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- Problems in credit markets have proven longer lasting and will have a greater impact than initially thought. - Tighter credit conditions in the U.S. will aggravate weakness in U.S. real estate markets, leading to a significant slowdown in American consumer spending. - U.S. economic growth forecast has been cut by more than half a percentage point to 1.8 percent in 2008. However, economic conditions should improve in late 2008 and throughout 2009. - Expectations that the global economy can decouple from a U.S. consumer slowdown are likely to be disappointed. World economic growth is expected to slow by a full percentage point from 5.2 percent in 2007 to 4.2 percent in 2008. - Canada's economy will not be immune. A strong Canadian dollar, weaker U.S. and overseas demand, and some cooling in domestic economic conditions will result in Canadian economic growth of 1.9 percent in 2008, recovering to 2.5 percent in 2009. - The Bank of Canada is expected to cut rates again in January, while the U.S. Federal Reserve has two quarter point rate cuts to come. - The Canadian dollar is forecast to average 97 U.S. cents in 2008, but trend down to 94 U.S. cents over the course of the coming year. TORONTO, Dec. 13 /CNW/ - The dominant economic theme for 2008 will be significantly slower economic growth in the United States, Canada and around the globe, according to the December issue of the TD Quarterly Economic Forecast. "Since our last forecast in September, we have become less sanguine about the near-term economic outlook. The problems in credit markets have proven longer lasting and will have a greater impact than initially thought, both in the U.S. and internationally," said TD's Deputy Chief Economist Craig Alexander. In the U.S., the fallout from the problems in credit markets, which intensified once again in November, will aggravate the weakness in real estate markets. High inventories of unsold homes and weak demand for real estate are likely to lead to a 5 percent decline in U.S. existing home prices in 2008. The negative wealth effects from housing and the likelihood of tighter credit conditions will dampen consumer spending in a significant way. "This has led us to scale back our expectations for U.S. economic growth by more than half a percentage point to a modest 1.8 percent in 2008," remarked Alexander. Given this backdrop, the Federal Reserve is expected to cut rates by a further 50 basis points in early 2008. While this will make monetary policy more stimulative, TD Economics warn that a lower fed funds rate will not resolve the strains in the financial system and it will only help to temper the coming slowdown in consumer spending and the weakness in real estate. "We still don't believe that a recession is the most likely scenario, but the risks have become acute," commented Alexander. U.S. real GDP is expected to be virtually flat in the fourth quarter of 2007 and advance by 0.6 percent in the first quarter of 2008. "Clearly, it would not take much for the downside risks to lead to back-to-back contractions in real GDP that would meet the definition of a technical recession," observed Alexander. However, TD Economics is convinced that the credit and housing problems will be resolved with time, and that is why economic conditions are forecast to improve in the second half of 2008 and economic growth is expected to rebound to 2.8 percent in 2009. "While there has been much talk about the ability of the global economy to decouple from a U.S. economic slowdown, this assumption is likely to be tested and debunked in the coming quarters," said Alexander. The correlation between overseas economic growth and U.S. consumer activity remains strong. This implies that the coming tightening in American purse strings will act as a major dampening factor on many economies, particularly in Japan and the newly industrialized Asian economies. Meanwhile, Europe is being hit by the fallout from the credit crunch and exports from the region are likely to soften in the coming quarters. As a result, TD Economics is forecasting that world economic growth will drop by a full percentage point from 5.2 percent in 2007 to 4.2 percent in 2008. Canada will be buffeted by these trends. Exports will be dampened by softer demand in the U.S. and overseas. Manufacturing will also struggle with a Canadian dollar that will average 97 U.S. cents in 2008 and average 92 U.S. cents in 2009. Slower inventory accumulation will also constrain economic growth over the next couple of quarters. Finally, the fallout from the on-going abnormal state of money markets in Canada will also have a modest adverse impact on the economy, but the consequences are expected to be significantly less than in the U.S. and Europe. Canadian housing markets are projected to cool in the coming year, with housing starts edging down from an average of 230,000 in 2007 to 210,000 in 2008 and resale home prices are expected to advance by a more moderate 6.3 percent in the coming year. Finally, Canada cannot count on rising commodity prices to provide an offset, as slowing global economic growth will lead to a modest pullback in raw material prices. As a result, while domestic demand will remain solid, Canadian economic growth will not be terribly different than that in the U.S. in 2008, with Canadian real GDP advancing by 1.9 percent, before picking up to 2.5 percent in 2009. The prospects for weaker economic conditions is expected to lead the Bank of Canada to cut rates by a further quarter point on January 22nd, but the monetary authority will likely leave rates on hold thereafter. Although economic growth will prove modest over the next few quarters and inflation will dip to well below 2 percent in mid-2008, very little economic slack will develop, as best illustrated by the expectation that the national unemployment rate will hover near 6 percent, and inflation will quickly return to the Bank's 2 percent target in early 2009. "The bottom line is that the Canadian economy is on the cusp of several quarters of weak economic growth, but conditions should improve once credit markets normalize and the U.S. housing correction has run its course," concluded Alexander. For further information: Craig Alexander, VP & Deputy Chief Economist, (416) 982-8064; Beata Caranci, Director of Economic Forecasting, (416) 982-8067

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