Long-Term Forecast

Leslie Preston, Senior Economist, 416-983-7053

Brian DePratto, Senior Economist, 416-944-5069 

Date Published: June 18, 2019

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United States

  • The U.S. economy is expected to moderate to 2.6% in 2019, as the boost from fiscal stimulus wanes. This is expected to continue into 2020, as growth slows toward its long-run potential pace of 1.8%.
  • At 3.6%, the current unemployment rate is near historic lows, and well under its pre-recession nadir. As growth slows toward potential in the second half of 2019, we expect 3.6% will mark the cyclical low. Thereafter, 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 approximately 0.6% – 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 in two 25 basis point moves as “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 2021, where it is expected to remain over the forecast horizon.

Canada

  • There are early signs that the recent economic soft patch is giving way to a modest recovery as oil production curtailments moderate and housing markets come off their bottom. Thereafter, growth is forecast to settle at a pace roughly in line with the economy’s underlying potential.
  • A more modest pace of hiring is anticipated, which help close the recent gap between labour markets and output. Over the longer-term, the unemployment will gradually rise towards 5.8%, consistent with the economy operating at or 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 is more encouraging, although the near-term cloud of trade uncertainty cannot be ignored. 
  • There is little in the way of underlying inflationary pressures. The current 1.75% Bank of Canada policy rate is thus consistent with an economy operating at or near capacity, meaning that we are already at ‘neutral’. No further hikes are expected.
  • Ultimately, economic growth is expected to settle around its trend pace of 1.7%. Population aging, private indebtedness, and modest productivity gains mean a slower pace relative to history.

Tables


U.S. Economic Outlook
Period-Over-Period Annualized Per Cent Change Unless Otherwise Indicated
                           Annual Average Fourth Quarter / Fourth Quarter
  18 19F 20F 21F 22F 23F 18 19F 20F 21F 22F 23F
 Real GDP 2.9 2.6 1.8 2.0 1.9 1.7 3.0 2.2 1.8 2.0 1.8 1.7
                         
 Consumer Expenditure 2.6 2.4 2.1 2.3 2.3 2.1 2.6 2.1 2.1 2.4 2.2 2.1
Durable Goods             5.5 3.0 4.3 4.8 5.0 4.7 3.4 2.9 4.4 4.9 4.9 4.7
                         
 Business Investment 6.9 2.8 2.6 3.3 3.2 3.1 7.0 1.9 2.9 3.3 3.2 3.0
Non-Res. Structures 5.0 -0.4 2.0 2.5 2.1 2.2 4.9 0.4 2.5 2.4 2.1 2.3
Equipment & IPP* 7.5 3.8 2.8 3.5 3.6 3.3 7.6 2.3 3.0 3.5 3.5 3.3
                         
 Residential Investment -0.3 -2.6 0.4 2.0 1.1 0.6 -3.3 -1.3 1.3 1.9 0.8 0.6
 Govt. Expenditure 1.5 2.2 1.4 0.4 0.3 0.2 1.5 2.6 0.8 0.4 0.3 0.2
 Final Domestic Demand 2.9 2.2 2.0 2.1 2.1 1.9 2.7 2.0 2.0 2.1 2.0 1.9
                         
 Exports                   4.0 1.4 2.8 3.1 3.1 3.1 2.3 2.0 3.0 3.2 3.1 3.1
 Imports                   4.5 0.6 2.4 4.3 4.3 3.9 3.4 -0.3 3.4 4.5 4.2 3.8
                         
 Change in Private                        
 Inventories 45.0 89.0 56.4 63.5 67.8 66.5 --- --- --- --- --- ---
 Final Sales 2.7 2.4 2.0 1.9 1.9 1.7 2.6 2.4 1.9 1.9 1.8 1.7
                         
 International Current                        
 Account Balance ($Bn)  -488 -517 -508 -531 -565 -606 --- --- --- --- --- ---
% of GDP  -2.4 -2.4 -2.3 -2.3 -2.3 -2.4 --- --- --- --- --- ---
 Pre-tax Corporate Profits                        
 including IVA&CCA 7.8 1.9 3.1 3.6 3.0 2.2 7.4 1.2 2.9 3.7 2.5 2.2
% of GDP  11.0 10.8 10.7 10.6 10.5 10.3 --- --- --- --- --- ---
 GDP Deflator (y/y) 2.2 1.8 2.2 2.4 2.4 2.3 2.1 1.8 2.3 2.4 2.4 2.3
 Nominal GDP  5.2 4.3 4.1 4.4 4.3 4.1 5.2 4.0 4.2 4.4 4.2 4.1
                         
