U.S. slowdown on the horizon

Canada will be caught in the crossfire, say TD economists

By: IE Staff
March 22, 2006 March 22, 2006
10:30

The U.S. economy will slow over the next 12 to 24 months and the effects of the weaker performance will spill into Canada, say TD economists.

“Last summer, we noted that housing market strength and household indebtedness in the U.S. was simply unsustainable, and that it would give way to an economic slowdown in the second half of 2006. Evidence is mounting in support of this view,” said Don Drummond, senior vice president and chief economist of TD Bank Financial Group, in a release.

TD says new and existing home sales are well off their peaks and mortgage refinancing activity has been in retreat since June of last year. The cooling in housing markets will eventually dampen construction and consumer spending, as real estate appreciation has spurred personal spending in recent years.

The U.S. economic expansion will ease to an average annualized pace of around 2.3% in the second half of 2006 and first half of 2007, which is a full percentage point below its long-term potential pace.

Although, Canada won’t be not immune to a slowdown south of the border, Canadian economic growth will only marginally slip below its somewhat lower long-term trend rate of 2.8%.

Drummond also noted that “virtually everything that matters in our forecast flows from two key assumptions: first, the U.S. experiences an economic slowdown; second, the economic weakness proves to be mild and relatively short-lived.”

“Underlying economic fundamentals will remain healthy, with low unemployment rates and with wages rising faster than inflation. Even though consumers are heavily indebted, spending growth will moderate rather than retrench in the absence of a spike in interest rates,” Drummond said.

However, there is a 30% probability that the downturn will be longer and deeper than currently anticipated.

According to TD Economics, the four key downside risks are: