Long-Term Forecast

Leslie Preston, Senior Economist, 416-983-7053

Brian DePratto, Senior Economist, 416-944-5069 

Date Published: December 17, 2019

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United States

  • U.S. economic growth likely slowed in 2019 to 2.3%, from stimulus-fueled rate of 2.9% in 2018. Growth around the 2% mark is expected to continue in 2020 and 2021.
  • At 3.5%, the current unemployment rate is near historic lows, and well under its pre-recession nadir. As growth slows, we expect a modest increase in the unemployment rate. Still, with an older, more-educated population, it is likely to remain low relative to history. 
  • The impact of population aging will intensify over the next five years. The adult population that is below the age of 65 is projected to grow by just 0.2% annually. Even as the labor force makes gains among younger adults, this will slow employment growth to 0.5% – roughly half the pace observed historically.
  • Interest rates are also likely to remain low over the forecast horizon. We expect that as modest global growth and uncertainty on the trade front will cloud the outlook and the inflation rate remains a bit below target, the Federal reserve will leave rates unchanged for a prolonged period. As the economy gradually improves, the Fed is forecast to raise the funds rate back to 2.5% by the end of 2022, where it is expected to remain over the forecast horizon.

Canada

  • Economic growth came back to earth in the third quarter, but the modest headline hid encouraging details, notably in the investment front. Revisions from Statistics Canada revealed more business spending and household savings than previously thought.
  • Recently, uncertainty has moderated somewhat, but there remain many unresolved issues in terms of the global backdrop. Domestically, households are presently focused on repairing their balance sheets in the wake of all-time high debt service costs.
  • There are few catalysts for a meaningful change in the pace of growth, positive or negative. Accordingly, we expect growth to trend around the economy’s underlying potential growth rate of 1.7%. Consistent with this, employment growth is expected to normalize at around 0.7% per year, consistent with a longer-term unemployment rate of 5.7%. Labour productivity is expected to average 0.8% to 1.0% over the medium term, roughly consistent with historic averages.
  • The risk of undue financial tightening as rising U.S. yields push their Canadian counterparts higher will result in a course correction from the Bank of Canada. We expect one rate cut in Spring 2020 to address this influence. As the durability of growth becomes reinforced, we expect the policy interest rate to move back to its long-run neutral setting of 1.75%.

Tables


U.S. Economic Outlook
Period-Over-Period Annualized Per Cent Change Unless Otherwise Indicated
                           Annual Average Fourth Quarter / Fourth Quarter
  19F 20F 21F 22F 23F 24F 25F 19F 20F 21F 22F 23F 24F 25F
 Real GDP 2.3 2.0 1.9 1.9 1.7 1.7 1.8 2.2 2.1 1.8 1.8 1.6 1.8 1.8
                             
 Consumer Expenditure 2.6 2.6 2.3 2.1 2.0 2.0 2.0 2.7 2.4 2.2 2.1 2.0 2.0 2.0
Durable Goods             4.9 4.5 2.9 3.5 4.1 4.2 4.3 6.2 3.2 2.7 3.9 4.1 4.3 4.2
                             
 Business Investment 2.3 1.4 3.0 3.0 3.1 3.1 3.1 0.4 2.8 3.0 3.1 3.1 3.1 3.1
Non-Res. Structures -4.8 -5.3 0.6 1.2 2.1 2.6 2.5 -8.0 -0.5 0.8 1.5 2.5 2.6 2.5
Equipment & IPP* 4.4 3.3 3.6 3.5 3.4 3.2 3.3 2.9 3.7 3.5 3.5 3.3 3.2 3.3
                             
 Residential Investment -1.6 3.0 1.0 0.7 0.6 1.2 1.2 1.1 2.4 1.0 0.5 0.7 1.4 1.2
 Govt. Expenditure 2.2 1.9 0.7 0.4 -0.2 0.0 0.4 2.5 1.7 0.5 0.2 -0.3 0.3 0.5
 Final Domestic Demand 2.3 2.3 2.1 1.9 1.7 1.8 1.9 2.3 2.3 2.0 1.8 1.7 1.8 1.9
                             
