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Steady growth for Canada, despite global uncertainties

The global economy may be a bit creaky but Canada is chugging along nicely thanks to its strong resource base and rising commodity prices, according to a report from RBC Economics.


June 9, 2011
by PLANT STAFF

TORONTO: The global economy may be a bit creaky but Canada is chugging along nicely thanks to its strong resource base and rising commodity prices, according to a report from RBC Economics.

It’s latest Economic Outlook says Canada’s real GDP is 2% above its pre-recession peak and posting a 3.9% annualized rate gain in the first quarter. With an anticipated continuing recovery in the US, RBC forecasts Canada’s GDP to grow 3.2% this year and 3.1% next year.

“With more than 50% of Canadian exports linked to natural resources, higher commodity prices have provided a substantive and positive boost to our economy,” said Craig Wright, senior vice-president and RBC’s chief economist. “Higher prices mean higher domestic income growth.”

The loonie broke parity with the US dollar in early January thanks to increased demand for commodities and a widening spread in short-term interest rates. RBC said Canada’s currency remains strong and is likely to hold its current range for the remainder of the year.

“This improvement has caused a dramatic fall in the price of imported machinery and equipment and will likely drive Canadian companies to purchase imported goods to update their capital stock and improve Canada’s productivity performance,” said Wright.

However, Statistics Canada reports Canada’s trade deficit widened in April, with export volumes falling 1.1% to $36.3 billion and prices by 0.9%, led by the machinery and equipment sector. Industrial goods and materials, and automotive contributed the most to the price decline.

Imports also fell (to $37.2 billion) as prices declined 1.5% and volumes rose 1%.
Imports of automotive products registered the largest decline, largely due to the earthquake and tsunami in Japan in March.

RBC forecasts imports will grow 7.1%, about double the average pace compared to the previous decade, while strong demand for commodities and a revival in US demand for autos will drive healthy gains in exports, at an average of 9% annually for the next two years.

While the report notes that consumer spending was a key contributor to growth through the recovery, a record high debt-to-income ratio will restrain spending going forward.

RBC forecasts Canada’s economy to be business-driven over the next two years, assuming the output gap will be eliminated in the second quarter of 2012 as the headline and core inflation rates gravitate toward the Bank of Canada’s 2% target.

“At this point, the level of uncertainty about the global economic outlook – worries about sovereign debt and fiscal balances ¬– is driving the Bank of Canada to hold the policy rate at its current level of 1%,” says Wright. “As concerns start to dissipate, attention will turn to domestic fundamentals.”

RBC anticipates the next rate increase will likely happen in the fall; the Bank of Canada is expected to raise the overnight rate to 1.75% by the end of 2011 and to 3% at year-end 2012.