TD Bank raises its outlook for economic growth for the third quarter

TORONTO – TD Bank has raised its outlook for Canadian economic growth for the third quarter and says consumer spending will be the driving force — not exports and business spending, as it had thought earlier.

In a quarterly update to its economic forecast, the bank (TSX:TD) said Wednesday that it expects Canada’s economy to grow at an annual pace of 2.3 per cent in the July-September period, compared with a June forecast for growth of two per cent.

TD still expects full-year growth will be 1.7 per cent in 2013 and 2.4 per cent in 2014.

“Economists in Canada are guilty of sounding like broken records, repeating the need for Canada’s growth to shift from relying on heavily indebted consumers to stronger exports and business investment,” the bank said in its report.

“While the process has started, U.S. economic growth looks slightly softer in the near term making the transition uneven. In the meantime, the consumer and the housing market have shown more momentum, helping to keep the economy puffing along.”

The U.S. economy faces several challenges in the coming months including another congressional showdown over the federal government’s budget and borrowing.

A near-term issue is a temporary spending bill required to keep the U.S. government fully open after the start of the new budget year. The government also reaches its borrowing limit, or debt ceiling, early in October.

In addition, the U.S. Federal Reserve has moved to delay its plan to start withdrawing some economic stimulus until it sees further confirmation of improvements in the economy.

However, TD noted that interest rates in the U.S. have been rising and they will act as a headwind to growth.

TD has reduced its U.S. economic growth forecast for all of 2013 to 1.6 per cent and 2.6 per cent in 2014, compared with its June forecast for growth of 1.9 per cent for this year and 2.8 per cent next year.

“The U.S. economic recovery remains broadly in place. While the transition to higher longer-term interest rates will slow the pace of growth over the next year, it will not halt it,” TD said.

“The fundamentals in place supporting higher growth are well entrenched.”

The Canadian economy grew by 1.7 per cent in the second quarter as flooding in Alberta and a construction strike in Quebec took their toll and most economists expect some bounce back in the third quarter.

However, TD noted the extent and timing remains uncertain.

The Bank of Canada estimated in July that the economy would grow by 3.8 per cent in the third quarter. However the central bank also predicted growth of just one per cent in the second quarter.

Bank of Canada governor Stephen Poloz has sounded a mostly upbeat tone on the Canadian economy, suggesting that it is on the tipping point toward more normal growth.

“The bank expects that strong increases in U.S. business and residential investment will particularly benefit the sectors of Canada’s export market that have lagged so far, notably machinery and equipment and wood products,” Poloz said in a speech last week.

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