Doom and gloom lifting

The doom and gloom weighing on the economy is lifting, say two of the Canada’s leading banks, which have issued the first upward revision of expectations in almost a year.

OTTAWA — The doom and gloom weighing on the economy is lifting, say two of the Canada’s leading banks, which have issued the first upward revision of expectations in almost a year.

After months of braking that saw gross domestic product expansion slow to a barely noticeable one per cent in the third quarter, the Royal (TSX:RY) and TD (TSX:TD) banks say conditions are improving.

And in a decidedly upbeat forecast, the RBC predicts the Canadian economy will accelerate to 3.2 per cent growth in 2011, slightly more than this year’s 3.1 advance — most of which happened in the first three months of the year.

“I think the optimism is warranted given what we’ve seen around the globe and what we’re seeing out of the U.S.,” said RBC chief economist Craig Wright.

“Global growth is stronger than people were expecting and much stronger than people were fearing. A short while ago the risks were largely tilted to the downside, but now we’re starting to see a resiliency in the global economy and better news from the U.S.”

TD Bank economists, who had been on the low end of the forecasting spectrum, were not as rosy, predicting growth of 2.6 per cent next year — but that is about half a point higher than their September call.

Both are now significantly higher than the Bank of Canada’s 2.3 per cent outlook.

In recent public pronouncements, the central bank’s governor, Mark Carney, has stressed that risks to the recovery have increased, particularly in Europe, where several countries are facing sovereign debt squeezes. And he has sounded the alarm about Canadian household debt rising to “unprecedented” levels.

But if the new forecasts by the bank economists are right — the central bank may have to revise its forecast upwards.

Meanwhile, there was more good news for the economy Wednesday, with the release of data showing manufacturing sales — the weakest link in the recovery so far — growing by 1.7 per cent in October to $45.5 billion, with 14 of 21 industries reporting gains.

The new, sunnier forecasts are based on a anticipated stronger bounce-back in the U.S. economy, which should help Canadian manufacturers and exporters.

Despite the massive consumer debt overhang in the United States, the TD Bank still sees Canada’s main trading partner recovering to a 3.1 per cent increase in gross domestic product next year, while RBC is slightly higher at 3.3 per cent.

“The extension of Bush-era tax cuts for all earners, in combination with additional cuts of the payroll tax … is likely to lift real GDP growth in 2011 by slightly over half a percentage point,” TD economists Beata Caranci and Martin Schwerdtfeger argue.

Furthermore, they say, the second instalment of quantitative easing, putting US$600 billion into circulation, will add an additional 0.3 per cent.

The improved outlook for the U.S. removes the biggest risk to Canada, they say — that the American economy would weaken further and possibly even fall into a second recession.

“There aren’t too many people talking about a double dip in the U.S. economy any more,” said Wright.

Higher growth will translate into more jobs in Canada, the banks say, although the pickup will be modest. Both see the unemployment rate around 7.5 per cent next year, slightly lower than the 2010 average of about eight per cent.

RBC sees unemployment reaching seven per cent by the end of 2012, while GDP growth remains at about 3.1 per cent in that year.

Next year, Saskatchewan is expected to take over from Newfoundland and Labrador as the fastest growing province, with Alberta moving into second place ahead of the Atlantic province.

Nova Scotia, New Brunswick and Prince Edward Island are projected to remain at the lower end of the scale through 2011.

Wright says there is good reason for his optimism, and that is that governments have been swift to act at the first signs of trouble.

He pointed to authorities moving decisively in Europe, the quantitative easing decision and tax measures in the U.S., and notes that even Canada extended the infrastructure program for six months.