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Syncrude's Mildred Lake oil sands upgrader vents into overcast skies north of Fort McMurray, Alta., on May 27, 2014.

Amber Bracken/The Globe and Mail

Economists at Toronto-Dominion Bank expect that low oil prices will continue to weigh on Canadian economic growth, corporate profit and employment levels this year, but the stronger U.S. economy, weak Canadian dollar and low interest rates should provide an offset.

The result: A forecast for subpar growth of just 2 per cent in 2015 and 2016 – unchanged from an earlier forecast – with the unemployment rate rising to 7 per cent by the end of this year and hovering there for some time.

But the first quarter could be a shocker, with growth expected to dip to just 0.5 per cent, at an annualized pace, down from an earlier forecast of 1-per-cent growth.

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"The data in the fourth quarter of 2014 gave us a sneak peak of what is in the pipeline, and we expect growth in output, income and employment to continue to soften through the first half of 2015, before improving gradually along with oil prices," the economists said in their quarterly economic update.

The update contains a few notable changes from the last economic outlook, published in January. Then, the TD economists expected that the Bank of Canada would lower its key interest rate again in March, after it surprised observers with a rate cut in January.

The central bank left its key rate unchanged, though, and now the economists believe the Bank of Canada will stay on the sidelines until the end of 2016, especially if the second half of 2015 shows a modest rebound from a weak first half. The low rates should provide support to the housing market.

They are also more specific about the downside risks in the price of oil. They believe the price could continue to soften, heading toward $40 (U.S.) a barrel from a current price of about $47, as global supply outpaces demand by about 1.5 million barrels per day. But the price should recover, averaging about $65 a barrel in 2016.

"With crude oil prices still vulnerable to further declines over the near term, a recovery in corporate profits and non-residential investment is unlikely until the tail end of 2015," the TD economists said. "Furthermore, prospects for most other commodity prices – notably natural gas – are unlikely to provide much support to the overall corporate bottom line."

The energy sector will react by slashing capital spending by 30 per cent in 2015. Yet oil output should rise between 3 per cent and 5 per cent this year, with the average cost of producing oil still below prevailing market prices.

Low energy prices will save Canadian consumers about $800 each this year, on average – but the higher cost of imported goods, due to the weaker Canadian dollar, will claw back about $600 of that.

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TD economists don't expect much improvement here. If the Federal Reserve starts to hike U.S. interest rates while the Bank of Canada stay put on monetary policy, the economists believe that the Canadian dollar could slide to about 75 cents against the U.S. dollar, down from nearly 80 cents today.

"This is equivalent to a 20 per cent decline in the value of the dollar relative to its recent peak of 94 US cents in mid-2014, and will give a boost to growth and competitiveness in Canada's manufacturing and tourism sectors," the economists said.

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