Long-Term Forecast

Leslie Preston, Senior Economist, 416-983-7053

Brian DePratto, Senior Economist, 416-944-5069 

Date Published: September 19, 2019

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United States

  • The U.S. economy is on track to moderate to 2.3% in 2019. This deceleration is expected to continue into 2020, as slower global growth and trade uncertainty hold growth to 1.7%, below the economy’s potential.
  • At 3.7%, the current unemployment rate is near historic lows, and well under its pre-recession nadir. As growth slows below potential in 2020, 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 protracted trade tensions weigh on the outlook and the inflation rate remains a bit below target, the Federal reserve will cut rates an additional 25 basis point as further “insurance” against a more rapid downturn. As the economy gradually improves the Fed is forecast to raise the funds rate back to 2.5% in 2022, where it is expected to remain over the forecast horizon.

Canada

  • Weakness early in the year gave way to robust second quarter growth. However, the details of the report suggest little staying power, and many challenges, domestic and external, remain unresolved. We expect only modest near-term growth reflecting global uncertainty, with the pace improving to settle roughly at a pace in line with the economy’s underlying potential.
  • A more modest pace of hiring is also anticipated. Over the longer-term, the unemployment rate will gradually rise towards 5.8%, consistent with the economy operating near capacity. Labour productivity growth (as measured by output per worker) is expected to average 1.0%, in line with its long-run historic average.
  • The process of repairing household balance sheets will take time and will hold back the pace of consumer spending. The outlook for business investment and net trade are weighed down in the near-term by trade uncertainty. 
  • These forces will motivate the Bank of Canada to join its advanced economy peers in adding a bit of stimulus to the economy. We expect the policy rate to reach 1.25% (from 1.75% currently) by early-2020. Once growth has convincingly normalized, the policy rate should be returned to its long-run neutral level of 1.75%
  • Normalization of growth means a pace of around 1.7%. Population aging, private indebtedness, and modest productivity gains all work to reduce this trend pace relative to its history.

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 19F 20F 21F 22F 23F 24F
 Real GDP 2.3 1.7 1.8 1.9 1.7 1.7 2.2 1.7 1.9 1.8 1.6 1.7
                         
 Consumer Expenditure 2.7 2.4 2.2 2.2 2.1 2.1 2.9 2.0 2.3 2.2 2.1 2.1
Durable Goods             4.4 3.5 4.0 4.2 4.2 4.3 5.3 3.0 4.1 4.2 4.2 4.3
                         
 Business Investment 2.5 1.9 2.9 3.1 2.9 2.9 1.1 2.6 3.1 3.1 2.8 3.0
Non-Res. Structures -3.4 -1.1 2.4 2.3 2.2 2.4 -3.8 1.6 2.5 2.1 2.2 2.6
Equipment & IPP* 4.2 2.7 3.0 3.4 3.1 3.1 2.5 2.9 3.3 3.3 3.0 3.1
                         
 Residential Investment -2.2 0.7 1.2 1.1 0.6 0.6 -0.3 0.8 1.4 0.8 0.6 0.6
 Govt. Expenditure 2.0 1.9 0.7 0.4 0.1 0.2 2.1 1.8 0.4 0.3 0.0 0.3
 Final Domestic Demand 2.4 2.2 2.0 2.0 1.8 1.8 2.4 2.0 2.1 1.9 1.8 1.9
                         
 Exports                   -0.1 1.5 2.5 2.7 2.6 2.5 0.1 2.3 2.6 2.7 2.6 2.5
 Imports                   1.9 3.0 3.6 3.3 3.2 3.2 1.1 3.3 3.5 3.3 3.1 3.2
                         
 Change in Private                        
 Inventories 81.3 36.9 37.3 37.8 33.5 32.6 --- --- --- --- --- ---
 Final Sales 2.1 2.0 1.8 1.9 1.7 1.7 2.4 1.8 1.9 1.8 1.7 1.7
                         
