Long-Term Forecast

Leslie Preston, Senior Economist, 416-983-7053

Brian DePratto, Senior Economist, 416-944-5069 

Date Published: December 13, 2018

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United States

  • Healthy momentum and fiscal stimulus should see growth peak at 2.9% in 2018, before moderating to 2.5% in 2019. The combination of fading fiscal stimulus, higher interest rates and capacity constraints is expected to slow growth further to 1.8% (Q4/Q4) by the end of 2020.
  • At 3.7%, the current unemployment rate is estimated to be below its structural rate. Above-trend economic growth over the next year will likely pressure this figure down further in the near-term, leading to higher wages and greater labor force participation. 
  • Meanwhile, the impact of population aging is intensifying. The adult population that is below the age of 65 is projected to grow by just 0.2% annually, resulting in employment growth of just 0.5% – roughly half the pace observed historically.
    The Federal Reserve is expected to lift the fed funds rate to a peak of 3.00% by the end of 2019. This is above our estimate of the neutral rate of 2.75%, but is consistent with returning inflation to 2% over the medium term.

Canada

  • Near-term set-backs in the form of oil production curtailments and the closure of a motor vehicle factory will weigh on  growth in 2019. Thereafter, growth is forecast to be supported by the resumption of oil and gas production and significant energy sector investment projects, notably LNG Canada’s liquefaction and export terminal in Kitimat B.C., anticipated to come online in 2023.
  • Recent months have seen robust employment gains, sending the Canadian unemployment rate below its structural rate. The result is a more constrained pace of job gains going forward, closer to the 0.6% mark. The unemployment rate is expected to trend gradually towards its longer-term level of 5.8%. Labour productivity growth (as measured by output per worker) is expected to average 1.1%, slightly above its long-run historic average.
  • Recent revisions by Statistics Canada indicate the Canada saw softer than reported economic growth in 2015 and 2016, but Canada is nevertheless estimated to be operating effectively at capacity. Risk management implies some caution as near-term oil shocks work through the economy, but the Bank of Canada remains predisposed to further rate hikes. We expect the overnight policy interest rate to reach its terminal level of 2.50% by early 2020.
  • Ultimately, economic growth is expected to settle around its trend pace of 1.8%. Population aging 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
  18F 19F 20F 21F 22F 23F 18F 19F 20F 21F 22F 23F
  Real GDP 2.9 2.5 1.9 1.7 1.8 1.8 3.0 2.2 1.8 1.8 1.8 1.8
                         
Consumer Expenditure 2.7 2.6 2.2 2.1 2.1 2.0 2.7 2.2 2.2 2.1 2.1 2.0
Durable Goods             5.7 4.3 4.4 4.3 4.2 3.9 3.9 3.9 4.4 4.2 4.1 3.8
                         
Business Investment 6.8 4.1 3.6 3.2 3.3 3.2 6.6 4.0 3.4 3.2 3.2 3.2
Non-Res. Structures 5.5 2.7 3.1 2.9 2.9 3.0 6.7 3.1 3.0 2.9 2.9 3.0
Equipment & IPP* 7.2 4.6 3.8 3.3 3.4 3.3 6.6 4.3 3.5 3.3 3.4 3.2
                         
Residential Investment -0.2 -1.0 2.5 2.5 2.8 2.3 -3.0 1.2 2.4 2.7 2.5 2.3
Govt. Expenditure 1.7 2.7 0.9 0.3 0.2 -0.2 2.6 1.9 0.5 0.3 0.1 -0.4
   Final Domestic Demand 2.9 2.7 2.2 2.0 2.0 1.8 3.0 2.3 2.1 2.0 1.9 1.8
                         
Exports                   4.1 4.0 5.4 4.1 3.9 4.0 2.7 5.8 4.7 3.9 3.9 4.0
Imports                   4.9 5.4 6.1 4.9 4.4 3.5 4.8 5.2 5.6 4.7 4.1 3.3
                         
Change in Private                        
Inventories 43.6 77.1 70.8 63.9 63.2 64.6 --- --- --- --- --- ---
   Final Sales 2.8 2.4 2.0 1.8 1.8 1.8 2.7 2.3 1.9 1.8 1.8 1.8
                         
