Canada’s economy dragged down by the effects of the
U.S. slowdown, says RBC Economics High export prices continue to temper this weakness
TORONTO, July 3, 2008 — The weakening U.S.
economy contributed to Canada's economic growth taking an
unexpected drop in the first quarter of 2008. The national
growth rate is forecast to slow to 1.4 per cent for 2008,
according to the latest economic report from RBC. In 2009,
Canada's economy is expected to rise 2.5 per cent.
"Going forward, Canada's economy will continue to be
hampered by flagging U.S. demand for exports, but domestic
demand will more than offset the drag this year," said
Craig Wright, senior vice-president and chief economist, RBC.
"The surprise economic contraction will be short-lived
as growth prospects for the remainder of the year should brighten,
with financial market pressures starting to ease, the U.S.
economy getting a boost from the issuance of tax rebate cheques,
and commodity prices remaining historically high."
Canada's strong terms of trade, boosted by rising export
prices, will drive economic growth. Commodities continue to
experience solid demand from emerging markets such as China.
Over the past five years, Canada's gross domestic income has
outpaced gross domestic product by an average of 1.2 percentage
points, also providing steady support for government revenues,
corporate profits and the labour market.
Inflation has become the predominant worry for central banks
given the elevated level of commodity prices, especially oil.
As a result, concern is growing about an upward boost to inflationary
expectations. However, the modest pace of growth and ease
in labour markets are expected to be sufficient enough to
offset these pressures.
The RBC report forecasts that Canada's core inflation rate
will likely trend higher this year though remain below the
Bank of Canada's two per cent target. Mitigating factors that
have pushed the inflation rate lower, such as the impact of
the rising Canadian dollar in 2007 and the retail discounting
that Canadian companies have had to offer to compete for market
share, will start to dissipate through 2008. By 2009, RBC
expects the inflation rate to average close to the two per
cent range.
Canada's housing market is also poised to cool in the face
of deteriorating affordability. Housing affordability in most
major markets across the country have deteriorated to their
worst levels in almost 20 years. However, the extent of any
weakening is expected to be much less pronounced than what
is occurring currently in the U.S. as the Canadian market
did not experience many of the excesses evident south of the
border.
RBC forecasts U.S. economic growth to be modest this year
rising 1.5 per cent. However, the risks are largely on the
downside as greater-than-expected restraint could emerge from
still high energy prices, tight credit conditions and weakening
labour markets. Growth is projected to strengthen to 2.0 per
cent in 2009. This modest growth outlook will help keep inflation
pressures under control through the forecast.
"We believe that the U.S. economy will avoid a contraction
this year and should start to see sustained upward growth
momentum in 2009," said Wright.
In a separate report, the Provincial Outlook continues to
uphold the theme of divergent paths taken by the Eastern and
Western parts of the country. Record-high commodity prices
and strong global demand for resources sustain unprecedented
prosperity in the Western provinces, while the strong Canadian
dollar, downturn in the U.S. economy and high energy prices
continue to cause hardship in key sectors in provinces east
of Manitoba. Saskatchewan is projected to lead all of the
provinces in economic growth for both 2008 and 2009, followed
by Alberta, while Newfoundland and Labrador and Ontario are
expected to lag the group this year, but should show some
improvement next year.
The RBC Economics Provincial Outlook assess 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
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