Long-Term Forecast

Leslie Preston, Senior Economist | 416-983-7053

Brian DePratto, Senior Economist | 416-944-5069

Date Published: June 18, 2020

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United States

  • The COVID-19 pandemic is expected to drive a 4.5% contraction in economic growth this year. Helped by significant monetary and fiscal stimulus, real GDP growth is expected to gain traction in the second half of 2020 and produce a 4.3% gain in 2021.
  • The pandemic has already lifted the unemployment rate to an historic level. Despite an expectation for a steady decline in the coming quarters, many sectors of the economy will struggle to return to pre-crisis levels. This will leave the unemployment forecast higher than the counterfactual pre-pandemic outcome over the medium-term.
  • 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, lopsided aging demographics will weigh on employment growth, which is anticipated to be just 0.5% over the longer-term – roughly half the pace observed historically.
  • In the face of the crisis, the FOMC took its policy rate to the zero-lower bound, and enacted substantial monetary stimulus. We don’t expect the FOMC to raise the policy rate until early 2023, and reach 2.0% in early 2026, where it is expected to remain over the forecast horizon.

Canada

  • Canada’s economy has been hit by a double whammy of weak oil prices and COVID-19. The result will be a 6.1% drop in economic activity this year. However, there are already signs that the economy has bottomed as economic re-openings continue.
  • Aided by the unprecedented monetary and fiscal pandemic response, an economic recovery started in May, but will be particularly apparent by the third quarter real GDP data. Provided governments don’t turn up the dial again on shutting down business activity in the event of a second wave, we anticipate economic growth of 5.2% next year.
  • The severity of the current shock is unprecedented. Economic activity is not expected to return to the pre-crisis level recorded at the end of 2019 until early 2022. Similarly, we expect scarring effects that leave the unemployment rate above the 6% threshold through 2023. This is despite a sizeable near-term downgrade of population and labour force growth that reflects travel restrictions.
  • The Bank of Canada has committed to maintaining stimulus “well into the recovery”. This means a large balance sheet for several years, and liftoff from the current 0.25% lower bound on the overnight rate that comes only in early 2023. We do not expect the policy interest rate to reach its current estimated neutral level of 1.75% until the end of the forecast window.

Tables


U.S. Economic Outlook
Period-Over-Period Annualized Per Cent Change Unless Otherwise Indicated
                           Annual Average Fourth Quarter / Fourth Quarter
  19 20F 21F 22F 23F 24F 25F 19 20F 21F 22F 23F 24F 25F
 Real GDP 2.3 -4.5 4.3 2.7 2.0 1.8 1.8 2.3 -3.8 4.0 2.3 1.9 1.8 1.8
                             
 Consumer Expenditure 2.6 -4.3 5.0 2.7 2.1 2.0 2.0 2.7 -2.8 3.7 2.3 2.0 2.0 2.0
Durable Goods             4.8 -6.1 7.3 1.3 1.9 2.8 3.3 5.9 -4.8 4.3 0.9 2.5 3.0 3.4
                             
 Business Investment 2.1 -8.2 4.8 4.3 3.4 3.3 3.3 -0.4 -7.1 6.4 3.6 3.4 3.3 3.3
Non-Res. Structures -4.3 -15.3 1.0 5.7 2.7 2.5 2.5 -6.2 -16.1 8.7 3.9 2.5 2.5 2.5
Equipment & IPP* 4.0 -6.2 5.7 4.0 3.5 3.6 3.6 1.3 -4.6 5.9 3.5 3.6 3.6 3.6
                             
 Residential Investment -1.5 -8.3 -0.1 5.4 2.6 2.3 2.3 1.7 -15.5 9.8 3.8 2.2 2.3 2.2
 Govt. Expenditure 2.3 1.5 2.3 1.1 0.2 0.2 0.4 3.0 1.5 1.8 0.8 0.1 0.3 0.4
 Final Domestic Demand 2.3 -3.9 4.3 2.7 1.9 1.9 1.9 2.3 -3.1 3.8 2.2 1.8 1.9 1.9
                             
 Exports                   0.0 -17.0 5.6 5.1 3.4 3.2 3.1 0.3 -18.3 9.8 4.0 3.2 3.2 3.0
 Imports                   1.0 -14.9 7.3 5.2 3.2 3.5 3.5 -2.1 -13.1 9.4 3.7 3.3 3.6 3.4
                             
 Change in Private                            
 Inventories 67.0 -81.5 -23.1 -5.1 17.5 24.3 25.1 --- --- --- --- --- --- ---
 Final Sales 2.2 -3.8 4.0 2.6 1.9 1.8 1.8 2.7 -3.4 3.7 2.2 1.8 1.8 1.8
                             
