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Canada’s Economy Gains Traction As Net Exports Surge: RBC Economics

Strong gains expected to continue through 2012

TORONTO, March 11, 2011 — On the back of solid net exports in the final quarter of 2010, Canada’s economy finished the year on a high note recording stronger than expected gains, according to the latest Economic Outlook released today by RBC Economics.

The biggest support for the economy came from net exports, which added a full 4.5 percentage points to the quarterly growth rate. Continued consumer spending also played a vital role in driving overall GDP, marking the fastest increase in spending since late 2007.

RBC expects real GDP to increase at 3.2 per cent in 2011, as U.S. demand for Canadian exports increases. Growth in 2012 is forecast to rise by 3.1 per cent. “We expect net exports to continue to bolster economic growth in 2011 and 2012, as long as demand for motor vehicles and commodity-related products remains robust; these industries account for two-thirds of Canadian goods sold abroad,” said Craig Wright, senior vice-president and chief economist, RBC.

“A sharp rise in commodity prices will help maintain a strong Canadian dollar throughout 2011,” Wright stated. “The strong dollar will support Canadian businesses importing capital equipment to improve productivity growth.” RBC projects that the Bank of Canada will resume its tightening campaign in late May and the overnight rate will rise from one per cent to two per cent by year-end. The gradual pace of rate increases combined with anchored inflation expectations will result in less upward pressure on long-term interest rates.

Labour market conditions will remain firm in 2011, according to the report, and disposable income is expected to post a 4.1 per cent gain that will provide continued support to consumer spending.

“Consumers’ earlier confidence in taking on increasing amounts of debt was based on a combination of lower interest rates, a strengthening labour market and a 4.6 per cent rise in disposable income,” explained Wright. “An expected slowing in the housing market, rising interest rates and tightening mortgage lending standards all add up to a levelling out in consumer debt relative to income.”

At the provincial level, RBC forecasts Saskatchewan will lead the country in growth this year. Alberta is expected to return to a top three placing, closely trailing growth in Newfoundland and Labrador. Ontario and Manitoba will hover close to the national average while both Quebec and British Columbia will fall slightly below. Nova Scotia, New Brunswick and Prince Edward Island are still projected to lag behind at the lower end of the scale for 2011.

RBC has remained optimistic on the U.S. economy, projecting firm growth of 3.4 per cent in 2011 and 3.6 percent in 2012. These expectations reflect the passage of the tax cut package in December, continued labour market improvements, ultra-low interest rates and tame underlying inflation (when measured in consumer prices).

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