TD Bank 2009 Annual Report Download - page 34

TD BANK FINANCIAL GROUP ANNUAL REPORT 2009 MANAGEMENT’S DISCUSSION AND ANALYSIS30
NET INCOME BY BUSINESS SEGMENT
(as a percent of total net income)
60
70%
40
50
20
10
30
0
07 08 0907 08 0907 08 0907 08 09
Canadian Personal and Commercial Banking
Wealth Management
U.S. Personal and Commercial Banking
Wholesale Banking
Growth in the U.S. economy is predicted to average 2.4% in 2010,
before strengthening to 3.3% in 2011. This level of growth is much
lower in comparison to the sharp rebounds that followed the early
1970s and early 1980s recessions. The moderate economic growth
combined with only gradual improvement in credit flows means that
inflation should not be problematic in the coming year, giving the
Federal Reserve flexibility to leave interest rates on hold for some time
yet. On the fiscal front, large deficits and mounting debt pose a signif i-
cant
challenge; however, this cannot be addressed while the U.S.
economy is fragile.
Although the Canadian banking system proved far more stable than
in any other major advanced economy during the global recession,
Canada’s heavy export reliance and spill over from the credit crunch
still meant that the domestic economy was impacted during the global
downturn. Now it should follow the global recovery, with real GDP
growth of 2.5% in 2010 and 3.1% in 2011. One of the key restraining
factors on Canadian growth will be the export sector. Although it is
improving, the sector will remain challenged by a further appreciation
in the Canadian dollar (which is expected to touch parity before pulling
back). However, the domestic economy will remain the foundation for
growth, as evidenced by a housing market that has already rebounded
with existing home sales having already returned to pre-recession levels
and with prices likely to post a 5 – 7% gain in 2010.
ECONOMIC SUMMARY AND OUTLOOK
In September 2008, the global financial system came under extreme
distress in the wake of the collapse of a key U.S. financial institution
amidst ongoing global bailouts of financial and insurance firms. Over
the subsequent months, the transmission mechanism between the
financial system and real economy proved almost instantaneous, bring-
ing deep economic contractions in late 2008 and early 2009. The
extreme interconnectivity of the global economy also became evident,
as the most synchronous world recession since the 1930s unfolded.
Global policy makers responded with deep interest rate cuts,
massive coordinated fiscal stimulus, and creative actions to help stabilize
the global financial system. Although economic challenges continued,
these actions paid off. By mid-2009, signs were materializing that the
worst of the contraction had passed. A number of Asian and European
economies rebounded in the second quarter of 2009, while data
pointed to economic growth in the United States and Canada resuming
in the third quarter.
The current focus is on the shape of the recovery. Around much of
the globe, inventories decreased to remarkably low levels during the
recession, implying that even modest improvements in demand will
lead to significant gains in production. Real estate markets, which
were the epicentre for the financial problems in the U.S. and the U.K.,
are stabilizing, and given the low levels reached, even a modest
improvement could bring a significant boost to economic growth.
Previously announced fiscal stimulus programs will continue to be
a contributor to economic growth in the coming quarters, while the
impact of record low interest rates should continue to encourage
growth. Unemployment rates are likely to continue to rise in the near
term, but this is a traditional lagging indicator and some of the rise
will reflect workers re-entering the labour market, which is a positive.
Improved consumer and business confidence should also be reflected
in a greater willingness to spend and invest. This is how economies
have climbed out of recessions before, and it will play out again.
However, the pace of economic recovery is likely to prove gradual
compared to past recessions. In the U.S., the financial system is being
repaired, which will take considerable time. Loan losses will continue
as foreclosure rates are expected to further increase, and this will likely
occur amidst ongoing recapitalization and deleveraging of financial
institutions. Further weakness in commercial real estate is anticipated.
Another systemic shock to the financial system is highly unlikely, but
the wounds of the credit crunch and the economic downturn will be
slow to heal. The deleveraging of the global financial system is also not
complete and the ability to securitize loans will not return to its prior
level. Credit growth should improve, but not in a way to fuel booming
economic conditions. The American household has experienced a
significant loss of wealth, and this is likely to induce a tendency towards
increased savings and a slower trend rate of consumer spending
growth during the recovery.