TD Economics: Quarterly Economic Forecast – 'The Art Of The Deal Makes a Late Appearance'

On Tuesday, TD Economics published its Quarterly Economic Forecast, entitled 'The Art Of The Deal Makes a Late Appearance.' Below is the executive summary of that report. The full report can be found here.

Global outlook: Slower for longer

We ended 2018 with a report discussing the many event risks that required political solutions in 2019, from U.S.-China trade tensions, to USMCA, to Brexit. We close 2019 with movement on all three fronts, but not nearly as much as is needed to remove global and business uncertainty and kick-start the investment cycle. But, beggars can’t be choosers. 

2019 global growth of 2.8% will mark the weakest rate in a decade. Unfortunately, there is little optimism for a strong rebound in 2020. We see only a modest lift to 3.0% next year, which would still mark a below-trend global pace.

The forecast reflects weaker-than-expected performances in Europe and Asia through the end of this year, with little momentum to kickoff 2020. The global manufacturing slump has intensified in recent months, officially landing on U.S. shores. Automobile manufacturing remains ground zero for the downturn. In contrast, tight global labour markets have supported healthy wage gains, helping consumers largely shrug off the woes of the manufacturing sector. But, layoffs in manufacturing industries will test the resilience of the household sector – the keystone to the economic recovery.

Although some trade-related economic uncertainty has abated in recent weeks, sustainability is key. Also, this impact will play second fiddle to the cyclical downturn in manufacturing and idiosyncratic shocks that have impacted several emerging market economies. The announcement of a Phase 1 trade deal between the U.S. and China has removed the threat of more tariffs coming into play, but the devil is in the details. At the time of writing, official communication was elusive on providing specific timetables for tariff roll backs and trade details between the two countries. Nevertheless, the détente in trade tensions is a net positive to market sentiment and marks a de-risking of the global backdrop. This assumes the U.S. does not pivot to Europe on aggressive tariff action. In the event that negative trade action takes place with Europe, it could mark the tipping point for Europe into a recession and once again undermine the stability of the global economy (including the U.S.) via the sentiment channel.

Aside from trade, other downside risks linger, dampening growth and are likely to contribute to bouts of financial market volatility. These include geopolitical hotspots (Hong Kong, Iran, North Korea, Venezuela) and more recently popular protests in Bolivia, Chile, Lebanon and France.

With below-trend growth persisting in a number of regions, there is little cushion to offset unanticipated shocks. In the G7, the risk of a further deterioration in economic activity is highest for the Euro Area (Germany and Italy) and the UK. In emerging markets, the risk is highest in Mexico and Brazil. Policymakers have reacted by cutting interest rates and committing to various fiscal packages, but economic growth is at risk of getting worse before improving.

Canada: Back to its old ways

The export-led surge in Canadian economic activity in the second quarter faded as quickly as it developed. The pace of expansion in the third quarter fell back to 1.3% annualized, a subdued rate that we anticipate will be repeated in the final quarter.

Still, a stronger than thought economic performance in the first half of the year leaves the economy on track to deliver a trend-like 1.7% turnout for this year as a whole. This marks a 0.2 percentage point upgrade from our last estimate, due to upward revisions to history from Statistics Canada.

Canada’s showing over the next few years is likely to be in line with 2019. Underneath this moderate headline is an economy that remains on two tracks. Labour markets have been strong, but households remain cautious around their spending plans. Housing activity is trending higher, but prospects for other types of investment remain challenging.

Domestically, stretched balance sheets will play off against rising incomes, including government tax measures. Balance sheet repair is expected to win out in line with recent trends, holding spending growth to a sub-trend pace. Improving housing activity points to an upside risk to this outlook.

The Bank of Canada remains wedded to holding rates stable, which has resulted in the highest policy rate among its peers and a more persistent inverted yield curve that has only very recently corrected at the 10- year to 3-month spread. At its December 4th rate decision, the central bank was more upbeat about the recent economic data, but once again highlighted downside risks to growth from abroad. They are mindful of the potential risk further monetary easing can present to household leverage, given signs of strengthening housing demand.

We still see the risks tilted towards an insurance rate cut this spring. Beyond the potential for global downside risks to materialize, a possible trigger for an easing could be a desire to offset negative impacts on household finances emanating from rising global bond yields.

Impeded by ongoing elevated global uncertainty, the Canadian dollar is expected to stay in its recent narrow range of 74-76 US cents.

U.S. economy: Fed pivot shores up demand

At a high level, the American economy has performed close to our expectations in 2019. Growth is on track to slow from 2.9% in 2018 to 2.3% this year. However, beneath the surface, the composition of growth is different from what we expected a year ago in two areas. First, the global slowdown and elevated uncertainty stopped business spending in its tracks by mid-year and turned down manufacturing activity. Second, the Federal Reserve needed to respond by pivoting to cutting rates (a total of 75 basis points). This succeeded in normalizing the yield curve slope, but we anticipate a relatively flat curve will persist in the absence of compelling evidence of stronger inflationary or economic pressures.

The good news is that the almighty consumer has responded to the lower rates in textbook fashion by increasing demand for interest-sensitive durables as well as home sales. Continued strength in job markets has also generated a positive impulse for household income and spending growth.

Provided that inflation remains close to the Fed’s 2% target (as we expect), the central bank is likely to move to the sidelines and patiently observe the interaction of past rate cuts on the economy as well as developments on the global and trade fronts.

Contributing authorsBeata Caranci, Derek Burleton, James Marple, Fotios Raptis, Leslie Preston, Brian DePratto and James Orlando

Beata Caranci

Senior Vice President and Chief Economist

TD Bank Group