 International Current                            
 Account Balance ($Bn)  -498 -507 -613 -621 -659 -695 -635 --- --- --- --- --- --- ---
% of GDP  -2.3 -2.5 -2.8 -2.7 -2.8 -2.8 -2.5 --- --- --- --- --- --- ---
 Pre-tax Corporate Profits                            
 including IVA&CCA 0.0 -28.1 6.9 10.7 10.9 10.7 9.0 2.2 -32.3 16.0 8.6 12.6 9.7 8.5
% of GDP  9.7 7.2 7.3 7.8 8.3 8.9 9.3 --- --- --- --- --- --- ---
 GDP Deflator (y/y) 1.8 1.0 0.9 1.6 1.9 2.0 1.9 1.6 0.6 1.2 1.7 2.0 1.9 1.9
 Nominal GDP  4.1 -3.6 5.2 4.3 4.0 3.8 3.8 4.0 -3.2 5.2 4.0 3.9 3.8 3.8
                             
 Labor Force 0.9 -1.6 2.4 1.0 0.6 0.6 0.5 1.0 -1.7 2.5 0.7 0.6 0.6 0.5
 Employment  1.4 -5.9 3.9 2.6 1.6 1.0 0.6 1.4 -5.4 4.1 2.0 1.3 0.9 0.5
 Change in Empl. ('000s)  2,045 -8,955 5,575 3,766 2,364 1,588 956 2,089 -8,266 5,835 3,042 1,995 1,339 811
 Unemployment Rate (%)  3.7 8.5 7.0 5.6 4.7 4.2 4.2 --- --- --- --- --- --- ---
 Personal Disp. Income  4.3 7.3 1.8 1.7 2.3 3.0 4.0 4.0 6.6 1.4 2.2 2.5 3.3 4.3
 Pers. Savings Rate (%)  7.9 17.1 13.7 11.6 10.1 9.2 9.3 --- --- --- --- --- --- ---
 Cons. Price Index (y/y) 1.8 0.9 1.5 1.7 1.9 2.1 2.1 2.0 0.6 1.7 1.7 2.1 2.1 2.0
 Core CPI (y/y) 2.2 1.4 1.2 1.8 2.1 2.2 2.2 2.3 0.9 1.4 2.0 2.2 2.2 2.2
 Core PCE Price Index (y/y) 1.6 0.9 0.9 1.5 1.9 2.0 2.0 1.6 0.5 1.1 1.7 2.0 2.0 1.9
 Housing Starts (mns)  1.30 1.10 1.23 1.33 1.35 1.37 1.39 --- --- --- --- --- --- ---
 Real Output per hour** (y/y) 1.9 0.3 0.3 1.4 1.3 1.4 1.7 1.8 -0.5 1.4 1.3 1.3 1.5 1.7
                             
*Intellectual proprty products. F: Forecast by TD Economics, June 2020.
**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
  19 20F 21F 22F 23F 24F 25F 19 20F 21F 22F 23F 24F 25F
  Real GDP 1.7 -6.1 5.2 2.0 1.7 1.7 1.7 1.5 -4.6 3.9 1.7 1.7 1.7 1.7
                             
Consumer Expenditure 1.6 -6.2 5.8 1.6 1.5 1.6 1.6 1.7 -3.9 3.5 1.4 1.5 1.6 1.5
Durable Goods             0.4 -11.2 12.3 2.1 1.5 1.5 1.5 0.4 -4.7 6.1 1.5 1.5 1.5 1.5
                             
Business Investment -0.4 -14.2 4.2 6.3 3.2 2.6 2.4 1.1 -16.0 11.0 4.6 2.8 2.4 2.4
Non-Res. Structures 0.7 -13.2 0.1 6.1 3.2 2.5 2.4 4.2 -19.4 9.5 4.6 2.8 2.4 2.4
Equipment & IPP* -1.6 -15.1 8.8 6.6 3.2 2.6 2.4 -2.2 -12.2 12.5 4.7 2.8 2.5 2.5
                             
Residential Investment -0.6 -16.2 8.1 1.9 1.9 1.8 1.8 4.3 -15.8 6.1 1.7 1.9 1.8 1.8
Govt. Expenditure 1.8 0.8 1.3 1.5 1.8 1.8 1.8 1.8 0.8 1.1 1.7 1.8 1.8 1.8
   Final Domestic Demand 1.3 -5.9 4.5 2.1 1.8 1.7 1.7 1.8 -4.8 3.7 1.8 1.8 1.7 1.7
                             
Exports                   1.3 -9.0 5.2 2.9 2.8 2.7 2.6 0.2 -6.3 3.7 2.9 2.7 2.7 2.5
Imports                   0.6 -10.4 3.7 3.2 3.0 2.8 2.7 0.5 -8.3 3.4 3.2 2.9 2.7 2.7
                             
Change in Non-farm                            
Inventories (2012 $Bn) 12.5 -1.7 2.3 1.9 1.5 1.2 1.0 -- -- -- -- -- -- --
   Final Sales 1.2 -5.1 4.3 2.1 1.8 1.8 1.7 2.1 -4.3 3.5 1.9 1.8 1.7 1.7
                             
