F ORECAST 2014: ECONOMIC FUNDAMENTALS AND GEOPOLITICAL RISKS

1. FORECAST 2014: ECONOMIC FUNDAMENTALS AND GEOPOLITICAL RISKS Presentation to NBF Clients London Club January 14, 2014 Pierre Fournier, Geopolitical Analyst

2. Key issues for 2014 • Continued U.S. outperformance among advanced economies • U.S. mid-term elections: more polarisation or a return to consensus politics • Stagnant growth and political tension in the Euro zone • Middle East crisis will keep global oil prices high, unless breakthrough emerges in Iran negotiations • Success of China’s economic transition key to global stability • Oil and pipeline geopolitics occupy center stage in Canadian politics

3. United States: sustainable economic outperformance, but obstacles to rapid growth remain • Positive fundamentals: • Energy and resources, demographics, competitiveness on the rise and a path towards deficit and debt reduction • Socio-economic challenges: • Unprecedented global competition • Employment growth subdued, decline in quality of jobs • Rising income inequalities and shrinking middle class • Public and private debt levels improve, but remain high • Insufficient investments in infrastructure, education and training • Stagnant private investments • Political risks: acute polarization, a dysfunctional political system, conflicts over pensions and benefits, gridlock and the mid-term elections 3

5. U.S. public opinion polls show high level of dissatisfaction for direction of country and Congress • Direction of country • Right direction: 30.3% • Wrong direction: 63.17% • Satisfaction with Congress • Satisfied: 13.1% • Dissatisfied 81.9% Source: Average of polls, Real Clear Politics, January 2014

6. 6

7. 7

8. Income inequality in the U.S. skyrockets in the last three decades Source: IRS and Forbes, August 2013 8

9. Source: Forbes, August 2013 9

10. The extent of wealth inequality in the U.S. and the gap between perception and reality Percent wealth distribution by quintile Source: Norton, M.I., and Ariely, D. (2011), “Building a Better America -- One Wealth Quartile at a Time”, Perspectives on Psychological Science 10

11. Will stagnant private investments undermine growth and profits? Source: The Financial Times, 2013

12. 12

13. Bi-partisan debt reduction

14. A positive for the U.S. economy and public debt: the growth rate of health care spending slows down Overall spending on healthcare rose less than 4% for the fourth year in a row in 2012. This is half the pace of the previous decade, and the lowest rate of spending since the 1960s. 14

15. The other side of the coin: public underinvestment in economic growth

16. The mid-term elections for the U.S. Congress: A turning point? • The future of the Republican Party • The moderates vs. the Tea Party • A Republican majority in the Senate would weaken the Obama administration further • Keys issues: growth, the role of government, inequalities and the middle class, energy and climate policies, minimum wage, regulations • A preview for the 2016 presidential election: Will polarization and gridlock persist or will U.S. politics move back towards the center?

17. The United States’ manufacturing cost advantage vs. Europe 17

18. Natural gas prices Industrial electricity prices Source: Boston Consulting Group (based on average 2012 prices ) 18

19. Despite harsh austerity measures, public debt levels continue to rise Five of the Euro-zone’s 17 members – Ireland, Greece, Italy, Belgium and Portugal – carry public debt larger than the size of their economies. Two other countries, Spain and France, have debt levels in the 90% range. Portugal and Spain’s debt level has increased by 15% over the last twelve months, Ireland’s by 18%, and Italy’s by 7%. 19

20. Europe’s emerging demographic crisis Rapidly aging populations and smaller workforces will make it much harder to stimulate growth, and pay for increasing burden of age-related expenditures. 20

21. Public opinion grows increasingly hostile towards the EU The government of Netherlands recently said the goal of a closer union is no longer viable and has come out with a list of powers it feels should not be ceded to the EU. The EU has still not been able to agree on a viable banking union or form of debt mutualisation. 21

22. Multiple conflicts in the Middle East and North Africa remain key systemic geopolitical risks Escalation of sectarian conflicts (Sunni vs. Shiite, but also Kurds, Christians and others) between and within countries Growing rift between moderate political Islam, radical/jihadi Islam and Arab monarchies Western powers, particularly U.S., trapped between their short-term geopolitical interests and support for democracy and human rights Decline of western influence and economic clout, anti-americanism on the rise The return of military rule in Egypt will lead to long term economic and political instability No end in sight for Syrian civil war, with high contagion risks Iraq and its oil vulnerable to sectarian conflicts between Shias, Sunnis and Kurds 22

23. Multiple conflicts in the Middle East and North Africa remain key systemic geopolitical risks Yemen, Libya, Jordan, Tunisia and Lebanon all exposed to geopolitical risks Longer term, Gulf State monarchies in a bind: Increasingly restless populations Dependence on oil revenues Cannot win free and fair elections Bahrain: Unsustainable rule of Sunni minority over Shia majority Israeli-Palestinian peace talks: a breakthrough unlikely Iran nuclear deal would be positive for the world, and likely put downward pressure on oil prices High levels of unemployment, inequality, poverty and corruption exacerbate risks 23

24. Oil and pipeline geopolitics in Canada Prospects for WTI and WCS prices to improve Keystone XL approval likely in 2014, as Obama chooses to focus on coal emissions Keystone XL: Not just about U.S. energy security, but also about supplying highly profitable Gulf Coast refineries, and ensuring global markets are less vulnerable to geopolitical events in the Middle East and elsewhere The capacity of the Trans Mountain pipeline to British Columbia coast will be tripled to 900,00 barrels per day A modified Northern Gateway may yet see the light of day Energy east project likely to be approved A more regulated and potentially more expensive crude-by-rail- industry will continue to grow Many other pipelines being built or planned in North America 24

25. Other determinants of global growth and geopolitical stability • Political tensions in Asia: China-Japan, North Korea… • A key year ahead for the Chinese transition to a more sustainable growth model • India’s internal political divisions could become an obstacle to growth • A resurgent Russia overblown as a risk factor