TD Bank has lowered its outlook for the Canadian economy next year to 1.7 per cent growth, followed by 2.2 per cent in 2013.
The bank’s latest forecast, issued Wednesday, knocked its 2012 prediction down by 0.2 percentage points from its last look ahead in September, and the following year’s by 0.4 points.
TD blamed Europe for the direr outlook.
"An escalation of the European financial crisis and a deepening recession in the region will exert a significant drag on the global economy," the bank said.
"Canada will be negatively impacted through weaker commodity prices, confidence and export growth."
TD predicted the unemployment rate — now 7.4 per cent — will increase, to a range of between 7.5 and eight per cent.
Although TD expects Canadian economic activity will improve in late 2012 and into 2013, "high household and government debt, rising interest rates and slowing housing activity will limit the speed of Canadian real GDP growth."
Euro crisis seen further eroding financial system
In a global outlook also issued Wednesday, the bank had stark predictions for Europe’s unfolding debt crisis.
It said Greece will very likely default in the first half of next year, with the risk that that will trigger credit default swaps, or financial derivatives meant to insure banks against bad loans, something TD said will lead to a weakening of the global financial system.
Under the bank’s scenario, a Greek default would spur European leaders into taking "bold actions," including having the European Central Bank buy the bonds of troubled member countries "on a major scale," and shoring up banks.
"Ultimately Germany and the ECB will likely accept that the central bank must become a lender of last resort," it said.
That will lead to "further progress politically towards a fiscal union, although it will take years to ultimately materialize," the bank predicted.