International Current                        
Account Balance ($Bn)  -488 -559 -604 -626 -645 -647 --- --- --- --- --- ---
% of GDP  -2.4 -2.6 -2.7 -2.7 -2.6 -2.5 --- --- --- --- --- ---
Pre-tax Corporate Profits                        
including IVA&CCA 7.8 5.9 2.2 3.1 3.3 3.4 7.5 4.5 2.6 3.0 3.6 2.9
% of GDP  11.0 11.2 10.9 10.8 10.7 10.6 --- --- --- --- --- ---
  GDP Deflator (y/y) 2.2 2.2 2.4 2.5 2.4 2.3 2.1 2.3 2.5 2.4 2.4 2.3
  Nominal GDP  5.2 4.8 4.4 4.2 4.2 4.2 5.2 4.6 4.3 4.2 4.2 4.2
                         
  Labor Force 1.1 1.1 1.0 0.7 0.7 0.6 1.4 1.0 0.9 0.8 0.7 0.5
  Employment  1.6 1.5 0.9 0.5 0.5 0.4 1.7 1.3 0.7 0.6 0.5 0.4
  Change in Empl. ('000s)  2,378 2,166 1,396 823 810 690 2,477 1,891 1,003 905 757 661
  Unemployment Rate (%)  3.9 3.6 3.8 4.0 4.1 4.2 --- --- --- --- --- ---
  Personal Disp. Income  4.8 4.5 4.6 4.4 4.3 4.3 4.8 4.7 4.4 4.4 4.3 4.3
  Pers. Savings Rate (%)  6.6 6.5 6.6 6.7 6.8 7.0 --- --- --- --- --- ---
  Cons. Price Index (y/y) 2.4 2.1 2.3 2.2 2.2 2.3 2.2 2.3 2.2 2.2 2.2 2.3
  Core CPI (y/y) 2.1 2.2 2.4 2.4 2.3 2.4 2.2 2.3 2.4 2.3 2.4 2.4
  Core PCE Price Index (y/y) 1.9 1.9 2.1 2.1 2.1 2.2 1.8 2.1 2.2 2.1 2.1 2.2
  Housing Starts (mns)  1.26 1.24 1.27 1.31 1.34 1.38 --- --- --- --- --- ---
  Real Output per hour** (y 1.2 1.2 1.3 1.5 1.6 1.7 1.5 1.1 1.4 1.5 1.7 1.7
                         
*Intellectual proprty products. F: Forecast by TD Economics, December 2018.
**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
  18F 19F 20F 21F 22F 23F 18F 19F 20F 21F 22F 23F
  Real GDP 2.1 1.8 2.0 2.0 1.8 1.8 2.1 1.8 2.0 2.0 1.8 1.8
                         
Consumer Expenditure 2.2 1.6 1.6 1.5 1.5 1.5 1.6 1.6 1.6 1.5 1.5 1.5
Durable Goods             1.6 0.3 1.4 1.7 1.6 1.5 -0.4 1.4 1.5 1.7 1.5 1.5
                         
Business Investment 4.9 2.0 4.7 4.4 3.5 3.1 2.6 3.9 4.9 4.0 3.3 3.0
Non-Res. Structures 3.1 0.9 3.8 3.7 3.2 2.9 -0.1 3.1 4.0 3.5 3.1 2.8
Equipment & IPP* 6.8 3.2 5.6 5.0 3.8 3.3 5.6 4.7 5.8 4.4 3.6 3.2
                         
Residential Investment -1.1 0.4 2.2 2.8 2.2 1.9 -3.6 2.0 2.6 2.6 2.0 1.9
Govt. Expenditure 3.0 1.6 1.7 1.8 1.8 1.8 1.7 1.7 1.7 1.8 1.8 1.8
   Final Domestic Demand 2.5 1.6 2.0 2.0 1.8 1.8 1.4 1.9 2.0 1.9 1.8 1.8
                         
Exports                   3.3 2.8 2.4 3.1 3.2 2.9 4.7 2.3 2.6 3.3 3.1 2.7
Imports                   3.2 0.8 2.5 3.0 3.1 2.9 0.8 2.1 2.7 3.1 3.1 2.7
                         
Change in Non-farm                        
Inventories (2007 $Bn) 10.4 1.4 2.0 2.4 2.3 2.1 -- -- -- -- -- --
   Final Sales 2.9 2.0 2.0 2.0 1.8 1.8 2.0 2.0 2.0 1.9 1.8 1.8
                         
