TD Economics: Quarterly Economic Forecast – 'Living on the Edge'

On Thursday, TD Economics published its Quarterly Economic Forecast, entitled "Living on the Edge." Below is the executive summary of that report. The full report can be found here.


Global economy: Early-year greenshoots nipped by the frost from trade winds

Amid mounting trade tensions and geopolitical uncertainty, we have revised down our global growth outlook for 2019 and, to a lesser extent, 2020. This year’s estimate of 2.9% would mark the weakest pace in a decade, leaving the world economy with a thin cushion to absorb political and economic shocks.

Within the advanced world, Europe has been home to the greatest data disappointments in recent months, including Germany and the UK. Growth downgrades have also been incorporated for a number of emerging market economies, especially those in South East Asia, where the current slump in global manufacturing has been highly visible.

Historically, deteriorating economic conditions in Europe and Asia have not led to recessions in North America. The economic and financial linkages generally flow in the other direction. However, a further weakening in foreign demand and trade flows will continue to restrain growth in the U.S. and Canada.

Fortunately, moves by central banks around the world to ease monetary policy are expected to help soften the negative cycle taking hold in sentiment and ultimately sow the seeds for a modest recovery in 2020. In addition, there seems to be more appetite to complement supportive monetary policy with fiscal stimulus. Actions remain in the planning stage for a number of countries and will be closely monitored.

At the end of the day, economic outcomes will remain closely linked to political outcomes. As of yet, no offramp has been identified to the trade battle between the U.S. and China. Moreover, the U.S. continues to wield the threat of auto tariffs on the EU to enhance its position in trade negotiations. Other geopolitical risks have also moved back to the forefront (Brexit, Argentina, Iran and Hong Kong). Political risks offer the dominant downside risk to our forecast, but could quickly transform into upside risks in the event of timely resolutions.

Canada economy: Blowing hot and cold

Canada’s economy turned in a strong rebound in the second quarter of 2019, but we see little staying power and a return to a more modest expansion. Growth for 2019 is forecast at 1.5%, followed by a similar outturn of 1.6% in 2020.

Data trends continue to blow hot and cold. Labour markets have begun translating into wage pressures, and housing activity is showing signs of life, yet consumer spending is tepid. Credit growth is picking up, but business investment continues to soften. Recent U.S. auto sector labour disruptions present a near-term growth risk, absent a timely resolution.

Beyond domestic factors, a still-decent U.S. outlook offers some offset to the ratcheting up of trade tensions and deteriorating global growth that has sent commodity prices lower and weakened Canada’s export growth prospects with other countries.

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In September, the Bank of Canada left its policy rate steady. We are closely watching for contagion to the broader economy from worsening global risks. Assuming trade disputes remain unresolved, we expect the central bank will need to provide a backstop this year.

The expected near-term easing should help to reduce some of the bond yield curve inversion. While the Canadian curve is not as accurate a recession-predictor as the U.S. curve, this development is negative and a warning signal that should be taken seriously by central bankers.

We have adjusted down our U.S. and Canadian yield curve forecasts in accordance with recent negative political and sentiment developments. However, should there be unexpected positive developments on the trade front, there would likely be a sudden repricing of the risk premium embedded within yields.

With Canada-U.S. yield differentials expected to hold relatively steady, the Canadian dollar is likely to remain within its recent 73-77 U.S. cent range.

U.S. Economy: Fiscal boost cushions tariff hit

Economic growth remains in line with our June forecast. Although we have lowered our 2019 annual average forecast by 0.3 ppts, to 2.3%, that reflects downward revisions to the historical data that weakened this year’s starting point.

Looking ahead, we have edged down our 2020 growth projection to 1.7% (from 1.8%). This average masks a slowdown in the quarterly pattern that would have been even larger were it not for two well-timed offsets. The recent spending deal in Washington will raise outlays above the levels assumed in our prior forecast. The outlook for the consumer is also a little brighter following upward revisions to the historical data on personal income.

Although consumer fundamentals are currently strong, we remain on the lookout for broadening signs that cautious business behavior is spilling into hiring decisions. Should this occur, it would risk kicking the legs out from under the expansion.

Unfortunately, it will be difficult to get a clean read on the data in the coming months. The expansion of tariffs to many consumer goods in September and those planned later this year will distort economic data through volatility in imports and inventory accumulation. Trends in domestic demand tend to provide the truer picture of underlying growth, but here too we may see distortions if consumers pull forward activity to front-run potential tariff-related price hikes.

Due to the evolution of global and political risks, we expect an additional interest rate cut by the Federal Reserve by year end.

Contributing authors: Beata Caranci, Derek Burleton, James Marple, Fotios Raptis, Brian DePratto, Leslie Preston and James Orlando.

Beata Caranci

Senior Vice President and Chief Economist

TD Bank Group