 Exports                   -0.3 1.0 2.2 2.4 2.8 3.0 2.8 -1.1 3.1 1.8 2.6 2.8 3.0 2.7
 Imports                   1.3 1.6 3.7 3.0 3.0 3.1 3.2 -0.9 3.8 3.2 2.9 3.0 3.2 3.2
                             
 Change in Private                            
 Inventories 82.7 37.1 49.3 62.2 63.0 62.8 66.3 --- --- --- --- --- --- ---
 Final Sales 2.2 2.3 1.8 1.8 1.7 1.7 1.8 2.4 2.2 1.8 1.8 1.6 1.8 1.8
                             
 International Current                            
 Account Balance ($Bn)  -523 -599 -723 -787 -809 -804 -784 --- --- --- --- --- --- ---
% of GDP  -2.4 -2.7 -3.1 -3.3 -3.2 -3.1 -2.9 --- --- --- --- --- --- ---
 Pre-tax Corporate Profits                            
 including IVA&CCA 0.2 2.7 2.7 3.3 3.8 4.5 4.7 2.4 1.1 2.6 3.6 3.9 4.7 4.7
% of GDP  9.7 9.6 9.4 9.4 9.4 9.4 9.4 --- --- --- --- --- --- ---
 GDP Deflator (y/y) 1.8 1.9 2.1 2.2 2.3 2.4 2.4 1.7 2.0 2.1 2.3 2.3 2.4 2.4
 Nominal GDP  4.1 4.0 4.0 4.1 4.0 4.2 4.3 4.0 4.1 4.0 4.1 4.0 4.3 4.2
                             
 Labor Force 0.9 1.3 0.7 0.7 0.7 0.6 0.5 1.0 0.9 0.7 0.7 0.6 0.6 0.5
 Employment  1.6 1.1 0.7 0.6 0.6 0.5 0.5 1.4 0.9 0.7 0.6 0.5 0.5 0.5
 Change in Empl. ('000s)  2,336 1,709 1,060 978 860 789 754 2,131 1,294 1,073 929 824 773 749
 Unemployment Rate (%)  3.7 3.7 3.7 3.8 3.9 4.1 4.1 --- --- --- --- --- --- ---
 Personal Disp. Income  4.4 3.6 4.0 4.2 4.2 4.4 4.6 3.9 3.7 4.1 4.2 4.3 4.6 4.5
 Pers. Savings Rate (%)  7.9 7.2 6.8 6.7 6.8 7.2 7.6 --- --- --- --- --- --- ---
 Cons. Price Index (y/y) 1.8 2.2 2.2 2.2 2.2 2.2 2.2 2.0 2.2 2.2 2.3 2.2 2.2 2.2
 Core CPI (y/y) 2.2 2.3 2.2 2.3 2.3 2.3 2.3 2.3 2.2 2.3 2.3 2.3 2.3 2.3
 Core PCE Price Index (y/y) 1.6 1.9 2.0 2.1 2.1 2.1 2.1 1.6 2.0 2.1 2.1 2.1 2.1 2.1
 Housing Starts (mns)  1.26 1.33 1.34 1.35 1.36 1.37 1.38 --- --- --- --- --- --- ---
 Real Output per hour** (y/y 1.6 0.9 1.5 1.6 1.5 1.7 1.8 1.4 1.4 1.5 1.5 1.6 1.8 1.8
                             
*Intellectual proprty products. F: Forecast by TD Economics, December 2019.
**Non-farm business sector. 
Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Census Bureau, TD Economics.