 International Current                        
 Account Balance ($Bn)  -508 -569 -641 -715 -768 -814 --- --- --- --- --- ---
% of GDP  -2.4 -2.6 -2.8 -3.0 -3.1 -3.1 --- --- --- --- --- ---
 Pre-tax Corporate Profits                        
 including IVA&CCA 1.0 1.2 3.3 2.5 1.7 2.0 2.1 0.8 3.3 1.9 1.7 2.3
% of GDP  9.8 9.5 9.4 9.3 9.1 8.9 --- --- --- --- --- ---
 GDP Deflator (y/y) 1.9 2.2 2.2 2.2 2.3 2.4 1.9 2.3 2.2 2.3 2.3 2.4
 Nominal GDP  4.2 4.0 4.1 4.2 4.0 4.1 4.1 4.0 4.1 4.1 4.0 4.2
                         
 Labor Force 0.8 1.0 0.7 0.6 0.5 0.5 0.6 0.9 0.7 0.6 0.5 0.5
 Employment  1.5 0.9 0.6 0.6 0.5 0.5 1.2 0.7 0.7 0.6 0.5 0.5
 Change in Empl. ('000s)  2,216 1,362 942 979 776 761 1,770 1,110 1,051 889 738 766
 Unemployment Rate (%)  3.7 3.8 4.0 4.1 4.2 4.2 --- --- --- --- --- ---
 Personal Disp. Income  4.6 4.0 4.0 4.1 4.2 4.3 4.5 3.8 4.1 4.1 4.2 4.4
 Pers. Savings Rate (%)  8.0 7.5 7.0 6.9 6.9 7.1 --- --- --- --- --- ---
 Cons. Price Index (y/y) 1.7 2.3 2.3 2.2 2.2 2.2 1.8 2.5 2.2 2.2 2.2 2.2
 Core CPI (y/y) 2.2 2.4 2.3 2.3 2.2 2.3 2.3 2.4 2.3 2.3 2.2 2.3
 Core PCE Price Index (y/y) 1.6 2.1 2.1 2.0 2.0 2.0 1.7 2.2 2.0 2.0 2.0 2.0
 Housing Starts (mns)  1.23 1.24 1.27 1.29 1.30 1.32 --- --- --- --- --- ---
 Real Output per hour** (y/y) 1.7 1.0 1.4 1.6 1.4 1.4 1.8 1.1 1.6 1.6 1.4 1.5
                         
*Intellectual proprty products. F: Forecast by TD Economics, September 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 19F 20F 21F 22F 23F 24F
  Real GDP 1.5 1.6 1.7 1.8 1.8 1.8 1.7 1.5 1.8 1.8 1.8 1.7
                         
Consumer Expenditure 1.6 1.6 1.6 1.6 1.6 1.6 1.8 1.6 1.6 1.5 1.6 1.6
Durable Goods             0.8 1.0 1.5 1.6 1.5 1.5 1.6 1.2 1.7 1.5 1.5 1.5
                         
Business Investment -2.5 1.5 3.9 3.6 3.1 2.6 -0.2 3.2 4.1 3.3 2.9 2.5
Non-Res. Structures -5.1 1.8 3.5 3.3 2.9 2.5 -0.6 2.7 3.7 3.1 2.8 2.4
Equipment & IPP* 0.2 1.2 4.3 3.9 3.2 2.7 0.3 3.6 4.5 3.5 3.0 2.5
                         
Residential Investment -1.3 4.3 3.0 2.3 1.9 1.8 3.4 3.4 2.8 2.1 1.9 1.8
Govt. Expenditure 1.5 1.1 0.9 1.5 1.8 1.8 1.6 0.9 1.0 1.7 1.8 1.8
   Final Domestic Demand 0.9 1.7 1.8 1.8 1.8 1.8 1.6 1.7 1.8 1.8 1.8 1.8
                         
Exports                   2.7 2.6 2.6 3.1 2.9 2.7 3.2 2.2 2.9 3.1 2.7 2.7
Imports                   0.9 1.8 2.5 3.0 2.8 2.7 2.3 2.2 2.8 3.1 2.7 2.7
                         
Change in Non-farm                        
Inventories (2012 $Bn) 11.8 5.4 2.8 1.3 1.3 1.0 -- -- -- -- -- --
   Final Sales 0.9 2.1 1.9 1.9 1.8 1.8 1.9 1.9 2.0 1.8 1.8 1.8
                         