International Current                        
Account Balance ($Bn)  -56.6 -44.0 -47.1 -47.7 -48.3 -50.0 -- -- -- -- -- --
% of GDP  -2.5 -1.9 -2.0 -1.9 -1.9 -1.9 -- -- -- -- -- --
Pre-tax Corp. Profits 4.3 2.2 5.0 5.4 5.0 4.7 6.8 1.9 5.4 5.3 4.9 4.6
% of GDP  13.2 13.0 13.1 13.3 13.4 13.6 -- -- -- -- -- --
  GDP Deflator (y/y) 1.9 1.8 2.0 1.9 1.9 1.9 1.4 2.2 1.9 1.9 1.9 1.9
  Nominal GDP  4.0 3.6 4.0 4.0 3.8 3.7 3.4 4.1 4.0 4.0 3.7 3.7
                         
  Labour Force 0.8 0.9 0.6 0.6 0.6 0.5 0.8 0.6 0.6 0.6 0.6 0.5
  Employment  1.3 1.0 0.6 0.6 0.6 0.6 1.0 0.6 0.6 0.6 0.6 0.6
  Change in Empl. ('000s)  234 179 113 107 106 108 189 113 110 105 107 108
  Unemployment Rate (%)  5.8 5.8 5.8 5.8 5.8 5.8 -- -- -- -- -- --
  Personal Disp. Income  3.9 3.4 3.3 3.4 3.6 3.7 3.0 3.2 3.4 3.4 3.6 3.7
  Pers. Savings Rate (%)  1.0 0.8 0.5 0.3 0.4 0.5 -- -- -- -- -- --
  Cons. Price Index (y/y) 2.1 1.7 2.1 2.0 2.0 2.0 1.6 2.2 2.0 2.0 2.0 2.0
  CPIX (y/y)** 1.5 1.9 2.0 2.0 2.0 2.0 1.7 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
  Housing Starts ('000s) 212 198 196 197 200 200 -- -- -- -- -- --
  Home Prices (y/y) -3.8 2.5 1.5 2.5 2.3 2.5 -4.1 2.5 1.7 2.5 2.4 2.5
  Real GDP / worker (y/y) 0.8 0.8 1.4 1.5 1.3 1.2 1.0 1.2 1.4 1.4 1.2 1.2
                         
F: Forecast by TD Economics, December 2018.
*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
  18F 19F 20F 21F 22F 23F 18F 19F 20F 21F 22F 23F
U.S. FIXED INCOME                        
   Fed Funds Target Rate (%)* 2.15 2.80 3.00 3.00 2.75 2.75 2.50 3.00 3.00 3.00 2.75 2.75
   3-mth T-Bill Rate (%) 2.05 2.80 2.90 2.85 2.65 2.65 2.35 2.90 2.90 2.78 2.65 2.65
   2-yr Govt. Bond Yield (%) 2.60 2.90 2.95 2.90 2.70 2.70 2.80 2.95 2.95 2.80 2.70 2.70
   5-yr Govt. Bond Yield (%) 2.75 2.95 3.00 2.95 2.85 2.85 2.85 3.00 3.00 2.90 2.85 2.85
   10-yr Govt. Bond Yield (%) 2.90 3.10 3.15 3.10 3.00 3.00 3.00 3.15 3.15 3.05 3.00 3.00
  10-yr-2-yr Govt. Spread (%) 0.30 0.20 0.20 0.20 0.30 0.30 0.20 0.20 0.20 0.25 0.30 0.30
                         
CANADIAN FIXED INCOME                        
   Overnight Target Rate (%) 1.45 2.15 2.50 2.50 2.50 2.50 1.75 2.25 2.50 2.50 2.50 2.50
   3-mth T-Bill Rate (%) 1.45 2.20 2.50 2.50 2.50 2.50 1.88 2.38 2.50 2.50 2.50 2.50
   2-yr Govt. Bond Yield (%) 2.00 2.40 2.55 2.55 2.55 2.55 2.05 2.50 2.55 2.55 2.55 2.55
   5-yr Govt. Bond Yield (%) 2.10 2.50 2.70 2.70 2.70 2.70 2.10 2.65 2.70 2.70 2.70 2.70
  10-yr Govt. Bond Yield (%) 2.20 2.60 2.85 2.85 2.85 2.85 2.20 2.80 2.85 2.85 2.85 2.85
  10-yr-2-yr Govt. Spread (%) 0.20 0.20 0.30 0.30 0.30 0.30 0.15 0.30 0.30 0.30 0.30 0.30
                         
*Upper bound of target range. F: Forecast by TD Economics as at December 2018.
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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