Entitlement reform key to recovery: TD economist

By Dean DiSpalatro | January 22, 2013 | Last updated on January 22, 2013
4 min read

How advanced economies deal with government debt will shape the economic and investment landscape for the next 10 years, Craig Alexander, senior vice president and chief economist, TD Bank Group, said at a Strategy Institute Summit in Toronto.

Governments have made entitlement promises they can’t make good on, especially with aging populations. Sweeping entitlement reforms will be necessary in much of the developed world if governments are to get their fiscal houses in order.


Alexander says the problem is particularly acute in Europe, where the financial crisis will continue for a while.

“Part of the challenge is the policies that would actually solve the crisis – the creation of a banking and fiscal union – are ones that politicians in Europe do not want to put in place.”

On the one hand, German politicians have to convince constituents that their hard-earned tax dollars will be siphoned off to cover the fiscal irresponsibility of countries like Greece, Portugal, and Spain.

“On the other end are the recipient countries: if they’re going to receive financial support primarily from Germany, they have to allow the Germans to dictate what they can and can’t do with their finances. They are giving up sovereignty. Europe has fought wars over things like this,” Alexander explains.

Nonetheless, Europe is moving incrementally in the right direction, he adds.

And although Canada doesn’t do much trade with the Eurozone, troubles there still affect us negatively: “If Europe lost control over their financial crisis, leading to sovereign debt defaults, we would have a global financial problem that would impact Canada,” Alexander says.

United States

Back on our side of the pond, the U.S. economy is on the mend, Alexander says.

“A lot of the legacies of the financial crisis are finally abating. The most positive sign is the stabilization of the housing market. When housing prices rise people feel wealthier and they’re more likely to go out and spend. About 20% of all retail spending is on housing-related items, so it’s a virtuous circle.”

Another positive for the U.S. economy is that consumer credit is flowing again.

“There’s a lot of pent-up demand in the United States. Consumers have tightened their belts for a long time and the deleveraging is finally running its course,” Alexander says, adding the auto sector may be one of the areas where this demand is unleashed.

Alexander also suggests business investment may take a turn for the better. Corporations are sitting on heaps of cash: profit growth has been strong but companies haven’t been spending because of political dysfunction in Washington and a high-risk global environment.

“You’ll see businesses start to put more of their balance sheets to work. And if they do they’re going to create a lot of economic growth and jobs,” he says.

The fiscal cliff bill only addressed the tax side of the equation, putting off the spending issue. Alexander suggests the odds the U.S. will default on its debt are “pretty close to zero.”

But an “ugly and protracted” political rumble on the way to a new agreement may lead the credit rating agencies to downgrade the U.S. government again.


Our recession was milder and the recovery stronger. Alexander notes the unemployment rate here has fallen because we’ve created jobs; whereas in the United States jobless numbers have improved largely because many of the unemployed have completely given up looking for work, taking them out of the calculation of the U.S. unemployment rate.

Alexander suggests consumer spending, a strong rebound in real estate, and government stimulus propped the economy up during the initial stages of Canada’s recovery.

But looking ahead, the key drivers of growth will be exports and business investment.

“Improving global demand will lead to stronger Canadian exports. In terms of business investment, it’s the same story as in the U.S. There’s a lot of pent-up demand for investment and very strong balance sheets. Businesses have every reason to invest. The thing that’s been restraining them is confidence,” he says.

Investment outlook

Bonds will beat inflation and will be useful for wealth preservation, not accumulation.

“Corporate bonds have the advantage because corporations have strong balance sheets; default risk is relatively low, and they provide a higher pick-up in yield,” Alexander says.

On the equity front the outlook is for moderate growth in both Canada and the United States.

“We expect mid-single-digit to high-single-digit profit growth. If you add on dividends, the economic fundamentals over the next couple of years support a total return of close to 8%. But I would stress this doesn’t say anything about changes in price-to-earnings multiples, and I do think there could be a lot of volatility in the market as we work through a lot of the political risks,” like the looming debt ceiling fight in the U.S.

Dean DiSpalatro