Canadian Economic Outlook
Period-Over-Period Annualized Per Cent Change Unless Otherwise Indicated
                           Annual Average 4th Quarter / 4th Quarter
  19F 20F 21F 22F 23F 24F 25F 19F 20F 21F 22F 23F 24F 25F
  Real GDP 1.7 1.6 1.8 1.8 1.7 1.7 1.7 1.7 1.6 1.8 1.7 1.7 1.7 1.7
                             
Consumer Expenditure 1.6 1.6 1.7 1.6 1.6 1.6 1.6 1.5 1.7 1.6 1.5 1.6 1.6 1.6
Durable Goods             0.9 1.2 1.6 1.7 1.5 1.5 1.5 1.7 1.3 1.8 1.5 1.5 1.5 1.5
                             
Business Investment 0.4 3.0 3.8 3.9 3.0 2.6 2.4 4.5 2.7 4.4 3.5 2.8 2.5 2.4
Non-Res. Structures 1.2 3.7 3.4 3.5 2.9 2.5 2.4 5.8 2.5 3.8 3.1 2.8 2.4 2.4
Equipment & IPP* -0.5 2.3 4.2 4.4 3.1 2.6 2.5 3.0 2.9 4.9 3.8 2.9 2.5 2.5
                             
Residential Investment -0.4 5.1 3.1 2.3 1.9 1.8 1.8 5.1 3.5 2.9 2.1 1.9 1.8 1.8
Govt. Expenditure 1.8 1.1 0.9 1.5 1.8 1.8 1.8 1.8 0.9 1.0 1.7 1.8 1.8 1.8
   Final Domestic Demand 1.4 1.9 1.8 1.9 1.8 1.8 1.7 2.2 1.7 1.9 1.8 1.8 1.8 1.7
                             
Exports                   2.0 2.0 2.4 3.0 2.8 2.7 2.6 2.1 2.1 2.7 3.1 2.7 2.7 2.5
Imports                   0.5 1.2 2.7 3.4 3.1 2.8 2.7 1.2 2.2 3.1 3.5 2.9 2.7 2.7
                             
Change in Non-farm                            
Inventories (2012 $Bn) 6.1 -2.9 -2.3 -2.1 -2.1 -2.4 -2.5 -- -- -- -- -- -- --
   Final Sales 1.6 2.5 1.8 1.9 1.8 1.8 1.7 3.0 1.8 1.9 1.8 1.8 1.8 1.7
                             
International Current                            
Account Balance ($Bn)  -43.5 -44.4 -50.6 -56.5 -60.7 -62.5 -63.4 -- -- -- -- -- -- --
% of GDP  -1.9 -1.9 -2.0 -2.2 -2.3 -2.3 -2.2 -- -- -- -- -- -- --
Pre-tax Corp. Profits -0.2 1.2 3.9 3.8 3.6 3.6 3.6 5.4 2.7 4.1 3.7 3.6 3.6 3.6
% of GDP  12.4 12.2 12.2 12.2 12.2 12.2 12.2 -- -- -- -- -- -- --
  GDP Deflator (y/y) 1.8 1.9 2.0 1.9 1.9 1.9 1.9 2.9 1.9 2.0 1.9 1.8 1.9 1.9
  Nominal GDP  3.6 3.6 3.8 3.7 3.6 3.6 3.6 4.7 3.6 3.8 3.6 3.6 3.6 3.6
                             
  Labour Force 1.9 1.1 0.8 0.7 0.7 0.7 0.7 2.0 0.9 0.8 0.7 0.7 0.7 0.7
  Employment  2.1 0.8 0.8 0.8 0.8 0.7 0.7 1.8 0.8 0.8 0.8 0.7 0.7 0.7
  Change in Empl. ('000s)  386 162 160 155 148 140 132 342 147 162 151 145 138 129
  Unemployment Rate (%)  5.7 5.9 5.8 5.8 5.7 5.7 5.7 -- -- -- -- -- -- --
  Personal Disp. Income  4.6 4.5 3.7 3.5 3.5 3.5 3.6 5.2 4.0 3.6 3.5 3.5 3.6 3.6
  Pers. Savings Rate (%)  3.0 3.7 3.6 3.4 3.4 3.4 3.5 -- -- -- -- -- -- --
  Cons. Price Index (y/y) 2.0 1.9 2.0 2.0 2.0 2.0 2.0 2.2 1.8 2.0 2.0 2.0 2.0 2.0
  CPIX (y/y) ** 1.8 2.0 2.0 2.0 2.0 2.0 2.0 2.0 1.9 2.0 2.0 2.0 2.0 2.0
  BoC Inflation (y/y) ** 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
  Housing Starts ('000s) 209 206 210 202 201 203 204 -- -- -- -- -- -- --
  Home Prices (y/y) 2.1 7.8 3.1 2.2 2.5 2.8 2.8 6.9 4.0 2.5 2.2 2.6 2.8 2.9
  Real GDP / worker (y/y) -0.4 0.8 0.9 1.0 1.0 1.0 1.0 -0.1 0.9 0.9 0.9 1.0 1.0 1.0
                             