 Labor Force 1.1 0.7 0.9 0.7 0.7 0.6 1.5 0.5 0.9 0.7 0.6 0.5
 Employment  1.7 1.5 0.9 0.6 0.7 0.6 1.8 1.2 0.7 0.7 0.6 0.5
 Change in Empl. ('000s)  2,453 2,202 1,336 957 1,058 859 2,651 1,727 1,080 1,128 968 807
 Unemployment Rate (%)  3.9 3.7 3.8 3.9 3.9 4.0 --- --- --- --- --- ---
 Personal Disp. Income  4.9 3.7 4.5 4.7 4.5 4.3 4.9 3.6 4.6 4.6 4.4 4.3
 Pers. Savings Rate (%)  6.7 6.3 6.4 6.6 6.7 6.9 --- --- --- --- --- ---
 Cons. Price Index (y/y) 2.4 1.8 2.3 2.3 2.1 2.1 2.2 2.0 2.4 2.2 2.1 2.1
 Core CPI (y/y) 2.1 2.1 2.2 2.3 2.2 2.2 2.2 2.2 2.3 2.2 2.2 2.2
 Core PCE Price Index (y/y) 1.9 1.6 2.0 2.1 2.0 2.0 1.9 1.7 2.1 2.0 2.0 2.0
 Housing Starts (mns)  1.25 1.20 1.22 1.27 1.29 1.31 --- --- --- --- --- ---
 Real Output per hour** (y/y) 1.3 1.9 1.1 1.5 1.6 1.5 1.7 1.7 1.3 1.6 1.6 1.6
                         
*Intellectual proprty products. F: Forecast by TD Economics, June 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
  18 19F 20F 21F 22F 23F 18 19F 20F 21F 22F 23F
  Real GDP 1.9 1.3 1.7 1.7 1.7 1.8 1.6 1.6 1.7 1.7 1.7 1.8
                         
Consumer Expenditure 2.1 1.9 1.6 1.6 1.5 1.6 1.4 2.1 1.6 1.6 1.5 1.6
Durable Goods             1.0 0.6 1.1 1.5 1.5 1.5 -1.1 1.4 1.4 1.5 1.5 1.5
                         
Business Investment 2.2 0.3 3.3 4.0 3.6 3.1 -2.5 4.0 3.7 4.1 3.3 2.9
Non-Res. Structures -0.9 -4.0 2.8 3.6 3.3 2.9 -7.2 1.2 3.0 3.7 3.1 2.8
Equipment & IPP* 5.6 4.5 3.7 4.4 3.9 3.3 2.7 6.7 4.3 4.5 3.6 3.1
                         
Residential Investment -1.5 -1.8 3.5 2.7 2.1 1.9 -5.7 2.3 2.9 2.4 2.0 1.9
Govt. Expenditure 3.0 1.7 1.1 0.9 1.5 1.8 1.6 1.8 0.9 1.0 1.7 1.8
   Final Domestic Demand 2.0 1.4 1.8 1.8 1.8 1.8 0.5 2.2 1.7 1.8 1.8 1.8
                         
Exports                   3.2 1.4 2.6 2.9 3.2 2.9 4.1 1.8 2.4 3.1 3.1 2.7
Imports                   2.9 1.5 2.2 2.6 3.0 2.8 0.0 3.3 2.3 2.9 3.0 2.7
                         
Change in Non-farm                        
Inventories (2007 $Bn) 12.7 11.0 8.3 5.7 2.9 2.1 -- -- -- -- -- --
   Final Sales 2.3 1.5 2.0 1.9 1.9 1.9 0.6 2.5 1.8 1.9 1.9 1.8
                         