International Current                        
Account Balance ($Bn)  -38.5 -34.5 -36.8 -37.4 -38.1 -39.3 -- -- -- -- -- --
% of GDP  -1.7 -1.4 -1.5 -1.5 -1.4 -1.4 -- -- -- -- -- --
Pre-tax Corp. Profits 1.7 3.7 4.1 3.8 3.6 3.6 11.1 3.0 4.2 3.7 3.6 3.6
% of GDP  12.5 12.5 12.5 12.5 12.5 12.5 -- -- -- -- -- --
  GDP Deflator (y/y) 2.1 2.1 1.9 1.9 1.9 1.9 3.3 2.0 1.9 1.9 1.9 1.9
  Nominal GDP  3.6 3.7 3.7 3.7 3.7 3.7 5.0 3.5 3.7 3.7 3.7 3.6
                         
  Labour Force 1.9 0.9 0.6 0.6 0.5 0.5 2.0 0.7 0.6 0.6 0.5 0.5
  Employment  2.0 0.8 0.6 0.6 0.6 0.5 1.8 0.6 0.6 0.6 0.6 0.5
  Change in Empl. ('000s)  381 148 123 117 110 105 337 119 123 114 108 104
  Unemployment Rate (%)  5.7 5.9 5.8 5.8 5.8 5.8 -- -- -- -- -- --
  Personal Disp. Income  4.0 4.1 3.6 3.6 3.7 3.7 4.4 3.7 3.6 3.6 3.7 3.7
  Pers. Savings Rate (%)  1.8 2.0 1.9 1.9 2.0 2.2 -- -- -- -- -- --
  Cons. Price Index (y/y) 2.0 2.0 1.9 2.0 2.0 2.0 2.2 1.8 1.9 2.0 2.0 2.0
  CPIX (y/y) ** 1.8 1.8 1.9 2.0 2.0 2.0 1.9 1.8 2.0 2.0 2.0 2.0
  BoC Inflation (y/y) ** 2.0 1.9 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0
  Housing Starts ('000s) 213 204 209 197 197 199 -- -- -- -- -- --
  Home Prices (y/y) 1.6 6.5 3.0 2.2 2.6 2.9 5.4 3.5 2.5 2.3 2.7 2.9
  Real GDP / worker (y/y) -0.5 0.8 1.0 1.2 1.2 1.2 -0.1 0.9 1.1 1.2 1.2 1.2
                         
F: Forecast by TD Economics, September 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 19F 20F 21F 22F 23F 24F
U.S. FIXED INCOME                        
   Fed Funds Target Rate (%)* 2.20 1.75 1.75 2.25 2.50 2.50 1.75 1.75 1.75 2.50 2.50 2.50
   3-mth T-Bill Rate (%) 2.00 1.60 1.65 2.15 2.35 2.35 1.60 1.60 1.73 2.35 2.35 2.35
   2-yr Govt. Bond Yield (%) 1.85 1.70 2.05 2.40 2.45 2.45 1.60 1.80 2.20 2.45 2.45 2.45
   5-yr Govt. Bond Yield (%) 1.80 1.75 2.10 2.45 2.55 2.55 1.60 1.85 2.25 2.55 2.55 2.55
   10-yr Govt. Bond Yield (%) 1.95 1.85 2.25 2.60 2.70 2.70 1.70 2.00 2.40 2.70 2.70 2.70
  10-yr-2-yr Govt. Spread (%) 0.10 0.15 0.20 0.20 0.25 0.25 0.10 0.20 0.20 0.25 0.25 0.25
                         
CANADIAN FIXED INCOME                        
   Overnight Target Rate (%) 1.70 1.25 1.25 1.50 1.75 1.75 1.50 1.25 1.25 1.75 1.75 1.75
   3-mth T-Bill Rate (%) 1.55 1.15 1.15 1.45 1.75 1.75 1.27 1.15 1.15 1.65 1.75 1.75
   2-yr Govt. Bond Yield (%) 1.45 1.40 1.60 1.80 1.85 1.85 1.30 1.45 1.65 1.85 1.85 1.85
   5-yr Govt. Bond Yield (%) 1.45 1.50 1.70 1.90 1.95 1.95 1.40 1.55 1.75 1.95 1.95 1.95
  10-yr Govt. Bond Yield (%) 1.50 1.55 1.85 2.00 2.05 2.05 1.40 1.70 1.90 2.05 2.05 2.05
  10-yr-2-yr Govt. Spread (%) 0.05 0.15 0.25 0.20 0.20 0.20 0.10 0.25 0.25 0.20 0.20 0.20
                         
*Upper bound of target range. F: Forecast by TD Economics as at September 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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