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Long-term Economic Forecast1www.td.com/economicsMarch 12, 2009
TD Economics
Long-Term Economic Forecast
March 12, 2009
Following a deep recession in both Canada and theU.S. in 2009, the following year is expected to markthe first leg of the recovery phase. However, particu-larly in the case of the U.S., the recovery in 2010 andthe following years will be shallow relative to historicalexperience due to the lingering economic costs fromrecapitalization, deleveraging among businesses andhouseholds, and huge public sector dissaving that willneed to be reversed.•The economic recovery gains speed in 2011 and 2012with quarterly annualized growth rates of 4% or more inCanada and the U.S. However, substantial output gapswill remain in both countries during this period, in spiteof the fact that we have applied conservative estimatesfor potential real GDP growth of only 2% in Canada and2.3% in the United States. Both of these are belowcentral bank estimates. We’ve incorporated these es-timates due in part to the impact of the structural eco-nomic influences cited above, but also because we haveassumed a downward cyclical influence on the rate ofeconomic growth stemming from depressed levels of
HIGHLIGHTS
 Beata Caranci 416-982-8067 
capital formation following the recession cycle. Andthen there’s also the influence of a slowing demographictrend, especially in the case of Canada.•Under these assumptions for potential real GDP growth,the output gaps for Canada and the U.S. do not closeover our forecast horizon, though they do narrow signifi-cantly (graphs). In both cases, this would mark theslowest recovery back to the status-quo in post-war his-tory.•The slow uptake in the output gap should mitigate therisk that inflation will become problematic once someof the global and domestic risks abate. This will allowcentral banks on both sides of the border time to pullliquidity out of the financial system as the recovery takeshold. As such, interest rates will likely remain at amore accommodative stance for a longer period thantraditionally seen. We don’t believe the Bank of Canadawill return the overnight rate to a ‘neutral’ stance of 4.00%until nearly the end of the forecast horizon (second halfof 2013).
U.S. OUTPUT GAP
-10-8-6-4-202468183858789919395979901030507091113Per cent of potential GDP
Fcst.
Forecasted by TD Economics as at March 2009.Source: Congressional Budget OfficeExcess supplyExcess demand
CANADIAN OUTPUT GAP
-10-8-6-4-202468183858789919395979901030507091113
Fcst.
Forecasted by TD Economics as at March 2009.Source: Bank of CanadaPer cent of potential GDPExcess supplyExcess demand
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