TD Bank upgrades outlook for Canadian economic growth

The improved outlook comes as efforts to contain the European financial crisis appear to be moving ahead with the Greek bailout and restructuring of that county’s debt.

“With some of the dark clouds overhanging the global economy starting to dissipate and commodity prices strong, Canada’s export-oriented businesses are expected to lead the way,” the bank said in its report.

“The Canadian business sector, which has been paying down debt and hoarding cash in recent years, is likely to take advantage of the nation’s much-improved business tax climate to retool and raise productivity levels.”

However, TD was cautious about Canada’s near- to medium-term economic prospects at home as governments look to reduce spending and household debt remains high.

“Domestically, growing household credit imbalances remain the number one medium-term risk to Canada’s economic fortunes,” TD said.

The bank also noted that tighter fiscal policy in Canada will also make growth difficult.

“In recent weeks, finance ministers at both the federal and provincial levels have been signalling their intent to stay the course on deficit reduction and prospects for particularly bold up-front actions have increased to some extent,” the bank said.

TD noted that its outlook for the job market remained unchanged, with a prediction that the jobless rate will hold around 7.5% this year before dropping to seven per cent in 2013.

The revised outlook came as Canada’s banking regulator issued new draft guidelines for home mortgage underwriting.

“Although financial institution mortgage portfolios in Canada continue to perform well, a number of vulnerabilities in the financial system exist, including high household indebtedness,” said Mark Zelmer, OSFI’s assistant superintendent.

“OSFI is acting in an effort to prevent these vulnerabilities from evolving into problems for the financial system.”

Canada’s banking system avoided a mortgage meltdown like the one seen in the U.S. thanks in large part to stricter lending conditions, but household debt has been near record levels in recent months.

Both Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have raised household debt as a risk for the Canadian economy.

Statistics Canada reported last week that household credit market debt, which includes credit cards, mortgages and loans, rose in the fourth quarter, though the pace of borrowing slowed.

Credit market debt-to-personal disposable income in Canada backed off to 150.6% from 151.9% in the quarter as gains in income outpaced debt.

In its report Monday, TD suggested the debt-to-income ratio could rise as high as 160% by late 2013, a similar level reached in the U.S. and Britain just before the financial crisis.

“Virtually non-existent wage growth is expected to keep household income gains in check, prompting many consumers to continue financing purchases through low-cost borrowing,” the bank said.