BUSINESS

TD Bank trims first-quarter outlook for Canadian economy as low oil prices bite

03/24/2015 10:33 EDT | Updated 05/24/2015 05:59 EDT
TORONTO - Growth in the Canadian economy will be slower than expected in the first quarter as low oil prices take their toll, but it will pick up in the second half of the year, TD Bank predicts.

The bank cut its growth forecast for the first quarter on Tuesday to an annual pace of 0.5 per cent compared with TD's January estimate of 1.0 per cent growth for the first quarter.

The forecast falls well short of the 1.5 per cent pace that the Bank of Canada has predicted for the first quarter.

However, TD suggested the economy will start to pick up in the third and fourth quarters of the year, helped by low interest rates, energy savings to consumers, a weaker Canadian dollar and growth in the United States

"Most of these positive forces are expected to have some staying power," TD Bank wrote in its quarterly economic forecast.

"This expectation, together with the waning negative impact of weak oil prices, will likely help to take real GDP growth in Canada back up to just over two per cent by the end of this year and into 2016."

TD predicts growth in the third quarter will accelerate to a 2.2 per cent annual pace and then to a 2.4 per cent pace in the fourth quarter.

The new estimate is based on a slightly higher average price for oil this year at US$49 per barrel compared with the January outlook which used an average price of US$47.

TD is also now estimating growth this year to average 1.9 per cent, compared with its earlier forecast for 2.0 per cent. Its forecast for 2016 is unchanged at 2.2 per cent growth.

However, the bank suggest the job market will continue to struggle.

"Partly reflecting weak profit margins, businesses will likely strive to boost productivity. With gains in the labour force still likely to be constrained by an aging population, the jobless rate is likely to remain close to seven per cent over the next few years," TD said.

The Bank of Canada cut its key overnight rate target in January to 0.75 per cent, from one per cent, in a surprise move that governor Stephen Poloz described as insurance against lower oil prices.

The central bank has suggested that it expects the impact of lower oil prices on the economy to be front-end loaded, striking in the first half of this year.

The Bank of Canada's next rate announcement is expected on April 15 when it will also release its spring monetary policy report.

TD predicted the Bank of Canada will keep its key policy rate at 0.75 per cent until the fourth quarter of next year when it suggested it will rise to one per cent.