Canada’s economic slowdown in 2007 will stem from external demand rather than domestic spending according to TD Economics.


“The problem will be with the American not Canadian consumer,” says chief economist and senior vp, Don Drummond.

The December issue of the TD Quarterly Economic Forecast says the Canadian economy will expand at an average 2.1% pace per quarter over the next three quarters. This is marginally below its potential pace of 2.8%.

South of the border, however, the U.S. economy will fall short of its potential pace (3.3%) by a full percentage point, resulting in a greater degree of economic slack. Moreover the American slowdown has only reached its halfway mark.


The slowing of U.S. demand, along with high resource costs and an elevated Canadian dollar, will continue to hurt Canadian exports. Drummond, who believes the weak export sector will be a dominant theme over the next 6 to 9 months, says: “The challenges of the export sector are plain to see on manufacturing, which has shed more than 170,000 jobs in the past two years. Exports will be hard-pressed to expand at even a meager 1% rate in 2007. Meanwhile, import growth should remain reasonably firm underpinned by domestic demand. As such the trade balance is will likely shave 1.3%age points from the accounting of real GDP growth next year.”

Canadian consumers should be less affected by developments in domestic housing markets, which were never bloated to the extent of their American counterparts. Likewise, the Canadian economy has not been confronted with a severe adjustment in home construction, inventories, sales or prices, as has been the case in the U.S.

Household finances also look healthy enough to withstand the expected moderation in economic growth, especially if gauged by 90-day mortgage delinquency rates, which currently remain at a more than 15-year low. Mortgages account for nearly 61% of total household liabilities. And, the asset side of the ledger sheet has increased at a faster rate than debt, such that net personal wealth (assets minus liabilities) has climbed steadily.

“As expected, growth in real estate assets has played a key role in wealth accumulation, representing more than one-third of total household assets and growing at a 7-9% annual clip since 2001,” says Drummond. “The cooling housing market will take some zip off of real estate appreciation in the coming year, but the absence of a market collapse should position real estate assets to still rise by a 6-7% clip in 2007, which is consistent with historical norms.”

Within this milieu, the Bank of Canada will likely ease rates by 50 basis points in 2007, with the first of two cuts coming in April. This should be viewed as a precautionary move on the part of the central bank. By the second half of 2007 and into 2008, a revitalized American economy should help lift the Canadian economy back to an average 3.2% quarterly pace in late 2007 through 2008.