TD Bank economists say weaker U.S. economy will spill into Canada
11:16:59 EST Mar 22, 2006
TORONTO (CP) - A looming slowdown of the American economy will put the brakes on robust Canadian growth, warns a report by the economics wing of the Toronto Dominion Bank (TSX:TD).
"The forecast is for sunny skies over the first half of the year, but storm clouds are building on the horizon," according to economists in the March issue of the TD Quarterly Economic Forecast.
Canadian and U.S. economies stumbled in the last quarter of 2005, due to temporary factors, before growth rebounded early this year but the "dominant theme" over the next one to two years will be a U.S. slowdown "in which detrimental knock-on effects to Canada will be unavoidable," the report said.
"Last summer, we noted that housing market strength and household indebtedness in the U.S. was simply unsustainable, and that it would give way to an economic slowdown in the second half of 2006. Evidence is mounting in support of this view," Don Drummond, chief economist of TD Bank Financial Group, said in a Wednesday release.
"There is no two ways about it, the U.S. slowdown will be a drag on economic growth north of the 49th parallel."
The report cited a cooling trend in housing markets since June as a likely damper on construction and consumer spending ahead.
"But, since Canada has neither the same degree of housing imbalances, nor as much tightness in monetary settings, it should fare slightly better than its U.S. counterpart," Drummond said.
The report predicted U.S. economic expansion will ease to an average annualized pace of around 2.3 per cent in the second half of 2006 and first half of 2007 and Canadian economic growth will "only marginally slip" under a long-term trend rate of 2.8 per cent.
The report anticipates a mild economic slowdown partly due to tame inflation and tightened interest rates that give the U.S Federal Reserve the option to cut rates once there's evidence of a slowdown.
"We also believe underlying economic fundamentals will remain healthy, with low unemployment rates and with wages rising faster than inflation," Drummond said.
"Even though consumers are heavily indebted, spending growth will moderate rather than retrench in the absence of a spike in interest rates."
In addition, the report noted, corporate balance sheets are in "outstanding shape, reflecting deliberate efforts to reduce liabilities and bolster assets over the past four years."
"The Canadian economy looks to be fundamentally healthy, but befitting of our status as a relatively small, open economy, the driving force over the next year or so will be from developments abroad," Drummond said. |
