TD: Economy in 'soft patch' as housing correction begins, exports tumble

OTTAWA – Canada’s economy has entered a “soft patch” amid a sharp slowdown in home construction and sales, poor exports and weak job creation, the TD Banks says in its latest forecast.

The chartered bank said Tuesday that the economy will barely eke out one per cent growth during the current third quarter that ends Sept. 30, and end the year with a 1.8 per cent overall advance.

That’s three-tenths of a point below the bank’s previous projection in June, and also shy of the Bank of Canada’s 2.1 per cent target.

TD chief economist Craig Alexander said the revision was necessary because global conditions have deteriorated and the domestic economy is also faring worse than expected, in part because of Ottawa’s decision to tighten mortgage rules.

Alexander said Vancouver’s housing market was actually cooling before the stricter mortgage rules went into effect July 9, but since then the real impact of the change has been evident. On Monday, the Canadian Real Estate Association reported August sales of existing homes slipped 5.8 per cent from July and were down 8.9 per cent from a year ago.

“That’s what we were anticipating. We were saying that we would probably lose about five percentages points in sales and three percentage points in prices nationally,” he said.

TD has previously suggested the Canadian housing market was overheated and called for a 10 per cent correction in prices over the next three years.

“The tide seems to have finally turned,” the report states. “The combination of market fatigue, stricter lending guidelines for insured mortgages and a deterioration in housing affordability is helping to put the brakes on housing activity.”

It notes that in the superheated Vancouver market, year-over-year sales are down 31 per cent and prices seven per cent.

Aside from housing, most engines of growth have slowed or retreated in the past few months, led by exports but also including Canada’s government sector, which has gone into deficit-reduction mode.

In July, Canada posted a record high trade deficit, with exports plunging 3.4 per cent in the face of soft demand in the U.S. and the strong dollar which makes Canadian shipments less competitive.

As well, consumers are under pressure to temper their spending, given that household debt is at a near-record 152 per cent of disposable annual income.

“With no engine firing on all cylinders, economic growth is being held to a meek sub-two-per-cent rate and the jobless rate is stuck above seven per cent,” the report states. Canada’s unemployment rate won’t slip below seven per cent until late next year, according to TD.

Alexander said he expects a modest turnaround will begin in 2013, but even then he projects no better than two per cent growth, below the Bank of Canada’s 2.3 forecast. Stronger growth won’t happen until 2014, TD says.

Under this scenario, the Bank of Canada is expected to move slowly and timidly on interest rates, with the first hike from one per cent coming in the third quarter of 2013, one year from now.

In the long term, the report says Canada must look for a global bounce to sustain its own recovery.

“By early 2013, we suspect that global headwinds will have dissipated enough to spur stronger Canadian exports and entice cash-flush businesses to loosen their purse strings, pulling real GDP (gross domestic product) growth back above two per cent and pushing the jobless rate down modestly,” the report predicts.

“This shift to more balanced growth will be a major step forward in ensuring sustainable economic growth in Canada.”

In a separate report, the Conference Board said Calgary and Edmonton will lead the nation in growth over the next four years, boosted by about $29 billion in energy sector investments already underway and another $86 billion projected for the future.

The surprise in the report is that the think-tank sees a revival in Toronto’s economy to an average growth rate of 3.1 per cent over the next four years on the strength of a manufacturing rebound and healthy home and non-residential construction.