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Thousands of shoppers attend the Toronto Premium Outlets mall in Milton, Ont.

J.P. MOCZULSKI/The Globe and Mail

Toronto-Dominion Bank raised its outlook for Canadian economic growth for the third quarter on Wednesday and said consumer spending will be the driving force – not exports and business spending, as it had thought earlier.

In a quarterly update to its economic forecast, the bank said it expects Canada's economy to grow at an annual pace of 2.3 per cent in the July-September period, compared with a June forecast for growth of 2 per cent.

TD still expects full-year growth will be 1.7 per cent in 2013 and 2.4 per cent in 2014.

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"Economists in Canada are guilty of sounding like broken records, repeating the need for Canada's growth to shift from relying on heavily indebted consumers to stronger exports and business investment," the bank said in its report.

"While the process has started, U.S. economic growth looks slightly softer in the near term, making the transition uneven. In the meantime, the consumer and the housing market have shown more momentum, helping to keep the economy puffing along."

The U.S. economy faces several challenges in the coming months, including another congressional showdown over the federal government's budget and borrowing.

A near-term issue is a temporary spending bill required to keep the U.S. government fully open after the start of the new budget year. The government also reaches its borrowing limit, or debt ceiling, early in October.

In addition, unexpectedly soft U.S. economic data have convinced the U.S. Federal Reserve to delay its plan to start withdrawing some economic stimulus until it sees further confirmation of improvements in the economy.

TD has reduced its U.S. economic growth forecast for all of 2013 to 1.6 per cent and 2.6 per cent in 2014, compared with its June forecast for growth of 1.9 per cent for this year and 2.8 per cent next year.

"The fundamentals supporting economic growth will withstand the impact of rising rates, but it will slow near-term economic momentum," TD said.

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The Canadian economy grew 1.7 per cent at an annual rate in the second quarter as flooding in Alberta and a construction strike in Quebec took their toll and most economists expect some bounce-back in the third quarter.

However, TD noted that the extent and timing remains uncertain.

The Bank of Canada estimated in July that the economy would grow at a rate of 3.8 per cent in the third quarter; however the central bank also predicted growth of just 1 per cent in the second quarter.

Bank of Canada Governor Stephen Poloz has sounded a mostly upbeat tone on the Canadian economy, suggesting that it is on the tipping point toward more normal growth.

"The bank expects that strong increases in U.S. business and residential investment will particularly benefit the sectors of Canada's export market that have lagged so far, notably machinery and equipment and wood products," Mr. Poloz said in a speech last week.

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