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Domestic Strength to Propel Canada's Economic Recovery into 2011: RBC Economics

However, recovery more subdued than past cycles

TORONTO, December 15, 2010 — Canada's economic recovery soldiered on in the third quarter, although the pace of growth slowed for the second straight quarter after losing traction in the spring amid softness in the U.S. economy, according to the latest Economic Outlook report from RBC Economics.

However, with financial market conditions improving and with monetary policy remaining very accommodative, the pace of quarterly growth is expected to quicken from the recent downshift. As a result, GDP is expected to come in at 3.2 per cent in 2011, slightly faster than 2010's projected growth of 3.1 per cent. RBC notes that projected growth this year and next represents the fastest pace over the past four years and forecasts that GDP will rise by 3.1 per cent in 2012.

"The mid-year economic slowdown reflected a pullback in housing investment, which fell after five consecutive quarterly increases, and a mild downturn in exports. However, financial conditions remain supportive of domestic growth which will be the main engine of the expansion going forward," said Craig Wright, senior vice-president and chief economist, RBC. "While the recovery is proving to be weaker than those previously experienced, economic growth in 2010 and 2011 is a substantial improvement from the contraction of 2.5 per cent experienced in 2009."

While consumers have been a mainstay of the recovery to-date, the pace of consumer spending is likely to slow from 2010's solid clip with the slack being taken up by business investment in capital goods. In fact, RBC expects that Canadian businesses will play a pivotal role in the economy's growth momentum as the recovery matures and pressures persist on businesses to boost productivity.

Though the recovery is expected to continue, the pace will remain moderate, implying only limited progress in lowering the unemployment rate which is expected to close out 2010 under eight per cent and decline only to 7.4 per cent by the fourth quarter of 2011. Beyond next year, RBC forecasts that the unemployment rate will continue to moderate slowly, reaching 7.0 per cent by the end of 2012.

RBC notes that inflation has been volatile in recent months reflecting the pass-through from the harmonization of sales taxes in Ontario and B.C. and movements in energy prices. As of October, the core rate, which excludes these factors, stood at 1.8 per cent and the all-items inflation rate rose to 2.4 per cent. The excess capacity that was generated during the economic downturn is slowly being whittled away and RBC expects that the output gap will be eliminated mid-year 2012.

According to the report, the persistent strengthening in the Canadian dollar from its early 2009 low aligns closely with the decline in import prices which have fallen by eight per cent as the Canadian dollar gained 19.4 per cent against the US dollar. As a result, import growth has solidly outpaced exports resulting in the trade sector acting as a weight on the overall level of GDP output for most of 2010. RBC forecasts that the Canadian dollar will continue to be well supported relative to the US dollar remaining close to parity through the forecast.

RBC forecasts U.S. GDP of 2.7 per cent in 2010 and 3.3 per cent in 2011 as the downdraft in U.S. growth in the middle of the year appears to have come to an end with the number of upside surprises in the economic data solidly outpacing the downside recently. Support to near term growth is also expected from recent rounds of increased monetary and fiscal stimulus, sending growth in 2012 up to 3.6 per cent.

At the provincial level, RBC expects Saskatchewan to take over the top spot in the provincial-growth rankings from Newfoundland & Labrador in 2011 after trailing behind it in 2010. Alberta is also expected to move ahead of Newfoundland & Labrador in 2011. Ontario is expected to slip to fifth position in 2011 from fourth in 2010. Manitoba is expected to move up in the rankings in 2011 to fourth spot after a modest recovery in 2010. Nova Scotia, New Brunswick and Prince Edward Island are projected to remain at the lower end of the scale in 2010 and 2011. The forecast for growth in British Columbia is fairly similar to the national average, and the forecast in Quebec is lagging slightly below the national average both this year and next.

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 and housing starts.

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For more information, please contact:
Craig Wright,
RBC Economics Research, (416) 974-7457

Paul Ferley,
RBC Economics Research, (416) 974-7231

Elyse Lalonde,
RBC Media Relations, (416) 974-8810