Bank says Canadian economy will grow by 2.5 per cent in 2010

Canada’s economy will grow by a robust 2.5 per cent next year due to improvements in the housing sector, consumer spending, exports and commodity prices, a report by TD Bank (TSX:TD) predicts.

Canada’s economy will grow by a robust 2.5 per cent next year due to improvements in the housing sector, consumer spending, exports and commodity prices, a report by TD Bank (TSX:TD) predicts.

The bank’s forecast, released Wednesday, is substantially higher than its previous prediction of 1.4 per cent GDP growth next year.

In 2011, the Canadian economy is forecast to grow by 3.1 per cent.

TD chief economist Don Drummond said exports will contribute to Canada’s growth for the first time in two years beginning in the third quarter of this year. TD estimates Canadian exports will be up 25 per cent in the July to September quarter.

This is because global demand for manufactured goods has come back much more quickly than expected, Drummond said.

“The vigour, particularly in some of the emerging Asian markets, as they came back in the second quarter has definitely caught us by surprise,” Drummond said.

“I didn’t think the emerging economies would come back quite that soon and when they did come back would come back with quite that vengeance.”

The rebound from the global economic downturn, particularly in developing countries, caused TD to raise its global growth forecast for 2010 by a full percentage point to 3.8 per cent, making it one of the most optimistic projections among economists.

“I think it’s kind of interesting that we’re just past the one-year mark of (the collapse of) Lehman Brothers, and remember all the talk that was being thrown around at that time of the Great Depression?” Drummond said.

“Yet here we are one year later and we’ve got evidence that virtually every country in the world is going to have reasonable growth in the third quarter, and some of the emerging economies are quite strong.”

A combination of factors is expected to drive growth, including stabilizing real estate markets, increased manufacturing production due to low inventories, record low interest rates, improved consumer and business confidence and government stimulus programs.

“Around the world it’s heavily, heavily dependent still on the monetary and fiscal stimulus. There’s not a whole lot going on besides that, but growth is growth, after all,” Drummond said.

However, this reliance on government life support, particularly in the United States, means the recovery will be much slower than it has been after previous recessions, according to TD.

The bank warned that “a number of bumps on the road to recovery remain.” In the U.S., foreclosure rates are expected to rise and ongoing weakness in residential and commercial real estate will lead to further loan losses.

In addition, TD said credit growth is improving, but the ability to securitize loans will not return to its previous level, and increased savings levels as well as high unemployment rates will also slow the recovery.

Meanwhile, Canada’s growth rate will be hampered by ongoing economic problems south of the border and a high dollar. TD said it could take as long as four years for Canada’s export sector to reach its pre-recession level of sales.

Still, there was more positive news for Canada’s manufacturing sector in Scotia Economics’ Global Auto Report on Wednesday.

The report said record low North American vehicle inventories, particularly for popular Canadian-made cars, will boost production through the end of 2009 and well into 2010.

Auto industry analyst Carlos Gomes said strong U.S. vehicles sales in August, boosted by the government’s “Cash for Clunkers” program, have left inventories at a record-low 30-day supply, down from a normal of 65 days.

In response, automakers are ramping up production, which had been cut back dramatically as vehicle sales slumped and inventories ballooned due to the recession.

“Current production plans will leave the industry short of normal inventory, so they’ll have to either continue to increase output into 2010 or ramp up their productions further from their current schedules,” Gomes said.

Gomes said vehicle assembly across North America climbed to an annualized 9.3 million units in July and August, up from seven million in the first half of the year.

Current production plans, which include assembly of an annualized 10.3 million units in the fourth quarter, will add two percentage points to overall U.S. economic activity and at least one percentage point to Canadian economic activity in the second half of the year, Gomes said.

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