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TD cuts growth outlook, says rates on hold until 2013

Tags: Canadian GDP
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A weakening global economic backdrop and indebted Canadian households are behind a move by TD Economics to cut its Canadian growth forecast.

TD now expects the Canadian economy to grow 2.1 percent this year and 2 percent in 2013. That’s just slightly below its March forecast for 2-percent growth this year.

But, they add that their forecast is fraught with risk to the downside, as uncertainty -- particularly in regard to the euro zone’s ongoing sovereign debt crisis -- continues to put pressure on global growth.

“Should the [euro zone] crisis turn into a full blown global financial crisis, the Canadian economy would be negatively affected through its global financial linkages and the detrimental implications for household and consumer confidence,” Craig Alexander, chief economist at TD Economics, said in the report. “Unfortunately, the event would hit the Canadian economy at a time when households in Canada are particularly vulnerable given their high indebtedness.”

TD believes that even with that low growth, Canada will continue to produce new jobs. They expect the unemployment to drop to 7.1 percent in 2013 from the current level of 7.3 percent.

TD also reiterated its call for a 10- to 15-percent correction for home prices, saying Ottawa’s changes to amortization rules for government-backed mortgages and an expected slight uptick in interest rates will be enough to tame the hot housing market.

They say a slowdown in the housing market will be felt on the broader economy.

“First, as home prices stop increasing, households will become more reluctant to go out and spend,” Alexander says. “Second, fewer home sales will reduce consumer purchases of housing-related goods and services, such as renovation supplies and furniture and equipment.”

In a separate report, TD Securities said the Bank of Canada will hold off on raising its benchmark interest rate until March 2013 – again citing the euro zone debt crisis and fragile financial system. It will then raise rates by 25 basis points in both the first and second quarter of 2013, taking the benchmark rate to 1.50 percent, TD says.

“It’s really the hit to financial conditions and to global confidence that has allowed the Bank to take a step back and think a little bit more broadly about some of these issues and our sense is they will take that opportunity to hold rates unchanged through the balance of the year,” David Tulk, chief Canada macro strategist at TD Securities, tells BNN.

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