International Current                            
Account Balance ($Bn)  -47.0 -36.6 -27.7 -31.4 -33.5 -33.8 -33.4 -- -- -- -- -- -- --
% of GDP  -2.0 -1.7 -1.2 -1.3 -1.3 -1.3 -1.2 -- -- -- -- -- -- --
Pre-tax Corp. Profits -0.1 -10.8 14.8 4.8 3.4 3.2 3.2 5.5 -8.0 14.2 3.6 3.2 3.2 3.2
% of GDP  12.5 11.7 12.5 12.6 12.6 12.5 12.5 -- -- -- -- -- -- --
  GDP Deflator (y/y) 1.9 1.3 1.7 2.0 1.9 1.9 1.9 3.2 0.9 2.0 2.0 1.9 1.9 1.9
  Nominal GDP  3.6 -4.9 7.0 4.0 3.6 3.6 3.6 4.8 -3.7 5.9 3.7 3.6 3.6 3.6
                             
  Labour Force 1.9 -2.2 3.1 0.8 0.7 0.6 0.6 1.8 -0.7 1.4 0.7 0.7 0.6 0.6
  Employment  2.1 -6.6 5.8 1.9 1.2 0.8 0.7 1.8 -5.2 4.8 1.5 1.0 0.8 0.7
  Change in Empl. ('000s)  391 -1262 1035 365 229 162 141 340 -998 869 291 196 153 133
  Unemployment Rate (%)  5.7 10.0 7.6 6.5 6.0 5.8 5.7 -- -- -- -- -- -- --
  Personal Disp. Income  4.5 2.8 1.6 2.9 3.1 3.4 3.4 5.0 1.4 2.3 3.0 3.3 3.4 3.4
  Pers. Savings Rate (%)  3.0 11.2 5.9 5.0 4.7 4.5 4.4 -- -- -- -- -- -- --
  Cons. Price Index (y/y) 2.0 0.7 1.8 2.3 2.1 2.0 2.0 2.1 0.5 2.1 2.3 2.0 2.0 2.0
  CPIX (y/y) ** 1.8 1.4 1.8 2.3 2.1 2.0 2.0 1.8 1.3 2.1 2.3 2.0 2.0 2.0
  BoC Inflation (y/y) ** 2.0 1.1 2.0 2.1 2.0 2.0 2.0 2.1 1.5 2.2 2.0 2.0 2.0 2.0
  Housing Starts ('000s) 209 189 196 172 170 180 187 -- -- -- -- -- -- --
  Home Prices (y/y) 2.3 2.3 -1.0 0.5 2.0 2.4 2.8 7.6 -1.9 -2.3 2.0 2.0 2.6 2.9
  Real GDP / worker (y/y) -0.4 0.5 -0.6 0.0 0.5 0.9 1.0 -0.3 0.7 -0.9 0.2 0.7 0.9 1.0
                             
F: Forecast by TD Economics, June 2020
* 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
  19 20F 21F 22F 23F 24F 25F 19 20F 21F 22F 23F 24F 25F
U.S. FIXED INCOME                            
   Fed Funds Target Rate (%)* 2.20 0.25 0.25 0.25 0.65 1.15 1.65 1.75 0.25 0.25 0.25 0.75 1.25 1.75
   3-mth T-Bill Rate (%) 1.95 0.10 0.10 0.15 0.55 1.05 1.55 1.52 0.10 0.10 0.25 0.75 1.25 1.75
   2-yr Govt. Bond Yield (%) 1.80 0.20 0.30 0.60 1.10 1.60 1.90 1.58 0.20 0.35 0.80 1.30 1.70 1.95
   5-yr Govt. Bond Yield (%) 1.80 0.35 0.75 1.30 1.70 1.90 2.05 1.69 0.45 0.95 1.50 1.80 1.95 2.05
   10-yr Govt. Bond Yield (%) 2.00 0.70 1.20 1.75 2.00 2.15 2.20 1.92 0.80 1.40 1.90 2.05 2.15 2.20
  10-yr-2-yr Govt. Spread (%) 0.20 0.50 0.90 1.15 0.90 0.55 0.30 0.34 0.60 1.05 1.10 0.75 0.45 0.25
                             
CANADIAN FIXED INCOME                            
   Overnight Target Rate (%) 1.75 0.25 0.25 0.25 0.65 1.15 1.65 1.75 0.25 0.25 0.25 0.75 1.25 1.75
   3-mth T-Bill Rate (%) 1.65 0.20 0.20 0.25 0.65 1.20 1.65 1.66 0.20 0.20 0.33 0.83 1.38 1.75
   2-yr Govt. Bond Yield (%) 1.55 0.35 0.40 0.70 1.20 1.65 1.85 1.69 0.30 0.45 0.90 1.40 1.75 1.85
   5-yr Govt. Bond Yield (%) 1.50 0.45 0.75 1.25 1.65 1.85 1.95 1.68 0.45 0.90 1.45 1.75 1.90 1.95
  10-yr Govt. Bond Yield (%) 1.55 0.60 1.05 1.60 1.95 2.05 2.10 1.70 0.65 1.25 1.80 2.00 2.10 2.10
  10-yr-2-yr Govt. Spread (%) 0.00 0.25 0.65 0.90 0.75 0.40 0.25 0.01 0.35 0.80 0.90 0.60 0.35 0.25
                             
*Upper bound of target range. F: Forecast by TD Economics as at June 2020.
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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