TD Bank 2012 Annual Report Download - page 25

TD BANK GROUP ANNUAL REPORT 2012 MANAGEMENT’S DISCUSSION AND ANALYSIS 23
ECONOMIC SUMMARY AND OUTLOOK
The Canadian economy has recently suffered a slowdown in growth.
After expanding at an average pace of only 1.8% per quarter on an
annualized basis over the first half of the year, real GDP growth cooled
to a mere 0.6% (annualized) in the third quarter of 2012. Exports
continued to struggle in the July – September period, declining by a
significant 8%; its largest quarterly setback since the recession. Business
investment also dropped during the period. Although consumer spend-
ing rebounded, it only managed to bring the average gain recorded
since the start of the year to a muted 2%. In addition to elevated debt
levels, households have faced a slowing pace of hiring in recent
months. In the first half of the year, the six-month moving average level
of job growth had hovered around 25,000 per month. That has since
been halved to just 12,000 as of October.
Much of Canada’s recent economic malaise has been international
in nature. The recession in the European Union and slowdown in China
have been factors holding back Canadian manufacturing exports.
Meanwhile, uncertainty over the U.S. fiscal cliff has put a substantial
dent in both consumer and business confidence stateside. With the
U.S. general elections now over, negotiations can now begin on avert-
ing what could potentially push the U.S. (and possibly Canada) back
into recession. We anticipate that a compromise will be made ahead of
the January 2013 deadline and that a combination of tax increases and
spending cuts should reduce U.S. real GDP growth by approximately
1.5 percentage points in 2013.
In turn, this should decrease Canadian economic growth by
approximately 0.5 to 0.7 percentage points. However, a resolution
will contribute greatly to improvements in both consumer and busi-
ness sentiment and should help both economies return to a stronger
pace of economic growth as 2013 progresses. In Canada, the export
sector is likely to add modestly to economic growth in the months
ahead, while consumers are expected to continue spending, albeit in
a restrained manner. Business investment should improve going
forward, supported by a continued low level of interest rates which
we expect to persist over the medium term. The housing market has
begun pulling back with home prices declining modestly over the last
few months. We anticipate a price adjustment of around 10% over
the next 2 to 3 years, although the profile over that time period
could be uneven, with periods of weakness followed by small
rebounds, and vice-versa. Ultimately, we anticipate real GDP growth
to return to a healthier 2% pace by the end of the year, with the
unemployment rate gradually trending lower in the quarters ahead.
There are several downside risks that TD Economics highlights.
While the European Union has made significant progress towards
containing its crisis, many hurdles lie ahead and the region’s troubles
will continue to hang over the global economy. In the U.S., an agree-
ment to avert the fiscal cliff to deal with the longer-term deficit chal-
lenge is not assured. Lastly, household debt in Canada remains the
biggest domestic challenge. Progress has been made in slowing the
pace of debt accumulation among households; however, it still exceeds
the pace of income growth, suggesting that we could still see some
further rise in the debt-to-income ratio from its current record level. In
turn, the eventual normalization in interest rates could potentially lead
to a more significant slowdown in housing and economic activity than
we currently anticipate.
NET INCOME – REPORTED BY BUSINESS SEGMENT
(as a percentage of total net income)
50%
40
20
10
30
0
11 12 11 12 11 12 11 12
NET INCOME – ADJUSTED BY BUSINESS SEGMENT
(as a percentage of total net income)
50%
40
20
10
30
0
11 12 11 12 11 12 11 12
Canadian Personal and Commercial Banking
Wealth and Insurance
U.S. Personal and Commercial Banking
Wholesale Banking