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TD Economics, Ouarterly Forecast Canada, March 19, 2013

TD Economics, Ouarterly Forecast Canada, March 19, 2013

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Published by Glenn Viklund
"Canada just waiting on a friend"
"Canada just waiting on a friend"

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Published by: Glenn Viklund on Mar 24, 2013
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03/25/2013

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QUARTERLY ECONOMIC FORECAST
TD Economics
Canada’s economic engines sputtered in the second half of 2012, as the pace of economic growthwas cut in half between the end of 2011 an 2012. This country is not unique in this predicament, as
and scal uncertainty in the U.S. weighed on business condence and
investment south of the border. But, that is yesterday’s news. Looking ahead at this year’s performance,we expect Canada’s economy to gradually shift into a higher gear.
Unfortunately, it won’t feel like the economy is roaring ahead, as
domestic sources of growth – most notably the housing sector – are set to slow (see Chart 1).Overall, we expect the Canadian economy to grow at a sub-par 1.6% pace on an annual average basis this year, before acceleratingto 2.6% in 2014. Due to the weak hand off from 2012, the 2013growth tally belies a stronger average quarterly pace of roughly
2%. The theme of slowing nal domestic demand in 2013 remains
intact, as the housing sector moderates, consumers keep spendingrestrained in the face of high debt levels and governments wrestle
with decits. In the wake of softer commodity prices, particularlylower oil prices, and a poor year for corporate prots, business
investment is also expected to be weak in the near term.At the moment, Canada continues to wait for stronger exportsand business investment to take over from consumers and gov-
CANADA - JUST WAITING ON A FRIEND
Highlights
 
After grinding nearly to a halt in the second half of 2012, Canada’s economic growth looks set topick up over the course of this year and next. Although real GDP growth in 2013 will advance byonly 1.6%, this masks an acceleration to roughly 2% growth on a Q4/Q4 basis. Stronger growth inthe U.S. should help lift Canadian economic growth further to an average of 2.6% next year.Canada’s housing sector is slowing, and ripple effects will be felt throughout Canada’s economy; fromresidential construction to purchases of housing-related goods. Still, low interest rates and decentemployment growth suggest a cooling not a crash, and the weight of a housing slowdown won’t beenough to sink the economy.That leaves exports as the giant missing piece in Canada’s economic growth. Fortunately a tideof positive indicators from the U.S. economy is rising and should help lift many economic boats inCanada later this year, and more notably in 2014.But, the recent slowdown in economic growth has meant increased excess capacity in Canada’seconomy, which has cooled inflation significantly. The Bank of Canada’s tone has consequently be-come more dovish, and we have pushed back the first rate hikes to the final quarter of 2014. Interestrates remaining lower for longer should help support the domestic economy until external sourcesof growth gain momentum.
March 19, 2013
Craig Alexander, SVP & Chief Economist, 416-982-8064Derek Burleton, VP & Deputy Chief Economist, 416-982-2514Leslie Preston, Economist, 416-983-7053
CHART 1. ECONOMIC GROWTH TO SHIFTGEARS GRADUALLY
-4-3-2-101234200620072008200920102011201220132014
Consumers, Govt. & HousingBus. Investment & Net ExportsReal GDP growthSource: Statistics Canada; Forecast by TD Economics as at March 2013
Contribution to Real GDP Growth, %
Forecast 
 
TD Economics | www.td.com/economics2
March 19, 2013
ernments to drive growth. Patience should be rewarded as
 private sector demand in the U.S. gathers speed later in
2013, providing a lift to exports, and eventually businessinvestment.
Canada needs a little help from its friends
Canada’s economic fortunes have long been tied to our 
neighbour to the south, and the sluggish U.S. recovery has
left an indelible mark on Canada’s export performance.Exports account for about one-third of Canada’s GDP and
roughly three quarters of exports are bound for the U.S. That
share was greater than 80% at times prior to the recession.This has left Canadian exports below their pre-recessionlevels (see Chart 2) and they represent the missing piece inCanada’s economic recovery thus far.Therefore, the most encouraging data for Canada’s eco-nomic outlook since our last forecast comes from south of 
the border. The U.S. housing sector is on the mend. Prices
are in positive territory on a year-on-year basis and housingstarts are starting to show upward momentum. Manufactur-
ers are becoming more optimistic after being hit by scaluncertainty in the U.S. last year, which should help lift in
-vestment. Auto sales are also expected to grow at a healthy pace over the forecast horizon. All of these factors are very positive for Canadian exporters who send a great deal of lumber, autos and parts and machinery south of the border.
Looking at the aspects of the U.S. economy that are themost important to Canada, as measured by the U.S. Activ
-ity index, suggests that Canada’s exports should notably
improve, particularly in 2014 (see Chart 3). In fact, net
exports should make a positive, albeit small, contribution togrowth this year, after having been a drag on the economy
in 9 of the last 10 years. However, the U.S. does still haveconsiderable scal drag to deal with in the near term. We
don’t expect exports to really strengthen until the secondhalf of 2013, as
.
Until then, challenges weigh on businesses
Until U.S. economic growth strengthens, Canada’s busi
-nesses will continue to face various headwinds constraining
growth in corporate prots and business investment. Much
hay was made last year about “dead money” on corporate balance sheets in Canada; that businesses were not invest-ing enough as they sat on piles of cash. However, with perfect hindsight businesses had good reason to be cautious.
Corporate prots were down 9% year-on-year in the fourth
quarter of 2012 (see Chart 4), and that backdrop bodes illfor business investment this year.
CHART 3. CANADIAN REAL EXPORTS& U.S. ACTIVITY INDEX
-20-15-10-50510152002200420062008201020122014Year-over-year % change
U.S. Activity IndexCanadian Exports
Source: Bureau of Economic Analysis, Statistics Canada, Federal Reserve, Bankof Canada. Forecast by TD Economics as of March 2013
Forecast 
CHART 2. EXPORTS STILL BELOW PRE-RECESSION LEVELS
708090100110120200620072008200920102011201220132014
Source: Statistics Canada; Forecast by TD Economics as at March 2013
Indexed, Q1:2006=100
Forecast 
CHART 4. FLAGGING COMMODITY PRICESHIT CORPORATE PROFITS
-60-40-20020406004:Q106:Q108:Q110:Q112:Q114:Q1FTD Commodity Price IndexCorporate ProfitsYear/Year % Chg.
Source: Statistics Canada; Forecast by TD Economics as at March 2013
Forecast 
 
