June 13, 2002

News Release: Canada's Economy Will Continue to Outperform the U.S. Say TD - Economists

TORONTO DOMINION BANK ("TD-TBDNX3")
In spite of the lacklustre economic picture that is unfolding south of the border, Canada's economy has pulled out of last year's economic slowdown with gusto - and is likely to continue to run circles around its U.S. counterpart for the remainder of the year say TD economists in the latest issue of the TD Quarterly Economic Forecast. "The U.S. recession may be over, but the U.S. economy is still struggling to take full flight. In Canada, we are already soaring," says Don Drummond, Senior Vice President and Chief Economist of TD Bank Financial Group. "One need look no further than the stunning performance of the Canadian labour market to understand just how remarkable Canada's economic rebound has been," he adds. While the U.S. economy continued to shed jobs until May, Canada's economy has created 237,000 positions in the first five months of the year - its strongest gain since 1994. "The first-quarter GDP results paint a similar picture," remarks Drummond. "Both countries recorded strong rates of GDP growth, but the bulk of Canada's gain came through strength in final demand, suggesting that economic growth is more firmly anchored on this side of the border."

Canada will continue to outperform

With only a tepid showing from the U.S. economy expected for the remainder of the year, the key issue is whether the Canadian economy can keep its shine - and the TD economists believe that it will. "Some may argue that Canada has never done better than the U.S. powerhouse over an extended period of time, but that is not quite true," says Drummond. "The Canadian economy grew faster, on balance, than its U.S. counterpart during the 1960s and 1970s. Canada's sub-par performance is largely a late 1980s and 1990s story - a period when Canada was struggling with the consequences of high inflation, runaway budget deficits, mounting public and external debt loads and in some sectors of the economy, a fairly painful adjustment to free trade. These are problems that have either been solved, or on which significant progress has been made," he adds.

The TD economists point to a number of factors highlighting that the cards are stacked in Canada's favour this time around. First, Canada's economy was not battered as heavily as the U.S. economy after September 11, and is clearly taking less time to heal. Second, the Canadian economy may be getting an even bigger splash of fuel from easier monetary settings than its U.S. counterpart. While the Bank of Canada cut its overnight lending rate by 375 basis points last year, the Canadian dollar lost 5 per cent of its trade-weighted value during the same period. "That is the equivalent of another 150 basis points in interest rate cuts," remarks Drummond. Third, corporate profits and business investment appear to be turning the corner faster than in the U.S. - in part thanks to the smaller weight of the high-tech sector in Canada's economy. And, finally, rising commodity prices will boost Canada's resource-based sectors. "With the global economy on the mend, non-energy commodity prices have nowhere to go but up," says Drummond.

Interest rates headed up

While the Canadian and U.S. economies ended last year with about the same amount of excess capacity built into their economies, Canada's will be eaten up much more rapidly. "By the end of the summer, the Canadian economy could be running close to full capacity," notes Drummond. As a result, he expects the Bank of Canada to raise its overnight lending rate by another 125 basis points this year - and a further 125 basis points in 2003. With the U.S. Federal Reserve only expected to start raising rates in September, the resulting widening of short-term interest rate spreads should allow the Canadian dollar to continue to climb to 67.5 U.S. cents by the end of this year, and 69 U.S. cents by mid-2003.

Canada faces longer-term challenges

The experience of the past year and a half leaves us with good reason to be optimistic about Canada's economic prospects. "Canadians may find that they paid a heavy price to bring down inflation and clean up the state of the country's public finances, but the payoff is now coming through," says Drummond. "The Bank of Canada has a degree of flexibility that it quite simply did not have ten years ago, and the massive premium in longer-term interest rates due to budget deficits are no more - to the overwhelming benefit of the Canadian economy."

Still, he adds, "Canada has a much more daunting challenge ahead - improving the country's lagging performance on the productivity front. Our target should be to beat the U.S. standard of living within 15 years, but that cannot be achieved without significant productivity gains." In order achieve this goal, Drummond encourages governments to carefully target their spending priorities, so that any spending increases are matched by reduced spending in low-priority areas, while continuing to reduce the country's tax burden and overall debt load. "And, any successful effort will require action from - and the cooperation of - all three levels of government, in addition to business, labour, and non-profit organizations," he concludes.

             CANADIAN MAJOR ECONOMIC AND FINANCIAL INDICATORS 
              Annual per cent change unless otherwise indicated 
 
                                         2001   2002 Forecast  2003 Forecast 
    Real GDP                              1.5        3.5              3.6 
    Employment(*) (Thous. of jobs)        167        263              300 
    Unemployment Rate (%)                 7.2        7.6              6.9 
    Real Personal Disposable Income       2.5        2.6              3.4 
    Consumer Price Index                  2.6        2.0              2.1 
    Bank of Canada's Overnight 
     Target Rate (%)(xx)                 2.25       3.75             5.00 
    3-month T-Bill Yield (%)(xx)         1.93       3.85             4.90 
    2-year Govt. Bond Yield (%) (xx)     3.15       4.80             5.30 
    10-year Govt. Bond Yield (%)(xx)     5.36       6.00             6.12 
    Canadian Dollar (in US cents)(xx)   62.80      67.50            69.00 
 
    (*) Fourth-quarter to fourth-quarter net change in employment 
    (xx) Data are for end-of-period values 
    Real GDP: Real gross domestic product; Forecast by TD Economics as at 
     June 2002 

Source: Bank of Canada, Statistics Canada, TD Economics


This report, TD Quarterly Economic Forecast, is available in PDF format on TD Economics' Home Page at www.td.com/economics. TEL: (416) 982-2556

Don Drummond, Senior VP and Chief Economist TEL: (416) 982-8063

Peter Drake, VP and Deputy Chief Economist TEL: (416) 982-2557

Marc Levesque, Associate VP and Sr Economist

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