TD economists are forecasting a mild technical recession in the near term, but they see a return to positive economic growth early in 2002.

Both the United States and Canadian economies are likely to contract slightly in the second half of 2001, say TD economists, as the devastating events of September 11 tip already weak economies into a mild recession. Don Drummond, senior vice president and chief economist of the TD Bank Financial Group, noted that, “even before the attacks, evidence had been mounting that the U.S. recovery was not going to materialize in the second half of the year. In fact, both North American economies were on a knife’s edge, struggling to stay in positive growth territory. The short-term ramifications of the attacks will be to push them over the edge.”

However, the downturn is likely short and shallow. “By early 2002, the U.S. and Canadian economies will begin growing again and will strengthen throughout next year,” he added. Economic growth will resume in early 2002, strengthening throughout the year and into 2003, it predicts.

TD says the Bank of Canada and the Federal Reserve will both cut short-term interest rates by a further 50 basis points in the fall of 2001. As economic growth picks up in 2002, both central banks will begin to take back their recent cuts, raising rates in the second half of 2002 and throughout 2003.

All output categories of demand will contribute to the recovery in 2002, it says, with business investment and exports beginning to recover from a very tough year. The unemployment rate will continue to rise after output recovers, peaking at 7.8% in the spring of 2002, and then falling to 7.5% by the end of 2002 and 7.2% by the end of 2003. Headline inflation will ease to a little above 2% and remain at that rate before rising modestly through 2003.

TD predicts that the collapse in manufactured durable goods will drag industrial production to negative growth in 2001, but will begin to recover in 2002 and will grow more strongly in 2003.

Energy production will grow more rapidly in 2002 while exploration will fall back in response to the lower oil and gas prices that have been seen in recent months. It forecasts that communications services will continue to be the fastest-growing Canadian industry in 2002 and 2003.

A further decline in commodity prices and a contraction in the Canadian economy are likely to push the Canadian dollar below its prior record low of 63.11¢ U.S. it says in the final months of this year. However, the Canadian currency should fare modestly better next year.

Fallout from the terrorist attacks, in the form of increased business and consumer uncertainty and increased security costs, will put at least a temporary damper on world trade and weigh down global economic growth in 2001. Global economic growth will improve in 2002, but won’t surpass 3% until 2003.