Long Term Mar09long-term Economic Forecast

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www.td.com/economics

TD Economics Long-Term Economic Forecast March 12, 2009

HIGHLIGHTS • Following a deep recession in both Canada and the U.S. in 2009, the following year is expected to mark the first leg of the recovery phase. However, particularly in the case of the U.S., the recovery in 2010 and the following years will be shallow relative to historical experience due to the lingering economic costs from recapitalization, deleveraging among businesses and households, and huge public sector dissaving that will need to be reversed. • The economic recovery gains speed in 2011 and 2012 with quarterly annualized growth rates of 4% or more in Canada and the U.S. However, substantial output gaps will remain in both countries during this period, in spite of the fact that we have applied conservative estimates for potential real GDP growth of only 2% in Canada and 2.3% in the United States. Both of these are below central bank estimates. We’ve incorporated these estimates due in part to the impact of the structural economic influences cited above, but also because we have assumed a downward cyclical influence on the rate of economic growth stemming from depressed levels of





capital formation following the recession cycle. And then there’s also the influence of a slowing demographic trend, 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 close over our forecast horizon, though they do narrow significantly (graphs). In both cases, this would mark the slowest recovery back to the status-quo in post-war history. The slow uptake in the output gap should mitigate the risk that inflation will become problematic once some of the global and domestic risks abate. This will allow central banks on both sides of the border time to pull liquidity out of the financial system as the recovery takes hold. As such, interest rates will likely remain at a more accommodative stance for a longer period than traditionally seen. We don’t believe the Bank of Canada will return the overnight rate to a ‘neutral’ stance of 4.00% until nearly the end of the forecast horizon (second half of 2013).

Beata Caranci 416-982-8067

CANADIAN OUTPUT GAP 6 4

U.S. OUTPUT GAP

Per cent of potential GDP Excess supply

6 4

Fcst.

2

2

0

0

-2

-2

-4

-4

-6

Excess demand

-6

-8

-8

-10

-10

Excess supply

Fcst.

Excess demand

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 Forecasted by TD Economics as at March 2009. Source: Congressional Budget Office

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 Forecasted by TD Economics as at March 2009. Source: Bank of Canada

Long-term Economic Forecast

Per cent of potential GDP

1

March 12, 2009

www.td.com/economics

CANADIAN ECONOMIC OUTLOOK: Period-Over-Period Annualized Per Cent Change Unless Otherwise Indicated Annual Average 08

11F

12F

13F

11F

12F

13F

0.5

-2.4

1.3

3.3

4.1

3.2

-0.7

-1.9

2.3

3.9

4.1

2.7

3.0

-2.0

0.9

2.9

4.7

4.2

0.3

-1.9

2.0

3.7

5.0

3.6

Durable Goods

5.2

-8.3

-0.2

4.9

9.3

7.2

-0.4

-6.6

1.8

7.1

9.2

6.4

Business Investment

1.7

-7.5

-1.3

4.0

6.9

5.3

-2.9

-6.2

1.0

5.4

7.0

4.6

Non-Res. Structures

1.1

-1.1

-0.6

3.6

6.1

3.9

4.1

-3.1

1.1

4.7

6.1

2.9

Machinery & Equipment

2.0

-12.9

-2.0

4.5

7.7

6.7

-8.8

-8.9

0.9

6.1

7.8

6.3

-2.9

-11.1

-1.5

4.4

6.7

3.7

-9.0

-8.2

1.7

5.8

6.1

2.8

Government Expenditure on Goods & Services

3.4

4.2

4.2

0.8

-0.7

1.3

2.0

6.2

2.1

0.1

-0.6

2.1

Final Domestic Demand

2.5

-1.1

1.4

2.6

3.7

3.6

-0.3

-0.9

2.0

3.1

3.9

3.3

Exports

-4.7

-15.2

-1.5

4.8

7.0

5.4

-7.4

-13.9

2.3

6.5

6.6

4.9

Imports

0.7

-14.9

-1.4

3.6

5.8

6.4

-8.4

-12.1

1.5

4.7

6.2

6.4

Change in Non-Farm Inventories ($97 Bn)

