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Exports to buoy Canada's Economic Growth in 2014: RBC Economics

Craig Wright, RBC's chief economist, discusses (opens new window) Canada's outlook

TORONTO, March 19, 2014 —  As the global economy continues to recover, demand for Canada's exports will pick-up, fuelling real GDP growth in the period ahead, according to the latest Economic and Financial Market Outlook (opens PDF in new window) issued today by RBC Economics. RBC is forecasting real GDP growth of 2.5 per cent in 2014 and 2.7 per cent in 2015.

"For the last four years the household sector has been the key driver of Canada's economic growth. We expect that to change in 2014 - as the global economy continues on its path to recovery, exports will become increasingly central to Canada's growth story," said Craig Wright, senior vice-president and chief economist, RBC. "Not only will the drivers of growth change, but the pace of economic activity will gather speed following two years of sub-potential increases."

RBC notes that this transition has already started to happen. Net international trade contributed a relatively modest 0.3 percentage points to growth in 2013, which represented the first positive contribution since 2001.

Export volumes stood 5.0 per cent below their pre-recession peak at the end of 2013. A large part of this underperformance is attributable to the subpar U.S. recovery, says RBC. Competitiveness issues also weighed on growth; the relatively strong Canadian dollar during the post-recession period was one of these factors.

"It is the changing fortunes of both the U.S. economy and the Canadian dollar that will act as catalysts for stronger exports in the year ahead," added Wright.

The report notes that the sharp selling pressure on the Canadian dollar that surfaced in late-October 2013 and subsequently picked up momentum, stalled in February. RBC still anticipates a further depreciation in the period ahead, though at a slower pace with weakness attributed to optimism about the U.S. economy rather than any made-in-Canada factors. In fact, RBC expects the loonie will trade at $0.87 U.S. at the end of 2014 and $0.85 U.S. at year-end 2015.

"A weaker Canadian dollar enhances the competitiveness of Canadian goods in the U.S. market - historically, a 10 per cent depreciation boosting export volumes by 3.3 per cent in the following two years," explained Wright.

The household sector is unlikely to be a significant factor in the strengthening in the economy in 2014, RBC says, largely owing to a pause in the housing market. Spending on goods and services is expected to accelerate relative to the past couple of years rising by 2.5 per cent in 2014 and 2.3 per cent in 2015. Historically low interest rates coupled with a well-functioning financial system and persistent, but moderating, employment growth will provide needed support.

The Outlook notes that market interest rates will continue to move higher in 2014 led by increases in longer-dated yields. Fed tapering of its bond buying program will exert upward pressure on treasury yields and Canadian bond yields will move in sync, says RBC. Shorter-term yields in Canada are also forecast to increase in 2014 as a strengthening in economic growth, tightening labour market conditions and accelerating wage growth fuel a steady, albeit slow, increase in inflation. This is expected to occur despite the official overnight rate remaining unchanged at 1.00 per cent through this year.

"As the downside risks to the inflation outlook dissolve, the Bank of Canada is likely to re-establish a tightening policy bias over the course of this year - we expect the first hike to the overnight rate in the second quarter of 2015," said Wright.

RBC expects the majority of provincial economies in Canada to accelerate their pace of growth in 2014. Alberta will stand atop the provincial growth rankings, well ahead of Ontario, the only other province to grow at or above the national rate. The remaining provinces will grow at varying paces below the national average.

A complete copy of the RBC Economic and Financial Market Outlook (opens new window) is available as of 8 a.m. ET. A separate publication, RBC Economics Provincial Outlook (opens 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, Communications, RBC Capital Markets, 416-842-5635

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