F: Forecast by TD Economics, December 2019.
* Intellectual Property Products. ** CPIX: CPI ex. 8 most volatile components. *** BoC Inflation: avg. of CPI-trim, CPI-median, and CPI-common.
Home price measure shown is the CREA Composite Sale Price.
Sources: Statistics Canada, Bank of Canada, CMHC, CREA, TD Economics.

Interest Rate Outlook
  Annual Average End of Period
  19F 20F 21F 22F 23F 24F 25F 19F 20F 21F 22F 23F 24F 25F
U.S. FIXED INCOME                            
   Fed Funds Target Rate (%)* 2.20 1.75 1.95 2.50 2.50 2.50 2.50 1.75 1.75 2.25 2.50 2.50 2.50 2.50
   3-mth T-Bill Rate (%) 1.95 1.55 1.85 2.30 2.30 2.30 2.30 1.55 1.55 2.17 2.30 2.30 2.30 2.30
   2-yr Govt. Bond Yield (%) 1.85 1.80 2.15 2.40 2.40 2.40 2.40 1.65 1.90 2.30 2.40 2.40 2.40 2.40
   5-yr Govt. Bond Yield (%) 1.80 1.85 2.25 2.50 2.50 2.50 2.50 1.70 2.00 2.40 2.50 2.50 2.50 2.50
   10-yr Govt. Bond Yield (%) 2.00 2.05 2.45 2.65 2.65 2.65 2.65 1.90 2.20 2.60 2.65 2.65 2.65 2.65
  10-yr-2-yr Govt. Spread (%) 0.15 0.25 0.30 0.25 0.25 0.25 0.25 0.25 0.30 0.30 0.25 0.25 0.25 0.25
                             
CANADIAN FIXED INCOME                            
   Overnight Target Rate (%) 1.75 1.55 1.50 1.55 1.75 1.75 1.75 1.75 1.50 1.50 1.75 1.75 1.75 1.75
   3-mth T-Bill Rate (%) 1.65 1.45 1.40 1.50 1.75 1.75 1.75 1.65 1.40 1.40 1.65 1.75 1.75 1.75
   2-yr Govt. Bond Yield (%) 1.60 1.45 1.60 1.80 1.85 1.85 1.85 1.70 1.45 1.65 1.85 1.85 1.85 1.85
   5-yr Govt. Bond Yield (%) 1.50 1.55 1.75 1.90 1.95 1.95 1.95 1.65 1.60 1.80 1.95 1.95 1.95 1.95
  10-yr Govt. Bond Yield (%) 1.55 1.55 1.85 2.05 2.10 2.10 2.10 1.65 1.65 1.90 2.10 2.10 2.10 2.10
  10-yr-2-yr Govt. Spread (%) -0.05 0.10 0.25 0.25 0.25 0.25 0.25 -0.05 0.20 0.25 0.25 0.25 0.25 0.25
                             
*Upper bound of target range. F: Forecast by TD Economics as at December 2019.
Annual averages are the average of the four quarterly end-of-period forecasts.
Source: Bank of Canada, Bloomberg, Statistics Canada, TD Economics.

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