TD Bank upgrades outlook for Canadian economic growth for 2012

TD Bank is upgrading its outlook for the Canadian economy for the first time in a year, boosted by an improved forecast for the global economy. But the bank warns that concerns at home remain amid rising debt levels and government deficits.

TD said that it expects the economy to grow 2.2 percent in 2012, up from a December forecast of 1.7 percent.

The improved outlook comes as efforts to contain the European financial crisis appear to be moving ahead with the Greek bailout and restructuring of that country’s debt.

“With some of the dark clouds overhanging the global economy starting to dissipate, and commodity prices strong, Canada’s export-oriented businesses are expected to lead the way,” the bank said in its report.

“The Canadian business sector, which has been paying down debt and hoarding cash in recent years, is likely to take advantage of the nation’s much-improved business tax climate to retool and raise productivity levels.”

However, TD was cautious about Canada’s near- to medium-term economic prospects at home, as governments look to reduce spending and household debt remains high.

“Domestically, growing household credit imbalances remain the number one medium-term risk to Canada’s economic fortunes,” TD said.

The bank also noted that tighter fiscal policy in Canada will make growth difficult.

“In recent weeks, finance ministers at both the federal and provincial levels have been signalling their intent to stay the course on deficit reduction, and prospects for particularly bold upfront actions have increased to some extent,” the bank said.

TD noted that its outlook for the job market remained unchanged, with a prediction that the jobless rate will hold around 7.5 percent this year before dropping to seven percent in 2013.

The revised outlook came as Canada’s banking regulator issued new draft guidelines for home mortgage underwriting.

“Although financial institution mortgage portfolios in Canada continue to perform well, a number of vulnerabilities in the financial system exist, including high household indebtedness,” said Mark Zelmer, the Office of the Superintendent of Financial Institutions’ assistant superintendent. “OSFI is acting in an effort to prevent these vulnerabilities from evolving into problems for the financial system.”

Canada’s banking system avoided a mortgage meltdown like the one seen in the U.S. thanks in large part to stricter lending conditions, but household debt has been near record levels in recent months.

Both Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney have raised household debt as a risk for the Canadian economy.

Statistics Canada reported that household credit market debt, which includes credit cards, mortgages and loans, rose in the fourth quarter, though the pace of borrowing slowed.

Credit market debt-to-personal disposable income in Canada backed off to 150.6 percent from 151.9 percent in the quarter, as gains in income outpaced debt.

In its report, TD suggested the debt-to-income ratio could rise as high as 160 percent by late 2013, a similar level reached in the U.S. and Britain just before the financial crisis.

“Virtually non-existent wage growth is expected to keep household income gains in check, prompting many consumers to continue financing purchases through low-cost borrowing,” the bank said.