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Canada's economic growth curbed by cautious business spending and increased U.S. fiscal restraint: RBC Economics

  • Real GDP to increase 1.8 per cent in 2013
  • Exports to strengthen and support economy
  • Bank of Canada to maintain 1 per cent policy rate until mid-2014

TORONTO, March 19, 2013 — Cautious business spending and increased U.S. fiscal restraint will weigh on Canadian growth, according to the latest RBC Economic and Financial Market Outlook (opens PDF in new window) issued today by RBC Economics. RBC trimmed its real GDP growth forecast to 1.8 per cent through 2013, following softer-than-expected growth in 2012.

“After boasting a relatively strong economic performance over the past several years, Canada’s economy hit a speed bump in late 2012,” said Craig Wright, senior vice-president and chief economist, RBC. “That said, financial conditions continue to support growth. As confidence recovers, business spending should accelerate, albeit at a less rapid pace than we saw in the early days of expansion.”

RBC notes that strong company balance sheets will help to abet business spending going forward. At the same time, high levels of household debt will limit spending on housing as well as goods and services, although moderate gains in income and employment will partially offset this, RBC says.

“With household spending likely to fall slightly, we need a pick-up in not only business investment but exports as well if we want to see the economy return to above-potential growth,” added Wright.

RBC indicates that pent-up demand in the U.S. for housing and vehicles will help fuel Canadian exports. At the same time, RBC expects a rise in U.S. business investment, which should strengthen demand for Canadian machinery exports. However, greater-than-expected fiscal restraint emerging in the U.S. with the implementation of the sequestration expenditure cuts in March will likely temper this strength.

Looking at the Bank of Canada’s policy rate, RBC expects it to remain at the current level for longer than previously thought. The main driver of this adjustment is weaker than expected growth in Canada over the second half of 2012, which resulted in a widening output gap – the difference between actual and potential output – and lower inflation.

“The urgency to boost interest rates is now less compelling; concerns that low interest rates were fueling an untenable buildup in consumer debt are being alleviated because of the slowing pace of household debt accumulation,” stated Wright. “RBC forecasts the overnight rate will remain at one per cent in 2013, with conditions likely to support a gradual increase starting in mid-2014.”

The downward revision to the national growth forecast contributed to lower growth expectations for a majority of provinces in 2013, with Newfoundland and Labrador being a main exception. However, provincial growth is expected to strengthen across most of the country in 2014.

RBC anticipates that Newfoundland and Labrador will emerge farther ahead of the pack at the top of the 2013 provincial growth rankings. The Prairies – Alberta, Saskatchewan and Manitoba – will continue to grow at the top-end. Nova Scotia is the only other province expected to grow just above the national average, while the remaining provinces stand below the national mark.

A complete copy of the RBC Economic and Financial Market Outlook (opens PDF in new window) is available as of 8 a.m. ET. A separate publication, 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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