OTTAWA — Canada’s economy will remain in the slow growth lane with accompanying high unemployment for the next year and a half, says a new forecast from one of Canada’s leading commercial banks.
Toronto-Dominion Bank says Canada is facing several headwinds that will keep the economy from returning to robust growth.
In a new paper, TD economists say the average 4.3 per cent growth rate bump since the fall cannot be sustained, and growth will slow to 1.5 per cent in the current quarter and two per cent in the last three months of the year.
That crawl speed will continue next year as well at two per cent, well below the Bank of Canada’s 2.9 per cent estimate.
Meanwhile, TD’s economists say the unemployment rate will hover around the current elevated eight per cent throughout the period. They see the jobless rate rising to 8.2 per cent at the end of this year and only edging down to 7.8 per cent by the end of 2011.
The economy has created more than 400,000 new jobs since last July, recouping all losses suffered in the recession. But Canada’s population has since grown and about 400,000 more Canadians have joined the ranks of the officially unemployed.
“Given the reasonable good early stages of the recovery, this is a bit of a disappointment,” said Derek Burleton, TD’s deputy chief economist.
“But to some extent this reflects a lot of spending brought forward (earlier in the recovery) . . . there’s no pent-up demand left,” Burleton said.
The TD economists cite four major reasons for the dampened expectations — the weaker than expected U.S. recovery, the cooling Canadian housing market, tapped out consumers and the winding down of both government fiscal stimulus and the central bank’s monetary stimulus.
The forecast does see the economy regaining some strength in 2012, when gross domestic product gains will average 2.8 per cent and the unemployment rate is expected to drop to 7.3 per cent.
The new projections are about half a percentage point below the bank’s previous forecast — and about a full point below the Bank of Canada’s July estimates — but the economists say the global outlook, particularly in the United States, has darkened.
Bank of Canada governor Mark Carney has said he will also downgrade his growth projections at the next interest rate setting in October.
If there is a bright side to the report, it’s that it does not envisage the slowdown to be so sharp as to plunge Canada into a double-dip recession.
But Burleton conceded the risks to the recovery, particularly in the U.S., have grown and that a second recession in the next year or so can’t be ruled out.
At a news conference Thursday morning, Conservative House leader John Baird also called the recovery “fragile,” saying the economy and job creation would be the government’s top priority when Parliament resumes Monday.
However, it is unclear how the government intends to intervene if growth is as slow as the TD projects.
Finance Minister Jim Flaherty has ruled out a second round of stimulus when the current two-year, $47-billion boost ends at the end of next March. But Baird appeared to open the door to maintaining federal funding on construction projects that fail to come in on time.
In an interview, economist Finn Poschmann of the C.D. Howe Institute said the case for continued public stimulus is no longer valid.
“We’re no longer in recession, so it’s time to slow down or we could really get into trouble (over deficits),” he said.
The Bank of Canada began withdrawing monetary stimulus in June, when it hiked interest rates for the first time in over a year. Last week, the central bank raised the trendsetting rate for the third consecutive scheduled session to one per cent.
Analysts are divided whether governor Carney will continue to hike rates at the next meeting in October, or take a pause.