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Canada's Economy Hits Choppy Waters but Remains Afloat despite Global Financial Market Volatility: RBC Economics

Confidence will determine whether or not the global economy can keep it together

TORONTO, September 12, 2011— RBC Economics downgraded their forecast for the Canadian economy in 2011 after a mild contraction in the second quarter and softer growth in the U.S. and Euro-zone economies. According to the latest RBC Economic Outlook issued today, Canada's real GDP is projected to grow by 2.4 per cent this year - a reduction of 0.8 percentage points from the forecast issued in June.

"Financial market volatility certainly took a toll on business and consumer confidence this summer. Our expectation that the global economy will avert another downturn, however, should temper the slide we've been seeing in the equity markets and in commodity prices," said Craig Wright, senior vice-president and chief economist, RBC. "We are cautiously optimistic that Canada's economy will continue to pick up speed next year, growing at a rate of 2.5 per cent."

Since June, increased market volatility has created uncertainties about the global economy. South of the border, the U.S. Federal Reserve recently committed to keeping interest rates low for a sustained period in order to ward off lacklustre growth. RBC expects that the Bank of Canada will do the same until mid-2012, when rate increases are likely to come into effect.

"The Bank of Canada is likely to maintain its key lending rate at one per cent, given lower expectations about the outlook for U.S., a mild contraction in second quarter Canadian growth and benign inflation pressures," said Wright. "Policy will be geared towards supporting fragile business and consumer confidence in the near-term."

Going forward, Canada's headline inflation rate is forecast to drift lower, thanks to the recent declines in commodity prices. RBC projects that core inflation will remain within the Bank's target range, which will alleviate the pressure on the Bank to resume its tightening campaign.

"Canada's labour market has more than fully recovered from the loss experienced in the downturn," said Wright. "As of August, Canada had 164,000 more people employed than during the pre-recession peak and so far this year, employment gains have been concentrated in full-time jobs."

The business investment cycle is on an upswing in Canada, growing at double digit rates throughout 2010 and the first half of this year. More businesses have cash available due to improved profits and better access to financing. The strong Canadian dollar has also provided support for increased investment.

At the provincial level, Saskatchewan leads the way in terms of economic growth, with Alberta and Newfoundland and Labrador following closely behind. Manitoba is projected to improve its economic standing in 2011, while Ontario, British Columbia, and Prince Edward Island fall slightly below the national average. Quebec continues to show mixed results and is positioned with the remaining Atlantic provinces at the back of the pack.

"In the second half of this year, we expect both the Canadian and the U.S. economies to rebound," said Wright. "Global growth will buoy commodity prices and fears of rate cuts will turn into expectations of rate hikes and the Canadian dollar is likely to further appreciate in 2012."

RBC Economics has cut its U.S. growth projection to 1.7 per cent in 2011, representing a full percentage point reduction to growth. To a large degree, this change is a result of a significant downward revision to historical U.S. data that indicated both a deeper recession and a weaker recovery. The downward revision also reflected one-off factors like poor weather conditions restricting non-residential construction activity, the Japanese disasters cutting into auto production and sales, and gasoline price reducing income to spend on other goods and services. As the weight of these factors dissipates, RBC expects growth to pick up. For 2012, RBC Economics is projecting growth of 2.5 per cent in the U.S.

A complete copy of the RBC Economic and Financial Market Outlook is available as of 8 a.m. ET. 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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For more information, please contact:

Craig Wright, Senior Vice-President and Chief Economist, RBC,
416 974-7457
Robert Hogue, Senior Economist, RBC Economics Research,
416 974-6192
Elyse Lalonde, Manager, Media Relations, RBC,
416 974-8810


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