TD predicts bumpy recovery

Canada’s economy is proving strong, but there will be potholes along the way to a full recovery, according to the latest economic forecast from TD Economics.

Canada has been defying the odds. For the third consecutive quarter, the combined spending of consumers, governments and businesses in the first quarter of 2010 powered ahead by a 5% annualized rate. That is about four times the rate recorded by the G-7 as a whole and preliminary data in Q2 points to an expansion of at least 4%.

The job market has recouped about three-quarters of the losses suffered during the recession and is set to grow at an annualized rate of 3.6% in the second quarter.

“The pace of Canada’s economic revival stands out in the world. Real GDP has virtually recouped all of the losses recorded during the recession and real consumer spending has already eclipsed its pre-recession level,” said Craig Alexander, chief economist for TD Bank Financial Group.

There was more good news: housing starts data has been pointing to continued strength in residential investment, despite the expiry of the federal home renovation tax credit in February.

In spite of those positive signs, TD says the economy is expected to face more bumps because Canada has a small, open, resource-based economy and is heavily influenced by global developments.

A heightened level of risk aversion, a stronger U.S. dollar and ongoing concerns about world growth are likely to pose a barrier for commodity prices, which could negatively impact Canada’s economic performance, reports TD.

The domestic sectors of the economy will likely see momentum fade significantly in the second half of 2010 and into 2011. Consumer spending has been growing more quickly than income, resulting in higher debt levels. Prospects for respectable job growth will help to soften the adjustment to a lower spending track, with a moderate 20,000-25,000 new jobs per month projected through the end of 2011.

Growing consumer fatigue is also impacting the housing market. Home sales have declined in each of the last four months, and are expected to continue to trend downward in the remainder of 2010 and in 2011. This will lead to a 7% drop in average prices from their peak in the second quarter of 2010 to the end of next year.

TD predicts governments will likely begin to tap on the fiscal brakes in order to rein in large deficits as well. In their minds, not only will this mean the end of infrastructure and other temporary stimulus programs but also the gradual restraining of operating spending, as laid out in 2010 budgets. Overall, TD expects a modest decline in real government spending in 2011.

(06/17/10)