Mild growth expected ahead, TD report suggests

This projection depends on continued strong growth in U.S. demand and steady gains in household spending, the TD report says.

“Low oil prices have been largely to blame for Canada’s economic woes this year, but there have been other culprits. Most importantly, manufacturing activity and exports disappointed in the January-May period despite signs of improving U.S. demand and a low Canadian dollar,” says TD chief economist, Beata Caranci, in a statement. “Fortunately, economic activity has turned the corner.”

TD says in the report that its view is “underpinned by recent economic data, which saw a broad-based expansion of real [gross domestic product] in June coupled with the best back-to-back monthly performance in exports since 2011.”

For 2016 and 2017, TD says that it expects a steady expansion of about 2% a year, which will keep the Bank of Canada’s overnight rate at 0.50% until 2017.

“Growth is expected to be sustained over the next few years, but will reflect a ‘two-speed’ economy,” TD says, with low commodities prices keeping business investment weak as well.

However, TD believes that this weakness “will be more than offset by sustained momentum in exports and steady growth in household consumption.”

Says Caranci: “Our research suggests that foreign activity has become more important for exports than in the past. Fortunately, in the grand hierarchy of global growth prospects, the U.S. economy will rank highly and this should work to Canada’s advantage, particularly alongside the expectation of another leg down in the loonie.”

In a separate report, TD says that it expects the U.S. economy to grow in a range of 2.4%-2.6% between 2015 and 2017: “Over that period, the unemployment rate is expected to dip to 4.8% and the Fed is likely to engage in a gradual tightening cycle that will see the fed funds rate rise by roughly 75 basis points in 2016, and the same amount in 2017.”

Returning to Canada, TD says that export gains will likely be led by sectors that exhibit more sensitivity to currency fluctuations, such as industrial products, building materials and services, particularly tourism.

Housing markets are expected to remain a source of strength into 2016, TD says, followed by a modest correction in mid-2016. However, job growth is expected to weaken to an average of just more than 5,000 new jobs a month through the remainder of 2015, leaving the unemployment rate stable at 7%.

“Regional differences in economic fortunes will likely intensify over the short term,” the TD report says. “British Columbia, Ontario and Manitoba are expected to top the growth charts over the forecast period, followed by more moderate gains in Quebec and the Maritime provinces. In contrast, economic activity in Alberta, Saskatchewan and Newfoundland and Labrador is expected to remain weak, reflecting their relative reliance on commodity producing industries.”

Globally, “the pace of economic growth in advanced economies and emerging markets will converge to its smallest level since 2000 and remain roughly flat over the forecast horizon,” TD predicts.

“While the global economy is undergoing a challenging phase, the outlook further out does appear marginally brighter. Led by the U.S. and euro area, a further pickup in advanced economies is expected for next year,” the TD report says. “Meanwhile, less weakness in certain [emerging markets] such as Brazil and Russia should offset the continued slowdown in China, generating a modest bounce-back in [emerging markets] growth in 2016-17.”

Against this outlook, global risks abound, TD cautions: “Much rests on the ability of Chinese policymakers to ensure a soft landing for their economy, and the Federal Reserve delivering a slow and gradual pace of tightening.”