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Canadian economic growth to strengthen modestly in 2013 as global uncertainty eases: RBC Economics

  • Real GDP growth to increase to 2.4 per cent in 2013
  • Interest rates set to rise modestly in second half of next year
  • Significant downside risk expected in near-term
  • Global economy to strengthen moderately in 2013

TORONTO, December 13, 2012 - As downside risks to the global economy ease, the Canadian economy is headed for a period of gradual improvement in 2013, according to the latest RBC Economic and Financial Market Outlook (opens PDF in new window)

"We expect that factors weighing on growth in late 2012 and early 2013 will reverse course, which, alongside accommodative financial conditions and low household borrowing rates, will set the stage for better economic growth," said Craig Wright senior vice-president and chief economist, RBC. "And, as the cloak of uncertainty is removed from the global economy, demand for Canadian exports will rise, as will investment and hiring."

External risks, slowing domestic investment and a drop in exports depressed Canada's economic growth in the third quarter to a 0.6 per cent annualized rate, which influenced the Bank of Canada in maintaining its stimulative policy rate of 1.0 per cent.

However, RBC says this slowing largely reflected temporary factors. With growth expected to rebound and Canada edging closer to full employment, it is unlikely that interest rates will stay where they are. As the economy continues to show signs of strength, the Bank of Canada is expected to implement a plan of gradual rate increases over the second half of next year.

RBC anticipates that the trade sector will boost growth in both 2013 and 2014. As the so-called "fiscal cliff" cloud lifts, stronger U.S. demand is expected to emerge. Elevated demand for commodities, especially as China shifts into higher gear, bodes well for a continued rise in energy and metal exports.

Import growth is also expected to accelerate, though the pace of increase is likely to be slower than exports given the very rapid increases recorded in 2010 and 2011. Still, RBC predicts overall import growth will rise over the next two years.

"Net trade is forecast to make the most significant contributions to real GDP growth since 2001," added Wright.

RBC's Outlook notes that while businesses are facing generally supportive conditions, the uncertain global environment and some weakening in commodity prices hampered spending on capital goods in the first three quarters of 2012. RBC anticipates corporations will take advantage of their enviable balance sheet positions and resume spending as the uncertainty gripping the world economy ebbs.

Low interest rates, access to loans, and a robust housing market, have recently driven the debt-to-income ratio in Canada to an all-time high (163 per cent), says RBC.

The continued tightening of mortgage rules and further cooling in housing market activity are likely to contribute to a steady moderation in debt accumulation. In fact, RBC affirms that this trend is already underway with household credit growth in September and October running at the slowest rate since 2002.

"The slower pace of debt accumulation is a step in the right direction, although it has been tempered by the fact that the pace of personal income growth has been lacklustre to date," said Wright. "Tightening labour market conditions and stronger wage increases may act to remedy this situation soon, paving the way for an eventual leveling off in the debt-to-income ratio."

RBC's near-term outlook calls for the housing market to weaken, albeit at a modest pace. This reflects affordability strain relative to historical averages, as well elevated debt-to-income ratios and the lack of certainty with respect to the future of the global economy. Some offset to this weakness will be provided by interest rates remaining historically low in the near-term.

In 2012, the Canadian dollar traded around parity against the U.S. dollar and RBC remains bullish on the loonie with strong underlying factors; commodity prices will remain historically high; interest rates in Canada will rise quicker than in the U.S.; and, foreign investors will continue to put their money into Canadian assets. As a result, the Canadian dollar is likely to remain on the strong side of parity though the forecast horizon.

At a regional level, there have been a number of transitory factors hampering economic growth across several provinces in recent months, though most of these factors should reverse in 2013, says RBC.

The most visible movement will be a sharp swing in Newfoundland and Labrador's outlook from bottom in the 2012 rankings to top spot in 2013. Alberta and Saskatchewan will also rank at the top-end of provincial economic growth, with Manitoba following closely behind. British Columbia and Ontario are positioned to grow at rates just below the national average, while the remaining provinces are expected to grow below that average.

A complete copy of the RBC Economic and Financial Market Outlook (opens PDF in new window)RBC Economics Provincial Outlook (opens PDF in new window), 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, RBC Economics Research, 416 974-7457
Paul Ferley, RBC Economics Research, 416-974-7231
Elyse Lalonde, RBC Corporate Communications, 416 842-5635


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