5.5

0.2

-0.7

0.6

2.8

3.2

---

---

---

---

---

---

Final Sales

0.6

-1.5

1.4

3.0

4.2

3.4

0.4

-1.1

2.2

3.7

4.2

2.9

10.1

-42.7

-33.6

-24.3

-8.8

-9.5

---

---

---

---

---

---

Real GDP Consumer Expenditure

Residential Investment

International Current Account Balance ($Bn) % of GDP

09F

10F

4th Qtr/4th Qtr 08

09F

10F

0.6

-2.8

-2.2

-1.5

-0.5

-0.5

---

---

---

---

---

---

6.4

-31.4

3.3

20.2

11.8

7.3

-7.3

-25.3

16.7

16.9

9.8

6.0

13.5

9.7

9.9

11.3

11.9

12.1

---

---

---

---

---

---

GDP Deflator (Y/Y)

3.9

-2.2

0.4

1.4

2.0

1.8

1.8

-0.9

0.5

1.8

2.0

1.7

Nominal GDP

4.4

-4.5

1.7

4.8

6.2

5.1

1.0

-2.8

2.8

5.8

6.1

4.5

Labour Force

1.7

1.0

0.3

0.7

0.9

0.8

1.4

0.7

0.2

0.9

0.9

0.8

Employment (%)

1.5

-2.1

-0.6

1.2

1.7

2.0

0.8

-3.0

0.5

1.4

1.8

2.1

Employment ('000s)

258

-365

-106

194

279

337

134

-520

81

231

304

356

Unemployment Rate (%)

6.2

9.0

9.9

9.5

8.8

7.8

---

---

---

---

---

---

Personal Disp. Income

6.0

0.4

1.9

3.7

5.1

5.5

5.0

-0.5

3.0

4.2

5.2

5.2

Pers. Savings Rate (%)

3.7

6.0

6.6

6.4

6.7

6.7

---

---

---

---

---

---

Cons. Price Index (Y/Y)

2.4

-0.8

0.8

1.2

1.7

1.9

1.9

-0.5

1.0

1.5

1.8

2.0

Core CPI (Y/Y)

1.7

0.9

0.8

1.1

1.5

1.8

2.2

0.3

0.9

1.3

1.6

2.0

Housing Starts ('000s)

211

129

135

150

171

175

---

---

---

---

---

---

Productivity: Real GDP / worker (Y/Y)

-1.1

0.0

2.0

2.0

2.7

1.3

-1.2

1.3

1.8

2.4

2.5

0.8

Pre-tax Corp. Profits % of GDP

F: Forecast by TD Economics as at March 2009 Source: Statistics Canada, Bank of Canada, Canada Mortgage and Housing Corporation, Haver Analytics

Long-term Economic Forecast

2

March 12, 2009

www.td.com/economics

U.S. ECONOMIC OUTLOOK: Period-Over-Period Annualized Per Cent Change Unless Otherwise Indicated Annual Average 08

