TORONTO, March 20, 2012 Canada's economy grew at a moderate pace in the final quarter of 2011 and is expected to pick up steam in the year ahead, according to the latest RBC Economic Outlook issued today by RBC Economics Research. Burgeoning signs of strength in the U.S. economy, low interest rates, solid balance sheets across corporate Canada and elevated commodity prices are setting the stage for continued economic expansion. RBC forecasts real GDP to increase by 2.6 per cent in both 2012 and 2013.
"Canada's economic growth clocked in at 2.5 per cent in 2011, shaking off a few speed bumps in the middle of the year and ending the fourth quarter with only moderate real GDP growth of 1.8 per cent," said Craig Wright, senior vice-president and chief economist, RBC. "The country's main engines of economic activity from the early days of the recovery - consumer spending and residential investment - are likely to play supplementary roles as the economy shifts into slightly higher gear on the road ahead."
High commodity prices and strong corporate balance sheets are expected to boost business investment's overall contribution to economic growth by 0.8 percentage points and 0.9 percentage points this year and next. As the U.S. economy continues on a promising path, Canada will also benefit from improving demand for exports such as autos, machinery, and lumber. Exports account for 30 per cent of Canada's GDP, and approximately three-quarters of them go to the U.S.
RBC forecasts that real exports will return to the pre-recession peak level in 2013, with net exports boosting growth to the tune of 1.0 percentage points in 2012 and 0.3 percentage points in 2013. Countering these areas of strength, the anticipated tightening in fiscal policy will likely have a restraining effect on economic growth.
"We expect that a continuation of accommodative monetary policy will offset the potential impact of the withdrawal of fiscal stimulus," Wright commented. "As inflation will likely remain close to the Bank of Canada's two per cent target, we expect that the overnight lending rate will stay at its current level until early 2013."
Despite disappointing labour data that has persisted for the past seven months, with an average increase in employment of just 2,000 per month, RBC expects greater strength in hiring going forward. The unemployment rate is expected to fall to 6.9 per cent by the end of 2013.
The pace of consumer spending eased to 2.2 per cent in 2011, down sharply from 2010's rapid 3.3 per cent rise. RBC projects that consumer spending this year and next will grow at a rate comparable to 2011, with durable goods accounting for approximately 25 per cent of the increase, slightly higher than its historical share. Elevated debt levels, which stood at 150.6 per cent of personal disposable income in the fourth quarter of 2011, will weigh on consumer spending moving forward.
"At this point, the low interest rate environment is keeping the cost of servicing debt manageable. We haven't seen any significant increase in consumer bankruptcies or a surge in mortgage delinquencies," explained Wright. "At the same time, household debt has been weighing on the minds of many and the willingness to take on debt has likely diminished. This reduces the likelihood of another debt-charged surge in spending on goods, services, or housing."
At the regional level, Western Canada is expected to top the growth rankings in 2012, with Saskatchewan and Alberta leading the way and Manitoba following closely behind. The economies of Newfoundland and Labrador, British Columbia and Ontario are expected to grow at rates close to the national average. Quebec continues to experience some challenges and, along with the remaining Atlantic provinces, is positioned to grow below the national average.
While risk lingers on the global stage, stimulative monetary policy and renewed confidence are expected to carry the world economy in 2012. RBC forecasts that, with the euro zone in recession and the U.K. economy limping along, the leadership baton is being handed over to the U.S., where signs of a more robust year for broad-based growth are materializing. RBC expects the U.S. economy to expand by 2.5 per cent in 2012 and 3.0 per cent in 2013.
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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