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Canada’s economy expected to slow in 2018, amid looming interest rates hikes and lower consumer spending

RBC Economics: Canada’s economy expected to slow in 2018, amid looming interest rates hikes and lower consumer spending

RBC Economics: Canada’s economy expected to slow in 2018, amid looming interest rates hikes and lower consumer spending

TORONTO, March 12, 2018 - After a year of rapid growth, the Canadian economy is expected to slow in 2018 amid the prospect of rising interest rates and lower consumer spending, according to the latest RBC Economic Outlook. Gross domestic product (GDP) growth is forecasted to slow to 1.9 per cent in 2018, followed by 1.6 per cent in 2019, compared to 3.0 per cent in 2017.

“Following a 3.5 per cent increase in consumer spending in 2017 we anticipate that rising interest rates will take their toll on indebted Canadians throughout 2018,” said Craig Wright, Senior Vice-President and Chief Economist at RBC. “But a healthy labour market and rising wages will help soften this blow. While the Canadian consumer reins in their spending, we expect business investment and government outlays to contribute more significantly to the economy.”

As for Canada’s housing market, RBC Economics forecasts improved demand-supply conditions in 2018. After tighter conditions last year, 2018 should see more balanced house prices. It is projected that price increases will drop from 11.1 per cent in 2017 to just 2.2 per cent in 2018. As a result, housing sales are forecast continue to soften in 2018.

Canadian dollar uncertainty
While the Canadian dollar appreciated throughout 2017, it is forecast to face much uncertainty this year. Although an increase in oil prices and short-term interest rates spreads have favoured the Canadian currency in the short run, NAFTA-related uncertainty will continue to put pressure on the Canadian dollar.

RBC Economics expects the dollar to hover at 78 U.S cents early this year before strengthening to 82 cents by end of 2018.

Provincial outlook: oil-producing provinces face significant budgetary shortfalls
Canada’s oil-producing provinces are facing significant budgetary shortfalls as they come to grips with lower resource royalty revenues. Royalties are expected to remain depressed in the coming year, even as global oil prices and domestic production are expected to rise. Meanwhile, Canada’s non-oil producing provinces have achieved budgetary balance and are leaning into a strong national economy by loosening their purse strings to boost infrastructure and program spending.

With a healthy job market, solid wage gains, and an increase in capital spending, Ontario is expected to have a 2.0 per cent growth rate in 2018, before settling into the national average of 1.6 per cent in 2019. Similarly, Quebec is forecasted to settle at 1.9 per cent GDP in 2018, after a year that saw the province climb to 3.0 per cent GDP - more than twice the national average.

Saskatchewan is forecasted to lead all provinces in growth for 2018 with a 2.9 per cent GDP, followed by another solid 2019 (2.5 per cent).

U.S tax overhaul to spur spending
Amid a comprehensive tax overhaul, robust labour market and healthy balance sheets, the U.S economy is forecasted to produce a 2.5 per cent rise in output this year. U.S consumers are expected to be the key economic driver throughout 2018.

The turnaround in business investment that began in 2017 is forecast to continue this year. The U.S manufacturing index rose 1.2 percentage points by the end of 2017, and RBC Economics forecasts that U.S investment activity will grow at a stronger pace in 2018 as companies use their tax windfall to buy machinery and equipment.

The strength of the U.S economy has led to more than 200,000 new jobs created in January alone, with unemployment holding at 4.1 per cent, well below the Federal Reserve Chair’s long term range of 4.4 to 4.7 per cent.

The U.S tax overhaul is expected to spur GDP growth by 0.4 percentage points in 2018 and an additional 0.3 percentage points in 2019. However, the tax cut will also add 1.0 trillion to the US debt.

A complete copy of the RBC Economic and Financial Market Outlook, including Canadian, U.S, and Global forecasts, can be viewed here. View here for the RBC Provincial Outlook.

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Media contacts:
Craig Wright, Senior Vice-President and Chief Economist, RBC Economics Research, 416-974-7457
Dawn Desjardins, Deputy Chief Economist, RBC Economics Research,
Paul Ferley, Assistant Chief Economist, RBC Economics Research, 416-974-7231
Joel Dembe, RBC Communications, 647-518-4981