International Current                        
Account Balance ($Bn)  -58.5 -55.4 -51.7 -52.8 -53.8 -55.3 -- -- -- -- -- --
% of GDP  -2.6 -2.4 -2.2 -2.1 -2.1 -2.1 -- -- -- -- -- --
Pre-tax Corp. Profits 0.5 -2.6 5.0 4.6 3.8 3.6 -5.7 6.2 4.9 4.2 3.7 3.6
% of GDP  12.7 12.0 12.1 12.2 12.2 12.2 -- -- -- -- -- --
  GDP Deflator (y/y) 1.7 2.0 2.2 1.9 1.9 1.9 0.5 3.2 2.0 1.9 1.9 1.9
  Nominal GDP  3.6 3.3 4.0 3.7 3.6 3.7 2.0 4.9 3.7 3.7 3.6 3.7
                         
  Labour Force 0.8 1.9 0.9 0.6 0.6 0.5 0.9 1.9 0.7 0.6 0.6 0.5
  Employment  1.3 2.0 0.7 0.6 0.6 0.6 1.2 1.7 0.6 0.6 0.6 0.6
  Change in Empl. ('000s)  238 376 139 123 117 110 222 323 119 123 114 108
  Unemployment Rate (%)  5.8 5.7 5.9 5.8 5.8 5.8 -- -- -- -- -- --
  Personal Disp. Income  3.8 3.9 3.9 3.6 3.6 3.7 2.8 4.2 3.7 3.6 3.6 3.7
  Pers. Savings Rate (%)  1.4 1.3 1.3 1.3 1.3 1.4 -- -- -- -- -- --
  Cons. Price Index (y/y) 2.2 1.9 2.0 2.0 2.0 2.0 2.1 2.0 2.0 2.0 2.0 2.0
  CPIX (y/y) ** 1.5 1.7 1.9 2.0 2.0 2.0 1.6 1.8 2.0 2.0 2.0 2.0
  BoC Inflation (y/y) ** 2.0 1.9 1.9 2.0 2.0 2.0 1.9 1.8 2.0 2.0 2.0 2.0
  Housing Starts ('000s) 214 198 196 197 200 200 -- -- -- -- -- --
  Home Prices (y/y) -3.5 -2.0 3.2 2.7 2.8 3.0 -3.4 -1.1 3.0 2.6 2.9 3.0
  Real GDP / worker (y/y) 0.6 -0.7 1.0 1.1 1.1 1.2 0.4 -0.2 1.0 1.1 1.1 1.2
                         
F: Forecast by TD Economics, June 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
  18 19F 20F 21F 22F 23F 18 19F 20F 21F 22F 23F
U.S. FIXED INCOME                        
   Fed Funds Target Rate (%)* 2.15 2.30 2.00 2.25 2.50 2.50 2.50 2.00 2.00 2.50 2.50 2.50
   3-mth T-Bill Rate (%) 2.05 2.10 1.85 2.15 2.35 2.35 2.40 1.85 1.85 2.35 2.35 2.35
   2-yr Govt. Bond Yield (%) 2.50 2.05 2.15 2.40 2.45 2.45 2.48 2.00 2.20 2.45 2.45 2.45
   5-yr Govt. Bond Yield (%) 2.70 2.05 2.30 2.50 2.55 2.55 2.51 2.10 2.40 2.55 2.55 2.55
   10-yr Govt. Bond Yield (%) 2.85 2.25 2.50 2.65 2.70 2.70 2.69 2.30 2.55 2.70 2.70 2.70
  10-yr-2-yr Govt. Spread (%) 0.35 0.20 0.35 0.25 0.25 0.25 0.21 0.30 0.35 0.25 0.25 0.25
                         
CANADIAN FIXED INCOME                        
   Overnight Target Rate (%) 1.45 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75
   3-mth T-Bill Rate (%) 1.40 1.65 1.65 1.75 1.75 1.75 1.64 1.65 1.65 1.75 1.75 1.75
   2-yr Govt. Bond Yield (%) 1.95 1.50 1.70 1.85 1.85 1.85 1.86 1.55 1.75 1.85 1.85 1.85
   5-yr Govt. Bond Yield (%) 2.05 1.50 1.75 1.90 1.95 1.95 1.88 1.55 1.80 1.95 1.95 1.95
  10-yr Govt. Bond Yield (%) 2.15 1.60 1.85 2.05 2.10 2.10 1.96 1.65 1.95 2.10 2.10 2.10
  10-yr-2-yr Govt. Spread (%) 0.20 0.10 0.15 0.20 0.25 0.25 0.10 0.10 0.20 0.25 0.25 0.25
                         
*Upper bound of target range. F: Forecast by TD Economics as at June 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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