The global economic expansion appears to be losing some momentum, but it is likely to continue at a robust pace in 2005/06, say TD economists in a quarterly forecast released today.

The report notes that oil shock is taking a toll on net oil importing countries, while depreciation of the U.S. dollar is dampening growth in America’s largest trading partners – including Canada.

TD economists predict more moderate growth ahead for the world’s two largest economies – the United States and China. However, non-Japan Asia, Latin America and Eastern Europe are poised to deliver strong economic gains. Japan and Euro-zone will continue to deliver a lacklustre performance.

Canada’s economy will struggle with below 3% growth in the first half of 2005 say TD economists, as weak exports and slower inventory accumulation constrain real GDP growth. But, the drag from these factors will wane with time.

With inflationary pressures to remain under wraps, the Bank of Canada is expected to leave monetary policy on hold until the fourth quarter of 2005 and raise rates only gradually thereafter.

As for the Canadian dollar, TD economists say the loonie is expected to be buffeted by offsetting forces. The currency will strengthen on U.S. dollar weakness, but the gains will be tempered by widening negative Canada-U.S. interest rate differentials and a modest pullback in commodity prices.

TD names three key risks to its global economic outlook: the future path of energy prices, financial markets’ reaction to a still-unsustainably large U.S. current account deficit, and the extent and timing of future interest rate increases and their impact on the global financial system.

However, TD economists say the healthy state of corporate balance sheets across the industrialized world, should help firms to weather any adverse developments.