09:13 AM EDT, 08/14/2024 (MT Newswires) -- The Canadian economy narrowly avoided a technical recession in 2023 and has since shown surprising resiliency over 2024 -- final domestic demand was up 2.9% q/q in Q1, noted TD.

Canada's debt-constrained consumer has demonstrated a renewed willingness to spend on 'nice-to-haves' like dining out at restaurants, travel, and entertainment. At the same time, population growth has well-outpaced expectations, which has created a bigger base for spending, wrote the bank in a note to clients.

How long this can last is uncertain, stated TD. New government restrictions on non-permanent residents (NPR) are intended to curb population flows in the coming months, which could act as a headwind for spending.

Not to mention that a significant number of mortgage holders will face higher rates at renewal of 200-250 basis points, even with a central bank cutting interest rates.

With consumer spending expected to slow going forward, the bank is optimistic that a mixture of business investment, government spending and increased exports could be a counterweight. Whether it be shovels in the ground on new EV/battery plants, the development of purpose-built rentals, or increased oil exports thanks to the expanded Trans Mountain pipeline, there are levers to create a much-needed growth offset, pointed out TD.

The big risk to this view is related to the outcome of the United States election, according to TD. Canada signed the USMCA deal under the prior Donald Trump presidency, but this doesn't shield it from renewed trade disputes.

This will be of greater importance since Canada has increased imports from Mexico and exports to the US since 2020 while reducing exposure to China. As such, Canada is more vulnerable to protectionist trade policy from the US, which could limit the expected gross domestic product (GDP) offset from Canadian business investment and trade, added the bank.