RBC says financial market turmoil to dampen Canada's economic
Domestic economy remains firm as historically high commodity
prices continue to buoy income
TORONTO, October 8, 2008 — The persistent turmoil
in financial markets and disappointing economic trends over
the past two quarters have prompted RBC to revise downward
its growth outlook for Canada to 0.9 per cent from 1.4 per
cent. RBC Economics expects Canadian economic growth to rebound
slightly in 2009, to a moderate 1.5 per cent.
"The continued weakness in the U.S. economy is expected
to dampen growth in Canada," said Craig Wright, senior
vice-president and chief economist, RBC. "However, this
pressure on our growth will be tempered by strong commodity
prices which are contributing to robust export revenues and
providing support to Canadian domestic spending via a boost
The report highlights that one of the key strengths in Canada's
domestic economy has been the significant rise in gross domestic
income (GDI) that accompanied the strong rise in commodity
prices over the past year. Canada's GDI has outstripped its
GDP growth, resulting in strong increases in consumer spending,
business investment and import demand. Despite the recent
weakening in commodity prices, Canada continues to enjoy the
benefits from a positive term of trade shock.
Canada's housing market is showing signs of coming off the
boil after almost a decade of growth, the report notes. However,
any weakening is expected to be more moderate compared to
the U.S. experience as Canadian mortgage markets did not see
the excesses that afflicted the U.S. housing sector.
Fatigue also appears to have set in with Canada's labour
market. After generating 320,000 new positions on average
each year from 2002 to 2007, the pace of job gains has slowed
to just 87,000 for the first eight months of 2008.
Earlier this year, the Bank of Canada had been highlighting
the risks of both an inflation rate above its target band
and an economy barely growing. However, the re-emergence of
tighter credit conditions has pushed the downside risks of
growth to the forefront, and with the U.S. falling into a
recession, RBC expects that the Bank of Canada will lower
the overnight rate a further 50-basis points before the end
of the year.
South of the border, the U.S. economy grew at a stronger-than-expected
1.9 per cent average pace in the first six months of 2008,
supported by the government's tax rebate package. This performance
was contrary to projections made earlier in the year that
the U.S. economy would post no growth or contract slightly
in the second quarter. However, looking into 2009, RBC has
downgraded its forecast for U.S. economic growth to a recessionary
0.2 per cent as the ongoing credit tightening takes a further
toll on the economy south of the border.
"This weakening in the U.S. economy is being exacerbated
by high gasoline prices, a softening labour market and an
erosion in Americans' net worth," said Wright. "This
is being overlaid on top of the unwinding of the fiscal stimulus
package effect which will dampen consumer spending activity."
The RBC report expects a cumulative 100-basis points in
reductions in Fed Funds before the end of the year. "The
Fed faces a complicated landscape as policymakers try to deal
with the crisis in the financial services industry, weakening
economic outlook and rising inflation rate. For now the most
likely course is that policymakers will continue to supply
liquidity to financial markets while closely monitoring the
risks to the economy and inflation outlook," Wright noted.
The general outlook for all provinces has generally darkened
as a result of the recent dramatic turn in the year-long financial
market crisis. The U.S. economy now appears to be in recession
with Europe, the U.K. and Japan also sinking fast. While Canada
is in better position with its financial sector less heavily
impaired, overall growth will be substantially weaker than
Among the provinces, Saskatchewan will lead the way this
year and next in terms of economic growth, with Manitoba closely
behind. The Atlantic region is expected to display continued
resilience and should sustain a moderate pace of expansion
for the most part. Conditions in the most western part of
the country are on a deteriorating path. Eroding housing situations
and rapidly slowing growth in consumer spending have prompted
downward revisions to the forecasts for British Columbia and
Alberta. With weak external trade continuing to exert a toll,
cracks have appeared in the domestic foundations of Ontario
and Quebec with Ontario likely to experience little to no
growth this year and next.
The RBC Economics Provincial Outlook assesses the
provinces according to economic growth, employment growth,
unemployment rates, personal income growth, retail sales,
housing starts, and the Consumer Price Index.
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