The U.S. economic outlook is still gloomy, and economists at TD Bank expect another 100 basis points in rate cuts out of the Bank of Canada to help fend off any fallout north of the border.

Last week, the U.S. Federal Reserve pared back the pace of its rate cuts, delivering just a 25 bps rate cut, and the Fed’s economic assessment was not quite as bad as feared, notes TD Economics in a research brief. “Even before the Fed delivered the rate cut, expectations for easing at the April 30 meeting had been scaled back. And with the statement that accompanied the decision, there are now indications that the Fed is not as worried about downside growth risks as it was just six weeks ago. What has shifted?” TD asks.

“Not much, quite frankly, when assessing economic fundamentals. In fact, the U.S. economy seems to be decelerating at an accelerating pace,” it says, noting that the labour market is clearly in contraction, GDP growth is slowing and domestic demand is weakening. .

Yet there have been signs of repair in the credit markets, TD says. “Against this backdrop, it is obvious the economy is not out of the woods yet, and although there are heartening signs of improvement in the credit market, it too, has much work still to do. The U.S. economic slowdown in this cycle is expected to be worse than that in 2001, and on this condition alone one can justify further Fed easing to address the situation. We continue to expect another 75 basis points of rate cuts based on our expectation that economic conditions will get much worse before staging a convincing and sustained turnaround,” TD predicts.

“The Canadian economy has started to show signs of strain, due to the headwinds from the U.S. economy creating a substantial drag on Canadian exports. Canadian real GDP is, therefore, on track to disappoint the Bank of Canada’s forecast for a 1% pace of growth in the first quarter,” it adds.

“The combination of little upside for growth and few imminently concerning price pressures makes a good recipe for further rate cuts. And as a result we continue to expect two more 50 basis point rate cuts by the Bank of Canada, which ultimately leaves rates at a cyclical nadir of 2.0%,” TD concludes.