Broader export demand to drive Canadian economy: RBC

Ontario tops provincial GDP growth ranking.

TORONTO — Canada’s economy is expected to see higher export growth in 2015, despite the recent decline in oil prices, according to RBC Economics’ Economic and Financial Market Outlook.

RBC is forecasting real GDP growth of 2.5% in 2014, 2.7% in 2015 and 2.1% in 2016.

After several years of export growth coming largely from the energy sector, 2014 marked a turning point with increased demand for non-energy exports. RBC said this broadening in export demand will continue to accelerate in 2015 supported by increased US investment in machinery and equipment, as well as rising US auto sales and housing starts.

“The decline in oil prices and any weakening of investment in the oil and gas industry will be offset by increased demand for Canada’s non-energy exports,” said Craig Wright, senior vice-president and chief economist.

While falling oil prices may not be significant from a national real GDP perspective, it will likely have diverging outcomes among the provincial economies. RBC said oil prices will remain low during 2015 – averaging US$70 per barrel on a WTI basis – resulting in slower projected real growth for oil-producing provinces than previously expected and slightly stronger growth for the majority of other provinces.

Lower oil prices will likely limit capital spending by oil and gas companies in 2015, but industries outside oil and gas are likely to pick up this slack due to stronger demand for exports from the US.

The report expects the unemployment rate to hold around 6.5% – within the range of what is considered to be the economy’s full employment rate. Wage growth, however, has not kept pace with the improving labour market with the average increase running at about 2% throughout 2013 and 2014 year-to-date.

The recent decline in energy prices will translate into a lower headline inflation rate in the months ahead however excluding energy, inflation pressures are likely to continue to run at or above 2%.

The report also said Ontario will top provincial growth rankings in 2015.

Real GDP growth rates of 2.3% in 2014 and 3.1% in 2015, the report said, reflecting the net boost the bank expects Ontario’s economy will receive from substantially lower oil prices.

The recovery in Ontario’s exports sector finally showed greater strength in 2014. Merchandise exports rose by a solid 7.3% on a nominal basis during the first 10 months of 2014 – the strongest pace since 2010 and the second strongest pace in 14 years.

Exports of motor vehicles and parts rose almost 8%. However, RBC said a surge in consumer goods exports stood out with an increase of 15%. Following multi-year-long slumps, there were also encouraging gains registered by forest products (up nearly 10%) and electronic and electrical equipment (up 2.5%).

“External demand for Ontario’s goods showed renewed vigour and generated much needed steam for the province’s manufacturing sector,” said Wright.

Year-to-date in 2014, manufacturing sales climbed by more than 6% – the fastest rate since 2010. Increases were broadly-based across the sector, with transportation equipment manufacturers among those who recorded more significant advances with a 7.5% increase in sales.

Find a full copy of the report here.

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