Archive for the ‘TD Economics’ Category

Perspective: Gridlock in America

November 10, 2011 Comments off

Perspective: Gridlock in America (PDF)
Source: TD Economics

All eyes are on the on-going European financial crisis. This is understandable, as it represents risk number one for the global economy and financial markets. However, the focus on Europe is drawing attention away from the fiscal risk playing out in America.

Washington is in the grips of extreme political gridlock. Congress has been unable – or perhaps unwilling is a better description – to pass a budget this year. The U.S. government is currently operating under a temporary “continuing resolution” that is set to expire on November 18th. During the summer, the parties had such difficulty in reaching a deal to raise the statutory debt ceiling that Standard & Poor’s downgraded the federal government’s long-term credit rating, citing political instability as a key motivating factor. While the debt ceiling was ultimately lifted, Washington could still not agree on the terms of offsetting fiscal consolidation. They agreed to around $900 billion in deficit reduction, but they could not find common ground on a remaining $1.5 trillion of fiscal savings over the next decade. With the Treasury department warning that America could not pay its bills if the negotiations continued, the political system dodged. They raised the ceiling and set up the Joint Select Committee on Deficit Reduction (JSC). The JSC – sometimes referred to as the Supercommittee – is composed of six Democrats and six Republicans. It has been tasked with finding the remaining fiscal savings and issuing a recommendation by November 23 of this year.

Now, a rational approach to fiscal adjustment would be to back-end load the fiscal pain. In other words, don’t apply significant restraint in the near term when the economy is weak – do the bulk farther down the road when one would expect the economy to be stronger. This could well be what the JSC decides should they be able to reach an agreement. However, in order to incent the bipartisan negotiators to reach an agreement, the debt ceiling legislation included potentially steep near-term consequences for inaction. If legislation with $1.2 trillion in savings over the next decade is not enacted by January 15th of next year, this would trigger automatic spending cuts. The amount of the automatic cuts will depend on how much savings the JSC finds in their deliberations. For example, should the JSC find $600 billion in cuts, the remaining $600 billion would come automatically beginning in 2013. In the event that the JSC fails to reach an agreement and the full $1.2 trillion in cuts is triggered, the automatic cuts would amount to a steady $113 billion annual reduction in primary spending starting in 2013 and running over the next nine years.

Moderation in Store for the Canadian Housing Market

July 25, 2011 Comments off

Moderation in Store for the Canadian Housing Market (PDF)
Source: TD Economics

Canada’s housing market appears set for a moderate correction, with resale activity and average prices projected to decline by roughly 15.2% and 10.2%, respectively, over the next two years. A combination of more subdued job and household income growth, rising interest rates, the recent tightening in borrowing rules for insured mortgages and fewer first time home buyers are expected to be the chief culprits behind the slowdown. With most of these drivers expected to remain supportive to housing demand in the very near term, we anticipate that the brunt of this adjustment will take place in 2012 and into 2013.

This overall picture hides considerable variations in regional performances. Among the twelve major markets profiled in this report, Vancouver and Toronto look poised for larger-than-average declines over the next few years, reflecting in part their exposure to the condominium segment, which appears particularly ripe for a correction. At the other end of the spectrum, prospects are considerably better for housing markets in Calgary, Edmonton and Regina. Still, no market is likely to experience a housing boom over the medium term.

Answers to Common Questions on Canadian Inflation

June 9, 2011 Comments off

Answers to Common Questions on Canadian Inflation
Source: TD Economics

When we speak to clients, few economic indicators generate the same number of questions as inflation. Why does the central bank strip away gasoline prices from its chosen measure of consumer price inflation? How is it that Canadian prices are higher than U.S. prices when the currency is at parity with the U.S. dollar? In particular, we find there is often skepticism that the measured inflation rate — currently 3.3% on a year-over-year basis — accurately captures the true increases in the cost of living. In this report, we attempt to provide answers to some of the most frequent questtions pertaining to trends in consumer prices.

Small Businesses Will Reclaim the Driver’s Seat Behind the Economic Engine

May 12, 2011 Comments off

Small Businesses Will Reclaim the Driver’s Seat Behind the Economic Engine (PDF)
Source: TD Economics


  • For small and medium-sized businesses, the Great Recession was a horrible house guest — it arrived early and stayed late.
  • SMEs lagged the recovery due to a high concentration in the hardest hit sectors and tight credit conditions that were made worse by having collateral tied to real estate. One in Five SMEs borrow against residential real estate for business.
  • Of the two influences, the mix of industry concentration seems to be the bigger issue holding SMEs back. Fortunately, the recovery is now broading out beyond the manufacturing sector, allowing SMEs to grab hold.
  • The prospects for SMEs should continue to brighter an the recovery extends this year and next, because the service sector will become incrasingly engaged.
  • With world growth increasingly driven by non-North American economies, some of the greatest sales growth potential will take place beyond domestic borders. SMEs have made noteable progress in some key emerging markets, a phenomenom that should continue in years ahead.

New Index Identifies Provincial Households Most Vulnerable to Economic Risks

February 11, 2011 Comments off

New Index Identifies Provincial Households Most Vulnerable to Economic Risks (PDF)
Source: TD Economics

The first index to rank the financial vulnerability of households by province was published today by TD Economics. British Columbia, Alberta, Ontario and Saskatchewan households were found to be at greatest risk to negative economic events such as a substantial correction in housing prices, a major disruption in incomes or an unexpected large increase in borrowing rates. Manitoba households are least vulnerable. The Atlantic region and Quebec fall in between. Detailed provincial assessments are included in Assessing the Financial Vulnerability of Households Across Canadian Regions.

The probability of one or more of these negative events occurring in the coming years is relatively low according to TD Economics. However, the Household Vulnerability Index does note that risks related to household finances have been rising broadly across all regions over the past few years, and with higher interest rates on the horizon set to boost the cost of servicing debt, this upward trend in vulnerability is almost certain to continue.

Since 2007, the increasing vulnerability has reflected in large part by the rising trend of household debt relative to income across the country. This development is an indication of the strength in housing markets and real estate related borrowing. More recently, however, there has been growing evidence that many Canadians have been turning to credit as a way to finance consumption rather than invest in their homes.

Despite rising indebtedness, home price increases have supported the asset side of the personal balance sheet ledger. Even more importantly the falling cost of borrowing has been pulling down the share of income households have been shelling out to service obligations. Low interest rates have also helped to keep a lid on the share of vulnerable households in recent years. As such debt-service ratios have been falling and remain in a comfortable range.

+ Assessing the Financial Vulnerability of Households Across Canadian Regions (PDF)


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