TD Economics | www.td.com/economics3
March 19, 2013
According to Statistics Canada’s survey of investment
intentions, capital spending is only expected to advance by1.7% nominally in 2013. That marks a dramatic pullback from the 8.5% average annual pace posted between 2010and 2012. Notably, the resource sector (mining and oil &gas extraction) expects to decrease capital spending by 2.7%this year. Despite all the worries about pipeline constraints
and continued price discounting for oil produced in Western
Canada, investment intentions in Canada’s unconventionaloil sector (primarily oil sands) actually held up fairly well.Resource sector investment weakness is concentrated inmining, particularly metals. On the plus side, investmentintentions showed strength in other sectors of the economy,like utilities, transportation and warehousing and wholesaleand retail trade.
Still, we expect business investment to grow at a very
modest 2.4% pace in 2013, reducing its contribution toeconomic growth compared to earlier in the recovery. Com-modity prices aren’t expected to accelerate much this year,holding back revenues in the resource sector, and Canadianmanufacturers continue to face competitive pressures like astrong Canadian dollar. These developments, combined withCanada’s relatively poor productivity performance, mean
that unit labour costs are rising faster here than in the U.S.
(see Chart 5) – a negative for the sector’s competitiveness.A relatively strong loonie does lower the cost of investingin productivity-enhancing equipment, and plans for capitalspending on machinery and equipment actually held uprelatively well for 2013, which is a good sign for business productivity.
Consumers and governments have already scaledback, now housing cooling
Consumer and government spending were key pillarsof strength earlier in the recovery, but their contributionsto growth have already faded considerably. Consumers did
nish 2012 on a relatively strong note, but there are signs
that the pace of spending will soften. Growth in consumer credit has slowed to roughly match income growth, autosales are already at lofty levels and aren’t expected to havetoo much more upward momentum, employment gains areexpected to moderate, and a cooler housing market willweigh on purchases of housing-related durables. Add it allup, and consumer spending is expected to continue its recentlacklustre trend pace of roughly 2%.Delving deeper into Canada’s real estate market, hous-
ing starts have already slowed signicantly, and we expect
residential investment to be a drag on growth in 2013. Lower residential investment and a cooling housing market haveripple effects throughout the economy. Over the past tenyears, a booming housing market made a substantial con-tribution to Canada’s economy through various channels:direct and indirect impacts of residential construction, pur-chases of housing-related consumer goods, and the “wealtheffect” of higher home prices on spending. The wealth effectrefers to the notion that as households see the value of their homes rise, they feel wealthier and choose to spend moreand save less. TD Economics estimates that the total lift tothe economy from the combination of these effects added0.8 percentage points to annual GDP growth on averageover the past ten years (see Chart 6). Looking ahead, it islikely to take away about 0.1 percentage points per year on
CHART 5. MANUFACTURING UNIT LABOURCOSTS (U.S. DOLLAR TERMS)
8090100110120200720082009201020112012
CanadaU.S.Index, 2007=100Source: Statistics Canada
CHART 6. HOUSING SET TO WEIGH ON ECONOMY
-0.02
-1.00.01.02.03.02001200320052007200920112013
Forecast 
Source: Statistics Canada, Forecast by TD Economics as at March 2013
Contribution* to Real GDP Growth, %-points
*Includes direct & indirect impact of residential construction, housing-related durablesspending and the wealth effect 

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