TD Bank 2002 Annual Report Download - page 26

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HOW WE PERFORMED IN 2002
The Canadian and U.S. economies ended 2002 on a soft note
and 2003 opened in similar fashion. Until mid-2003, the
Canadian economy is forecast to continue to grow faster than
the U.S. The second half of the year is likely to see stronger
economic growth, particularly in the United States, where U.S.
business investment will finally recover with enough vigour to
offset some loss in momentum of household spending which had
been leading growth for some time. Improved U.S. economic
growth expected to be driven by the cumulative effect of the very
low interest rates in place since late 2001, stimulative fiscal
policy and progress in the elimination of some of the imbalances
that developed in the recession in 2001.
The roots of Canada’s superior economic performance go back
several years. Canada didn’t experience as strong an investment
boom as the United States in the late 1990s, so there was less
retrenchment in this area in Canada in the slowdown of 2001.
Moreover, business investment in Canada began to recover in the
second quarter of 2002. A relatively smaller high-tech sector and
a relatively larger oil and natural gas production sector in Canada
acted in Canada’s favour in recent years. Economic growth held
up much better in Canada in 2001 and revived early in 2002.
These differences translated into a sharper fall in corporate
profits in the United States and little in the way of recovery
through 2002. In contrast, corporate profits in Canada came
back sharply in the first quarter of 2002.
Household spending was strong in both economies in 2002.
In Canada, it was supported by the creation of approximately
560,000 jobs. This was one of the largest annual increases in
the past 25 years. The strong gains in employment and low
mortgage interest rates provided strong support to housing
markets and housing starts exceeded the 200,000 mark last
year – the highest level since 1989. Neither employment growth
nor housing activity is expected to be as strong in 2003, but the
softening in activity is forecast to be gradual, with housing starts
dropping to around 185,000 units.
The U.S. Federal Reserve and the Bank of Canada have stated
their intentions on several occasions to move rates up to less
stimulative levels when economic conditions warrant. In fact, the
Bank of Canada began this process in the spring of 2002, but
paused later in the year. Both central banks are likely to wait
until mid-year before they begin to boost rates, as both will want
to be certain that their respective economies are on a
strengthening and sustainable growth path. Each central bank is
expected to tread fairly lightly in raising rates with the result that
short-term interest rates will still be providing stimulus to growth
in both countries into 2004. With virtually no spare capacity in
the Canadian economy, a better than expected economic
performance in Canada would push the Bank of Canada to speed
up its tightening.
A pickup in world economic growth should provide some
improvement in non-energy commodity prices that in turn should
provide some lift to the Canadian dollar. Additionally, the positive
spreads between short-term interest rates in Canada and the
United States should prove supportive of the Canadian currency.
Nevertheless, geopolitical uncertainty may act as a restraint.
Thus, the Canadian dollar is unlikely to exceed 67 U.S. cents by
the end of 2003.
The economic outlook