TD Bank’s economists say that the sputtering U.S. recovery will not be weak enough to drag down the Canadian economy too. “Canada’s economic expansion has become remarkably well-balanced,” says Don Drummond, SVP and chief economist at TD Bank.

“Short of a relapse of the U.S. economy into recession, which would weigh on our exports, Canada’s economic engine is likely to continue to chug ahead at a healthy cruising speed.” TD does expect the Canadian economy to slow in the second half of the year.

“There is still a lot of talk about a double-dip recession and further interest-rate relief from the Fed,” says Drummond. “In our view, however, investors’ concerns are way overblown – the U.S. recovery may be weak and hesitant, but it is fully intact. And that is good news for Canada.” The current U.S. situation has much more in common with the so-called “jobless recovery” of the early 1990s than previous double-dip recessions.

According to the TD report, the real key to a sustained U.S. recovery is still business investment and on that front the news is encouraging. New orders for durable goods are rising, capacity utilization rates are starting to turn up, and unit labour costs have been falling thanks to strong productivity gains — which bodes well for corporate profits.

Perhaps the most compelling reason to expect the U.S. recovery to gain strength over the next few quarters is the Fed. “U.S. interest rates are
extremely low – a glaring difference with periods when the economy dipped back into recession after an initial upturn,” noted Drummond. “The Fed is
not going to make the mistake of raising rates too quickly this time around,” he said. TD economists expect the Fed to keep its bellwether Fed
Funds rate unchanged until March 2003.

“As long as the U.S. economy continues to claw its way back, Canada’s economy is home-free,” says Drummond. In contrast to the U.S., business
investment is already turning the corner in Canada, supported by a burst in corporate profits and a rapid rise in capacity utilization rates. “And, with
the 386,000 jobs created in the first seven months of the year, there is not even an outside chance that the Canadian consumer will throw in the towel.”

While the sluggish U.S. economy will prevent the Canadian economy from replicating the breakneck gains recorded in the first half of the year, the
expansion is likely to continue at a respectable pace. “This will put the Bank of Canada back into tightening mode,” says Drummond.