09/21/2015 12:46 EDT | Updated 09/21/2015 12:59 EDT

The Largest Risk To Canada's Economy? China, TD Bank Says

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The terraces of the Jin Mao Tower overlooking the Oriental Pearl Tower in Shanghai, China

The largest risk to Canada’s economy isn't the slowdown in the oil industry, or the spectre of a housing bubble — it’s the world outside Canada and particularly China, economists at TD Bank say.

Canada will return to “steady, modest” growth in the second half of this year, TD Economics said in a report issued Monday.

It sees the economy bouncing right back from the recession that took hold in the first half of this year, largely on a rebound in exports fueled by a lower loonie that TD says could fall as low as 73 cents U.S.

Still, the recession in the first half of this year means Canada will see its slowest economic growth this year since 2009, the report said, a total of 1.2 per cent.

But the TD economists say their forecast could be challenged by “a number of prominent downside risks to the outlook.” At the top of the list is China, which experienced a broad-based slowdown this summer as its stock markets crashed.

As the world’s largest importer of raw materials, China is “a major driver of global prices” for commodities, TD said. And, of course, Canada’s economy is heavily dependent on commodity exports.

“If Chinese growth surprises to the downside, commodity prices would surely fall further,” TD said, noting China accounts for a third of all the growth in oil demand and 80 per cent of all the growth in metal demand over the past five years.

And if China’s weakness spreads to Canada’s trading partners, that could slow down Canada’s export-driven recovery as well, the TD report said.

Interest Rates Low Until 2017

But the bank also sees upside risks to the economy, noting the strength of Canada’s housing market this year.

“The resiliency of Canada’s housing demand has been persistently underestimated and this may continue to be the case given low interest rates alongside steady gains in incomes and jobs,” TD said.

TD was one of the many institutions that “underestimated” the housing market. Three years ago it called for a 10-per-cent to 15-per-cent decline in house prices by 2015. Prices have instead climbed steadily, particularly in Toronto and Vancouver. Today, the bank sees a more upbeat future for housing.

“As long as borrowing rates remain low, a major correction in the housing market remains a distant probability,” it said.

On that front, TD has good news. It sees the Bank of Canada holding its key lending rate at 0.5 per cent until 2017, thanks to continuing “slack” in the Canadian economy.

By then, the economy should be growing at around 2 per cent per year, and the Bank of Canada will be looking at raising rates, TD said.