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TD Economics
Long-Term Economic Forecast
March 12, 2009

HIGHLIGHTS
• Following a deep recession in both Canada and the capital formation following the recession cycle. And
U.S. in 2009, the following year is expected to mark then there’s also the influence of a slowing demographic
the first leg of the recovery phase. However, particu- trend, especially in the case of Canada.
larly in the case of the U.S., the recovery in 2010 and • Under these assumptions for potential real GDP growth,
the following years will be shallow relative to historical the output gaps for Canada and the U.S. do not close
experience due to the lingering economic costs from over our forecast horizon, though they do narrow signifi-
recapitalization, deleveraging among businesses and cantly (graphs). In both cases, this would mark the
households, and huge public sector dissaving that will slowest recovery back to the status-quo in post-war his-
need to be reversed. tory.
• The economic recovery gains speed in 2011 and 2012 • The slow uptake in the output gap should mitigate the
with quarterly annualized growth rates of 4% or more in risk that inflation will become problematic once some
Canada and the U.S. However, substantial output gaps of the global and domestic risks abate. This will allow
will remain in both countries during this period, in spite central banks on both sides of the border time to pull
of the fact that we have applied conservative estimates liquidity out of the financial system as the recovery takes
for potential real GDP growth of only 2% in Canada and hold. As such, interest rates will likely remain at a
2.3% in the United States. Both of these are below more accommodative stance for a longer period than
central bank estimates. We’ve incorporated these es- traditionally seen. We don’t believe the Bank of Canada
timates due in part to the impact of the structural eco- will return the overnight rate to a ‘neutral’ stance of 4.00%
nomic influences cited above, but also because we have until nearly the end of the forecast horizon (second half
assumed a downward cyclical influence on the rate of of 2013).
economic growth stemming from depressed levels of Beata Caranci 416-982-8067

CANADIAN OUTPUT GAP U.S. OUTPUT GAP

Per cent of potential GDP Per cent of potential GDP

6 6

4 Excess supply Fcst. 4 Excess supply Fcst.

2 2

0 0

-2 -2

-4 -4

-6 Excess demand -6 Excess demand

-8 -8

-10 -10
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 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. Forecasted by TD Economics as at March 2009.
Source: Bank of Canada Source: Congressional Budget Office

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CANADIAN ECONOMIC OUTLOOK:

Period-Over-Period Annualized Per Cent Change Unless Otherwise Indicated

Annual Average 4th Qtr/4th Qtr

08 09F 10F 11F 12F 13F 08 09F 10F 11F 12F 13F
Real GDP 0.5 -2.4 1.3 3.3 4.1 3.2 -0.7 -1.9 2.3 3.9 4.1 2.7

Consumer Expenditure 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

Residential Investment -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

International Current
Account Balance ($Bn) 10.1 -42.7 -33.6 -24.3 -8.8 -9.5 --- --- --- --- --- ---
% of GDP 0.6 -2.8 -2.2 -1.5 -0.5 -0.5 --- --- --- --- --- ---
Pre-tax Corp. Profits 6.4 -31.4 3.3 20.2 11.8 7.3 -7.3 -25.3 16.7 16.9 9.8 6.0
% of GDP 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

F: Forecast by TD Economics as at March 2009

Source: Statistics Canada, Bank of Canada, Canada Mortgage and Housing Corporation, Haver Analytics

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U.S. ECONOMIC OUTLOOK:

Period-Over-Period Annualized Per Cent Change Unless Otherwise Indicated

Annual Average 4thQtr/4th Qtr

08 09F 10F 11F 12F 13F 08 09F 10F 11F 12F 13F
Real GDP 1.1 -3.1 1.4 3.6 4.5 3.5 -0.8 -2.1 2.4 4.4 4.2 3.2

Consumer Expenditure 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

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

Change in Non-Farm
Inventories ($96 Bn) -32.8 -72.9 -16.5 36.5 70.6 72.4 --- --- --- --- --- ---
Final Sales 1.4 -2.7 0.9 3.1 4.2 3.5 -0.7 -1.8 1.9 3.9 4.0 3.3

International Current
Account Balance ($Bn) -660 -514 -525 -578 -633 -702 --- --- --- --- --- ---
% of GDP -4.6 -3.7 -3.7 -3.9 -4.0 -4.2 --- --- --- --- --- ---
Pre-tax Corporate Profits
including IVA&CCA -10.5 -28.2 11.9 17.8 14.2 12.2 -23.3 -14.6 18.9 15.6 15.1 10.5
% of GDP 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 -4,781 717 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
Housing Starts (mns) 0.90 0.44 0.53 0.87 1.23 1.40 --- --- --- --- --- ---
Productivity:
Real Output per hour (y/y) 2.2 1.7 2.8 2.1 1.8 1.4 1.1 1.8 2.5 2.1 1.7 1.2

F: Forecast by TD Economics as at March 2009

Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, TD Economics

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Long-term Economic Forecast 4 March 12, 2009