Equity markets, powered by the U.S. markets, will probably improve this year, TD Bank says.

In a special report on economic trends, TD says that although it does not provide an explicit forecast of equity market performance, it does make general comments on the outlook. It sees better markets ahead.

“The performance of U.S. equity markets will, as usual, be the major influence on Canadian equity markets,” it says. “There are several reasons for expecting a more favourable U.S. equity market performance in 2003, including a gradual recovery in U.S. corporate profits, a fading into the background of the corporate accounting scandals and, if passed by Congress, a reduction in personal income taxes on dividends paid by U.S. corporations.”

TD says that Canadian corporate profit growth will continue to outpace that of U.S. firms.

It also says that Canada will outperform the U.S. economy for the fifth consecutive year in 2003, although Canada’s economic growth, forecast at 2.7%, will be less than the 3.4% estimated for 2002. U.S. economic growth is expected to be slightly faster on average in 2003 than in 2002, at 2.6%. “Even though the annual growth rate won’t improve much, U.S. economic growth is forecast to strengthen substantially in the second half of the year, leading to a considerably better performance in 2004,” it says.

Once the war in Iraq draws to a close, the Bank of Canada will probably resume raising short-term interest rates. It is expected to raise the target rate for overnight funds from the current level of 3.00% to 4.00% by the end of 2003. The U.S. Federal Reserve is expected to hold its target rate for Fed Funds at the current rate of 1.25% until at least October 2003, when it will begin to raise interest rates. But the Fed will be cautious, and the target rate for Fed Funds is forecast to rise only to 1.75% by yearend.

Elsewhere, TD says Europe will grow by 1% to 2% in 2003, only a little faster than in 2002, hampered by weakness in the region’s largest economies — Germany, France and Italy. Japan will continue to struggle in 2003 and its economy will grow by little more than 1.0%. Non-Japan Asia will grow the fastest of the global regional economies, with individual national growth rates of 4.0% to 7.5%. Latin America is expected to grow by a little over 2.0% in 2003.

The major risk to the forecast is the effect of the war in Iraq. “While the war continues, we are likely to see continued volatility in oil and gold prices and in the foreign exchange value of the U.S. dollar and a continuation of the low and/or falling confidence of both consumers and businesses. An end to the war in the spring would result in an initial pop in confidence, as well as lower and more stable oil prices,” TD says.

“However, economic growth would still be slow for the remainder of the first half of the year. A prolonged war, one in which there was more bad news than good or terrorist attacks, would have the same effects on oil, gold and currency markets, but would affect confidence more severely. Needless to say, the longer the war goes on, the longer it will take to undo the economic damage that is inflicted.”