Canada’s economic growth remains solid
Domestic strength offsets external challenges
TORONTO, October 12, 2007 — Canada's economy
is expected to grow by 2.8 per cent in the final half of 2007
and 2.5 per cent next year, according to the latest economic
forecast from RBC.
"Despite recent financial market volatility, Canada
should continue to sustain relatively solid economic growth
for the rest of 2007 and into 2008," said Craig Wright,
vice-president and chief economist, RBC. "Strong consumer
and business spending will more than offset ongoing export-related
weakness resulting from slower U.S. growth and the high Canadian
dollar."
According to the RBC report, strong demand from emerging
markets, such as China, has pushed prices higher for numerous
natural resource products exported by Canada. As a result,
Canada's terms of trade - a measure of the movement in the
price of Canadian exports relative to imports - has improved
significantly between 2002 and mid-2007, increasing by roughly
20 per cent. Improving terms of trade means that Canadians
are able to purchase more as its export earnings rise. Consequently,
while growth in overall export volumes is weak, particularly
to the U.S., prices for these natural resource exports have
skyrocketed and are helping to lead Canada's growth story.
As a result of the improved terms of trade along with the
lowest unemployment rate in more than 30 years and solid wage
gains, Canadians have seen their disposable incomes increase
sharply over the past two and half years. This boost has helped
fuel the pace of both consumer and business spending.
Inflation rates remain slightly above the mid-point of the
Bank of Canada's target rate. While this state would normally
spur the central bank to raise interest rates, unstable financial
markets and the unexpected strength of the Canadian dollar
will likely delay a rate increase until 2008.
"The Canadian dollar appears likely to remain above
parity through the end of the year," said Wright. "However,
moving into 2008, as financial market expectations shift away
from further Fed easing and toward an increase in the Fed
funds rate, the Canadian dollar will start to reverse recent
gains. This weakening trend will be abetted by moderating
commodity prices. We are forecasting that the currency will
end 2008 at US$0.94/C$, which represents a 9.2 per cent depreciation
compared to current levels."
For the U.S., RBC has downgraded its economic forecast for
the second half of this year to an average annualized quarterly
growth rate slightly below 2.5 per cent due to the recent
tightening of credit conditions and continued weakness in
its housing market.
The U.S. economy grew on average by 2.2 per cent in the
first half of 2007, with growth restrained by an ongoing housing
market correction. Consumers started the year spending aggressively
and, even though activity slowed in the second quarter, the
sector remained a key support for the U.S. economy. RBC forecasts
that consumer spending will average 2.5 per cent in the second
half of 2007 and 2.4 per cent in 2008 - a key factor that
will see the U.S. economy avoid a more serious slowdown even
as the housing market correction enters its third year.
Investors' continued reassessment of risk has created heightened
downside exposure for the near-term U.S. economic outlook,
placing pressure on the U.S. Federal Reserve to use all the
tools in its arsenal to keep markets liquid. A 25-basis point
reduction of the Fed funds rate is expected before the end
of the year, to support the 50 basis point reduction on September
18. Once stability is restored, the Fed's focus will return
to inflation and rates will start to move back up late in
2008.
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
Jackie Braden, RBC Media Relations, 416-974-2124
Jimmy Jean sera disponible pour des commentaires en français.
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