Canada Economic Forecast Raises Odds On Slump

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CANADA ECONOMY FORECAST TD BANK
TD Bank economists have joined others in downgrading their forecast for both Canadian and global growth this year and next in light of renewed fears about Europe and other economic difficulties. (THE CANADIAN PRESS IMAGES/Lars Hagberg) | CP

OTTAWA - Canada's economy will underperform even moderate expectations in the next two years, TD Bank economists predicted Wednesday, adding that recent tightening of mortgage and credit rules is contributing to the slowdown.

In a new forecast, the TD Bank now expects growth in Canada this year to average 2.1 per cent, shaving a tenth of a point from its March outlook. And it expects two per cent growth in 2013, down four-tenths of a point from the earlier forecast.

That is still enough to generate modest job creation and TD says Canada's national unemployment rate should decline slightly to 7.1 per cent in 2013 from the current rate of 7.3 per cent.

TD is the latest of a list of forecasting groups to officially or unofficially downgrade their outlook for the economy, with some — particularly Capital Economics — coming in even weaker.

The Bank of Canada is expected to follow suit at its next policy announcement in mid-July and write down a call for 2.4 per cent growth in both 2012 and 2013.

TD Bank chief economist Craig Alexander said conditions have deteriorated through much of the world in the past few months.

Europe's problems with government debts in countries that use the euro currency have resurfaced, while China and the U.S. are both underperforming expectations.

Europe remains by far risk No. 1, he said.

His expects European leaders will stare the abyss squarely in the face and come up with the policies needed to avert a disaster, but he warns the situation will be dire if they don't.

"In the case of Europe, they are toying with the possibility of a global financial catastrophe," he said. "The good news is that the politicians realize this, so it makes it more likely they will do what is necessary."

Alexander wouldn't put a number on the odds of another economic slump in Canada because all the risks depend on political decisions in Europe, United States and China "and I have no way of calculating those."

"If I were to make a guess, I'd say it is one in four," he added.

For Canada, the slower global growth and tumbling commodity prices are responsible for about half the reduction in TD's domestic growth estimate, particularly in 2013.

The other half — or about 0.2 percentage points — comes from expectations of lower consumer spending, particularly for housing, as a result of changes to mortgage rules and new restrictions on borrowing.

Last week, Finance Minister Jim Flaherty announced that after July 9, the maximum amortization period on a government-insured mortgage would be dropped to 25 years from 30, which will increase monthly payments assuming all other factors are stable.

As well, the federal regulator of financial institutions has told lenders they can only issue home equity loans up to a maximum of 65 per cent of the property's value, down from the previous 80 per cent.

"We think the housing market will cool down even more than we anticipated because of the new regulations," Alexander said.

Overall, he expects consumer spending on durable goods will fall by more than one percentage point from previous expectations, impacting the overall economy.

But Alexander noted that he believed the changes were needed for the long-term health of Canada's housing market, and to rein in household debt.

The bright spot in the Canadian economy is business investment, but TD economists believe that will also be dimmer than it might have been because of the risky global situation.

On Tuesday, the Conference Board reported its consumer confidence index for June had fallen to where it stood in January, when fears about a European crisis were also elevated.

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