11F

12F

13F

1.1

-3.1

1.4

3.6

4.5

3.5

-0.8

-2.1

2.4

4.4

4.2

3.2

0.2

-1.6

1.2

2.9

3.6

2.9

-1.5

-0.3

2.0

3.6

3.4

2.7

Durable Goods

-4.3

-7.7

5.6

9.9

10.9

9.4

-11.4

0.2

7.1

11.3

10.5

8.9

Business Investment

1.7

-16.7

-6.5

5.7

11.9

8.2

-5.0

-17.6

-0.7

9.8

11.3

6.6

Non-Res. Structures

11.5

-10.8

-4.5

0.6

0.4

-0.1

7.3

-15.2

-0.7

0.8

0.3

-0.3

Machinery & Equipment

-3.0

-19.9

-7.8

9.3

19.3

12.6

-11.2

-19.1

-0.8

16.0

17.9

10.0

Residential Construction

-20.7

-25.1

-0.2

25.6

26.9

13.4

-19.3

-22.9

12.1

29.5

23.4

8.7

Govt. Consumption & Gross Investment

2.9

2.5

2.1

0.3

-0.6

0.6

3.3

2.4

1.3

-0.5

-0.1

1.1

Final Domestic Demand

0.0

-3.1

0.7

3.1

4.1

3.3

-1.7

-2.2

1.9

3.9

4.0

3.0

Real GDP Consumer Expenditure

09F

10F

11F

4thQtr/4th Qtr 12F

13F

08

09F

10F

Exports

6.2

-9.1

2.5

6.5

8.8

7.9

-1.8

-5.3

3.9

8.3

8.5

7.5

Imports

-3.4

-10.4

0.7

6.0

7.2

5.6

-7.1

-7.2

3.4

6.9

7.0

4.9

-32.8

-72.9

-16.5

36.5

70.6

72.4

---

---

---

---

---

---

1.4

-2.7

0.9

3.1

4.2

3.5

-0.7

-1.8

1.9

3.9

4.0

3.3

-660

-514

-525

-578

-633

-702

---

---

---

---

---

---

-4.6

-3.7

-3.7

-3.9

-4.0

-4.2

---

---

---

---

---

---

-10.5

-28.2

11.9

17.8

14.2

12.2

-23.3

-14.6

18.9

15.6

15.1

10.5

10.3

7.5

8.3

9.3

10.1

10.8

---

---

---

---

---

---

GDP Deflator (Y/Y)

2.2

1.4

0.2

0.7

1.3

1.6

2.0

1.0

0.1

1.1

1.4

1.7

Nominal GDP

3.3

-1.7

1.6

4.3

5.8

5.1

1.2

-1.2

2.5

5.5

5.6

4.9

Labour Force

0.8

-0.3

0.2

0.8

1.1

1.1

0.7

-0.6

0.5

0.9

1.1

1.1

Employment

-0.4

-3.5

-0.8

2.0

3.0

2.6

-1.6

-3.5

0.5

2.7

2.9

2.4

Change in Empl. ('000s)

-558 -4,759 -1,120 2,664 3,986 3,608 -2,239 -4,781

Change in Non-Farm Inventories ($96 Bn) Final Sales International Current Account Balance ($Bn) % of GDP Pre-tax Corporate Profits including IVA&CCA % of GDP

717 1,632 2,386 3,049

Unemployment Rate (%)

5.8

8.9

10.1

9.6

8.4

7.5

---

---

---

---

---

---

Personal Disp. Income

4.7

1.9

1.2

3.8

5.3

4.7

2.9

2.0

1.9

5.1

5.0

4.6

Pers. Savings Rate (%)

1.8

5.2

4.8

4.8

4.9

4.9

---

---

---

---

---

---

Cons. Price Index (Y/Y)

3.8

-0.9

0.5

1.0

1.5

1.9

1.5

-0.1

0.6

1.2

1.7

2.1

Core CPI (Y/Y)

2.3

1.0

0.5

0.8

1.4

1.9

2.0

0.6

0.6

1.0

1.6

2.1

---

---

---

---

---

---

1.1

1.8

2.5

2.1

1.7

1.2

Housing Starts (mns) Productivity: Real Output per hour (y/y)

0.90 2.2

0.44 1.7

0.53 2.8

0.87 2.1

1.23 1.8

1.40 1.4

F: Forecast by TD Economics as at March 2009 Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, TD Economics

Long-term Economic Forecast

3

March 12, 2009

www.td.com/economics

This report is provided by TD Economics for customers of TD Bank Financial Group. It is for information purposes only and may not be appropriate for other purposes. The report does not provide material information about the business and affairs of TD Bank Financial Group and the members of TD Economics are not spokespersons for TD Bank Financial Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. The report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise TD Bank Financial Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.

Long-term Economic Forecast

4

March 12, 2009

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