Canada's economic growth expected to outperform U.S. in
2007, says RBC Economics
Expects Canadian dollar to weaken
TORONTO, June 22, 2006 — Canada's economic growth
is expected to accelerate to 3.3 per cent in 2006, from 2.9
per cent in 2005 before slowing to a 2.9 per cent pace in
2007, according to the latest economic forecast from RBC Financial
Group.
"Despite inflation concerns and rising interest rates
in North America and elsewhere around the world, tight labour
markets, rising wages and a diminishing drag from net exports
are helping to sustain growth in both Canada and the U.S.
this year," said Craig Wright, vice-president and chief
economist, RBC. "We expect Canada's economic growth to
outperform the U.S. due to rising business investment."
U.S. economic growth is expected to slow to 3.3 per cent
in 2006 from 3.5 per cent in 2005 before slowing further to
2.7 per cent in 2007.
RBC notes that North American consumer spending is expected
to slow as the positive wealth effect caused by higher home
values winds down alongside the softening North American housing
market. The continued cooling of the U.S. housing market will
reduce GDP growth more than in Canada because the Canadian
housing boom began from lower levels relative to the U.S.
According to the report, Canada and the U.S. are experiencing
a revival in non-residential construction that should absorb
resources liberated by declines in residential construction.
As well, North American business investment in productivity-enhancing
technology is expected to improve growth this year and next.
The Bank of Canada raised the overnight rate to 4.25 per
cent in late May, the highest level since August 2001, and
signalled that monetary policy was now consistent with meeting
the central bank's stated medium-term inflation targets. Interest
rates in Canada are getting close to their cyclical peaks
with limited increases in core inflation expected. RBC forecasts
that the Bank of Canada will likely hike the policy rate once
more to 4.5 per cent and leave it at that level for the remainder
of 2006.
"With Canadian interest rates increasing more slowly
than U.S. rates, some of the momentum in the Canadian dollar
will be removed," said Wright. "Combined with the
recent price declines of key commodities for the Canadian
economy, we expect the Canadian dollar to weaken to 85.5 US
cents by the end of 2006 and to 81 cents US cents by the second
half of 2007."
At the same time, the U.S. Federal Reserve is winding down
its 16 successive rate hikes which pushed the Fed funds rate
to five per cent from one per cent in June 2004. With a slowing
U.S. economy but core inflation still rising, RBC expects
the U.S. Federal Reserve to hike the policy rate two more
times bringing the funds rate to 5.5 per cent for the balance
of the year.
A complete copy of the forecast is available as of 8 a.m.
E.D.T., at www.rbc.com/economics/market/pdf/fcst.pdf.
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For more information, please contact:
Craig Wright, RBC Economics, 416-974-7457
John Anania, RBC Economics, 416-974-7231
Kathy Bevan, RBC Media Relations, 416-974-8810
John Anania sera disponible pour des commentaires en français.
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