Canada’s economy is likely to continue to run circles around the United States for the remainder of the year, say TD Bank economists.

“The U.S. recession may be over, but the U.S. economy is still struggling to take full flight. In Canada, we are already soaring,” says Don Drummond, chief economist of TD Bank Financial Group. “One need look no further than the stunning performance of the Canadian labour market to understand just how remarkable Canada’s economic rebound has been,” he adds.

While the U.S. economy continued to shed jobs until May, Canada’s economy has created 237,000 positions in the first five months of the year – its strongest gain since 1994. “The first-quarter GDP results paint a similar picture,” remarks Drummond. “Both countries recorded strong rates of GDP growth, but the bulk of Canada’s gain came through strength in final demand, suggesting that economic growth is more firmly anchored on this side of the border.”

The key issue is whether the Canadian economy can keep its shine without a strong rebound in the U.S. TD economists believe that it will. “Some may argue that Canada has never done better than the U.S. powerhouse over an extended period of time, but that is not quite true,” says Drummond. “The Canadian economy grew faster, on balance, than its U.S. counterpart during the 1960s and 1970s. Canada’s sub-par performance is largely a late 1980s and 1990s story – a period when Canada was struggling with the consequences of high inflation, runaway budget deficits, mounting public and external debt loads and in some sectors of the economy, a fairly painful adjustment to free trade. These are problems that have either been solved, or on which significant progress has been made,” he adds.

TD notes that Canada’s economy was not battered as heavily as the U.S. economy after September 11; the Canadian economy may be getting an even bigger push from easier monetary settings; corporate profits and business investment appear to be turning the corner faster than in the U.S.; and, rising commodity prices will boost Canada’s resource-based sectors.

“By the end of the summer, the Canadian economy could be running close to full capacity,” notes Drummond. As a result, he expects the Bank of Canada to raise its overnight lending rate by another 125 basis points this year – and a further 125 basis points in 2003. With the U.S. Federal Reserve only expected to start raising rates in September, the resulting widening of short-term interest rate spreads should allow the Canadian dollar to continue to climb to 67.5 U.S.¢ by the end of this year, and 69 U.S.¢ by mid-2003.