are expected to maintain a good pace of growth, helped by a continued healthy consumer appetite.

All sectors combined, the Canadian economy likely grew at a sub-par pace of 1.5% (annualized) in Q4 of 2007, and not much better is expected for the first half of this year. A weak U.S. real GDP growth print of 0.6% in Q4 of 2007, along with a first half of near-stagnant performance, highlight the main drag on Canadian GDP growth through weaker exports. But given its overall strengths in most other sectors, the Canadian economy should be able to muddle through this rough patch without too many wounds.

TD Bank Financial Group

The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.