Improvements in U.S. Credit Markets May Boost Economic Growth in Canada, according to TD Economics

TORONTO, Jan. 18 /CNW/ - TORONTO -- Despite a chilly North American winter, U.S. credit markets may be seeing an early spring thaw. That spells good news for Canada, whose economic prospects are so intricately tied to those of its southern neighbour.

"What we are beginning to see in terms of credit growth in the United States suggests that financial markets may well be underestimating the strength of the U.S. economy," said TD Chief Economist, Craig Alexander. "Stronger-than-expected growth in the U.S. would be a boon to the Canadian economy," he adds.

In a report released today by TD Economics, Alexander highlights a number of positive developments in U.S. credit markets over recent months. According to an October survey by the Federal Reserve, U.S. banks are reporting a greater willingness to lend to consumers today than at any point since the recession. This is due in large part to improvements in credit quality: delinquency rates on consumer credit and commercial and industrial loans have fallen close to a percentage point from peak levels over the last few quarters. Banks' renewed appetite for lending has translated into increased activity in the market for unsecured consumer credit - such as credit cards and student loans -which unlike other forms of credit such as mortgage loans, are backed only by the lender's faith in the borrower's ability to repay. This market seized up during the recession, with unsecured lending falling 7.4% from its peak reached in 2008. But the data suggests that unsecured lending is growing once again. Adjusted for charge-offs - a one-time hit that banks take on delinquent accounts that they deem unrecoverable - total consumer credit is up over 3.0% from a year ago.

The potential for improving credit conditions, in combination with fiscal stimulus to feed into a more robust U.S. recovery was not lost on the Bank of Canada. In their interest rate announcement this morning, the Bank noted that U.S. economic growth had picked up more than previously anticipated. Further details of the Bank's global growth forecasts will be released Wednesday. An upgrade to the U.S. forecast from their current forecast of 2.3% is likely.

For their part, TD Economics is projecting U.S. growth of slightly above 3.0% over the course of 2011 and 2012. But, this estimate is conservative, as it assumes that access to credit improves gradually over the coming year. "A sharper-than-expected increase in the availability of credit and credit quality could unlock pent-up demand by U.S. consumers and businesses and lead to growth that exceeds expectations," said Alexander.

The good news story in the U.S. means that Canada's strong economic recovery may get stronger yet. Canada's economy is heavily oriented toward trade, with exports comprising 30% of the country's gross domestic product. Exports to the United States, Canada's largest trading partner, make up the lion's share of that number. According to Alexander, strength in U.S. demand is fundamental for the prospects of many Canadian industries, - autos, forestry, energy, and manufacturing -, all of which tend to be export-oriented. "As Canadians we don't always like to admit it," he said, "but the reality is that in terms of economic activity, Canada is still tied in some ways to the United States. Positive developments south of the border will inevitably be felt here."

TD Economics forecasts Canada's economy will grow at an annual rate slightly above 2.5% in 2011 and 2012, with an upside risk from a stronger U.S. economy.