The bank said the Canadian economy slowed in the second quarter and possibly shrank, and the concern is the current third quarter could also be marked by a decline. A recession is defined as two consecutive quarters of decline in real gross domestic product (GDP).
“If a contraction is realized, worries that Canada’s economy has already entered a recession will increase, especially in light of the financial market turmoil that erupted midway through the third quarter,” TD said in its report.
TD Economics said the U.S. will likely avoid a recession in the coming quarters, but the concern is if that forecast is incorrect, Canada would also likely suffer. It put the odds on a recession in the U.S. at 40%.
“The U.S. has a razor thin economic cushion to absorb any further deterioration in consumer and business confidence,” said the report.
TD Economics also warned that Canada’s household debt has become “excessive,” with an estimated household debt-to-income ratio of 147% in the second quarter. The report said a ratio of 138% to 142% is considered “appropriate.” Based on current spending, the debt-to-income ratio will rise to 150% by the end of 2012, then 151% by 2013, said the report.
And while reports this week by Royal Bank of Canada and the Canada Mortgage and Housing Corporation were upbeat the housing market and economy due to low interest rates, TD Economics expressed concern.
“Low interest rates for longer could boost consumer spending and real estate by more than anticipated, leading to a larger consumer debt problem and further overvaluation in Canadian real estate,” said the report.
TD Economics said it’s possible the Bank of Canada will wait, like the Fed in the U.S., in waiting until 2013 to raise interest rates.
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