Steady growth in Canada amid uncertain global
environment: RBC Economics
Boost in commodity prices creates a net wealth benefit for domestic economy
TORONTO, June 9, 2011 Canada's economy
has been a frontrunner in the race to expansion with real
GDP standing two per cent above its pre-recession peak and
posting a 3.9 per cent annualized rate gain in the first quarter
of 2011. Aided by a projected continued recovery in the U.S.,
Canada's economy is forecast to expand by 3.2 per cent in
2011 and 3.1 per cent in 2012, according to the latest Economic
Outlook released today by RBC Economics.
"With more than 50 per cent of Canadian exports linked
to natural resources, higher commodity prices have provided
a substantive and positive boost to our economy," said
Craig Wright, senior vice-president and chief economist, RBC.
"Higher prices mean higher domestic income growth."
Courtesy of an increased demand for commodities and a widening
spread in short-term interest rates, the Canadian dollar broke
parity with the U.S. dollar in early January. Canada's currency
remains strong and is likely to hold its current range for
the remainder of 2011.
"The dollar has made a remarkable recovery from the
all-time low we saw in 2002, to within six per cent of its
all-time high," explained Wright. "This improvement
has caused a dramatic fall in the price of imported machinery
and equipment and will likely drive Canadian companies to
purchase imported goods to update their capital stock and
improve Canada's productivity performance."
RBC forecasts a 7.1 per cent gain in imports; growing at
about double the average pace compared to the previous decade.
Strong demand for commodities and a revival in U.S. demand
for autos will drive healthy gains in exports - at an average
of nine per cent per annum for the next two years.
While the report notes that consumer spending was a key contributor
to growth through the recovery, a record high debt-to-income
ratio will restrain spending going forward.
Similarly, 2010's surge in Canada's housing market is unlikely
to be sustained, meaning little support will be derived from
the residential real estate market in 2011 and 2012. Housing
affordability deteriorated earlier this year because of a
combination of rising home prices and steady interest rates.
Going forward, interest rates are expected to inch higher.
"Rising interest rates will largely be balanced by growing
income levels and ultimately contribute to a stable home price
environment," explains Wright. "With interest rates
heading higher, we anticipate that the volume of home sales
will calm and prices will post very modest gains."
Overall, RBC forecasts Canada's economy to grow at a respectable
clip over the next two years. The main support for growth
will switch from being household-driven, as consumer spending
slows, to business-driven, as investment by business strengthens.
This forecast factors in the assumption that Canada's output
gap will be eliminated in the second quarter of 2012 as the
headline and core inflation rates gravitate toward the Bank
of Canada's two per cent target.
"At this point, the level of uncertainty about the global
economic outlook - worries about sovereign debt and fiscal
balances - is driving the Bank of Canada to hold the policy
rate at its current level of one per cent," says Wright.
"As concerns start to dissipate, attention will turn
to domestic fundamentals."
RBC anticipates the next rate increase will likely happen
in the fall; the Bank of Canada is expected to raise the overnight
rate to 1.75 per cent by the end of 2011 and to three per
cent at year-end 2012.
At the provincial level, Alberta
is the one to watch in terms of economic growth, with Newfoundland
and Labrador following closely behind. The other Prairie provinces
are also making their mark - Saskatchewan
are expected to achieve above-average growth this year and
be among the top-four. Again, Ontario
is expected to hover close to the national average, while
Columbia's growth is reduced in light of the somewhat
sluggish start to 2011. The Atlantic
Provinces continue to show mixed results at the lower
end of the pack.
RBC's report indicates that the U.S. economy is moving into
expansion mode. In the first quarter of 2011, real GDP exceeded
the pre-recession peak level by 0.6 per cent, although growth
was moderate in comparison to the previous two quarters. Special
one-off factors, like poor weather conditions, were to blame
for this temperate growth. As these factors pass, RBC projects
growth in the U.S. economy to increase, resulting in a 2.7
per cent gain this year and 3.4 per cent growth in 2012.
A complete copy of the forecast is available as of 8 a.m.
ET, at www.rbc.com/economics/market/pdf/fcst.pdf.
A separate publication, RBC
Economics Provincial Outlook, assesses the provinces according
to economic growth, employment growth, unemployment rates,
retail sales, housing starts and consumer price indices.
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Craig Wright, RBC
Economics Research, (416) 974-7457
Paul Ferley, RBC
Economics Research, (416) 974-7231
RBC Media Relations, (416) 974-8810