Canadian GDP gets real in 2013 at 1.9%: RBC Economics

Global economy to grow modestly for the rest of the year.

Real GDP to rise 2.9% in 2014.

TORONTO — Canada’s economy started 2013 growing at a solid clip, and RBC Economics has raised its forecast for real GDP growth to 1.9% after a 1.7% increase in 2012, followed by a firmer rise to 2.9% in 2014.

The bank’s latest Economic and Financial Market Outlook notes energy production continued to recover this year as the US economy proved to be more resilient to a recession than was feared.

RBC Economics says first quarter saw a marked turnaround in the domestic economy, with Canada logging a 2.5% annualized gain, supported by a turnaround in net trade which added 1.4% to the quarterly growth rate – the largest contribution since mid-2011.

“Stronger demand for autos, houses and industrial machinery from the US will help sustain the lift in export growth that Canada experienced so far this year for the remainder of 2013,” said Craig Wright, RBC’s senior vice-president and chief economist.

RBC says businesses reduced the pace of investment in structures and capital goods in recent quarters, likely a reflection of the uncertainties surrounding the effect of US government’s fiscal restraint on demand for Canadian goods. But easy financial conditions in Canada coupled with indications that the US will clear the fiscal cuts in good stead will support a rebound in business spending in the quarters ahead.

“Company balance sheets are healthy – business financing made headway in early 2013 and will continue to provide Canadian firms with the capacity to invest at an accelerating rate in 2014,” said Wright. “After rising an expected 3.7% this year, business spending will strengthen to 7.3% in 2014.”

The forecast for residential investment is less optimistic: it will decline 2.4% this year and 0.7% in 2014.

Cooling activity in the housing market led to the slowest pace of mortgage debt since 2001 in April, easing concerns that the economy is vulnerable to a significant shock. In fact, RBC indicates that debt service costs remain historically low and one-third of households continue to be debt free.

“The firm labour market is another factor mitigating the risk that a debt-associated downturn is brewing,” notes Wright. “With employment at an all-time high and household income and savings on the rise, we expect household debt to remain in check, which should limit the weakness in the housing market and support consumer spending.”

RBC says that new Bank of Canada Governor Stephen Poloz will likely maintain interest rates at the current level for the remainder of 2013, and start to reduce the amount of stimulus in the second half of 2014.

Globally, RBC expects the world’s economy to continue growing at a modest pace in the first half of 2013 as a result of Europe’s ongoing struggle to get out of recession and the US economy absorbing government austerity measures. Growth is likely to accelerate later this year, however, as the benefits from structural changes combined with very supportive interest rates boost global economic momentum.

After a generally disappointing finish to 2012, the economic performance across the majority of Canada’s provincial economies improved in early 2013. RBC forecasts that natural resource-intensive provinces will remain at the top-end of the growth rankings in and that stronger exports will be the mainstay for many of Canada’s provinces.

Newfoundland and Labrador will outpace all other provinces while Alberta, Saskatchewan and Manitoba will continue to grow at the top-end. The remaining provinces are expected to stand slightly below the national average for growth.

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