The Canadian economy is coming off a “sugar high” from stimulus measures as well as the unleashing of pent-up consumer and business demand, and is now showing signs of a maturing recovery according to the most recent forecast by TD Economics (www.td.com/economics). This will result in a more subdued pace of growth averaging about 2 percent in 2011, marking a downward revision of a half percentage point from the TD Economics June forecast.
The losses in economic output and employment suffered during the recession have been recouped in relatively short order. However four factors will constrain economic gains over the near term: weaker prospects for the U.S. economy; further softness in Canadian housing; an increasingly fatigued Canadian consumer; and the waning of benefits from past fiscal stimulus measures.
“For a variety of reasons, like demographics and poor productivity, the Canadian economy’s natural ‘cruising speed’ has slowed from its traditional 3 percent pace to the 1.5-2.2 percent range,” said Craig Alexander, Chief Economist, TD Bank Financial Group. “After rebounding smartly, economic growth will likely fall into this weaker ‘new normal’ range. Given the remaining slack in the economy, as evidenced by a still-elevated unemployment rate, the outlook for 2011 can only be characterized as underwhelming.”
U.S. employers have been reticent to add to payrolls, casting a pall over the consumer and slowing the recovery in the U.S. housing market. As a result, the forecast for U.S. economic growth in 2011 has been downgraded to 1.9%, compared to the 2.8% projected in June. It is important to note, and as highlighted in a recent report (“U.S. Recovery is Tracking Traditional Experience after Financial Crisis Induced Recession”), TD’s U.S. forecast profile is not unusual for an economy re-emerging from a deep financial crisis.
Yet in this environment – and with the Canadian dollar expected to close in on parity over the next 12 months – U.S. demand for key Canadian-made manufactured goods is likely to recover at a very gradual rate. For example, U.S. light vehicle sales, which absorb four-fifths of Canadian auto production, are still expected to climb off their recent lows to 12.2 million units in 2011, but remain well below their decade average of 15.3 million units. A similarly weak recovery profile is unfolding in U.S. homebuilding, which will hold back gains in Canada’s key lumber industry. Moreover, a moderation in the pace of global demand growth suggests limited upside for commodity prices from current levels.
On the home front
With prospects for an export-driven expansion fading, there will be continued pressure on the domestic front, notably the Canadian consumer, to continue to do the heavy lifting. Unfortunately, having already done more than their share, increasingly fatigued households will be hard pressed to spend at anything more than a moderate pace over the next few years.
Indeed, household indebtedness has been on a sharp and unsustainable climb over the past few years. Debt-to-PDI in Canada now stands at 144 percent, quickly approaching the U.S. level of 151 percent. Only four years ago, this gap was as much as 30 percentage points.
As such, despite a low interest rate environment, households will shy away from taking on substantial new borrowing. In particular, existing home sales will feel a sharp pinch, sliding down to a trough of 320K units by mid-2011 (annualized) from their near all-time record annual level of 465K units in 2009. The cooling in real estate also suggests that future consumer purchases will be more closely linked to underlying growth in employment and overall income.
Job creation has so far exceeded expectations this year. Aggregate hours worked on a year-over-year basis have matched that of real GDP growth, implying no growth in hourly productivity. In view of this recent unsustainably strong hiring trend, along with non-resource corporate profits still below their pre-recession levels, TD Economics expect to see an increased push by the Canadian business sector to grow their productivity in the months ahead. This shift will further be supported by recent policy initiatives to cut the cost of investment, such as the HST and corporate and capital tax cuts. “Business investment – particularly machinery and equipment – is likely to be a leading growth area over the remainder of 2010 and into 2011-12. The corollary, however, is that private-sector hiring is likely to be reined in,” says Alexander. At about 15,000 jobs per month, overall job creation over the next year is unlikely to put much of a dent on the nation’s unemployment rate, which currently stands at about 8%.
Mr. Alexander notes: “Adding to these challenges, the government sector will gradually unwind temporary stimulus measures and begin to freeze operational budgets to help deficit-reduction efforts. Fortunately, Canada faces a lesser near-term need than other countries for radical fiscal austerity, and a gradual move to deficit fighting will limit its economic undertow.”
Regionally, there appears relatively little to meaningfully differentiate growth performances aside from government fiscal positions and the particular timing and magnitude of local housing cycles.
“While we expect the Prairie region to retake the growth lead – currently being held by Central Canada and B.C. – next year, there are no standouts,” observes Alexander.
A cautious pace for interest rates
Consistent with its most recent decision to raise the overnight rate by a quarter-point to 1 percent, the Bank of Canada will want to continue lifting its policy rate off emergency levels. But timing matters a great deal. Although the communiqué accompanying provided no guidance over the next decision in October, the economic outlook suggests that a pause in the monetary policy cycle is likely until some of the acute uncertainty surrounding the U.S. outlook subsides. As such, TD Economics predicts a short-term rate of only 2.00% by the end of 2011.
Ce rapport est aussi disponible en français à http://www.td.com/francais/services_economiques/index.jsp. Pour de plus amples informations, veuillez communiquer avec Pascal Gauthier, économiste senior, au (647) 248-5960, [email protected].
For further information: Craig Alexander, SVP & Chief Economist, TD Bank Financial Group, 416-982-8064, [email protected]; Derek Burleton, VP & Deputy Chief Economist, TD Bank Financial Group, 416-982-2514, [email protected]