Improving global economy will support Canadian growth: RBC Economics

Economic growth will be fuelled by persistent support from low interest rates coupled with strong demand for exports.

TORONTO – Following a period of Canadian economic underperformance that ended in late 2012, the economy is expected to grow at an above-potential pace in the second half of 2013 and through 2014, according to the latest Economic and Financial Market Outlook by RBC Economics.

Fuelled by persistent support from low interest rates coupled with strong demand for exports, RBC projects real GDP growth of 1.8% in 2013 and 2.8% in 2014.

Exports increased at the fastest pace since late 2011 in the first quarter of 2013 and continued to grow in the second quarter. RBC expects even stronger Canadian export figures as the global economy perks up.

So far in 2013, employment data has been extremely volatile; however, the six-month average provides a more accurate view of Canada’s labour market conditions. As of August 2013, Canada had an average gain of 12,100 jobs per month for the previous six months.

The unemployment rate has been oscillating in a narrow band between 7.0 and 7.2% since November 2012, most recently registering at 7.1% in August 2013. RBC expects the gradual narrowing of the output gap to be accompanied by a decline in the unemployment rate to 6.6% by the end of 2014.

RBC states that against this backdrop, the Bank of Canada will begin to temper the policy stimulus in the second half of next year to accommodate the lags between changes in the policy rate and economic activity. To that end, RBC forecasts the overnight rate will remain at 1.0 per cent in 2013 with 50 basis points of increases likely by the end of 2014.

The Canadian dollar has recently been trading off investor sentiment, as waves of risk appetite and risk avoidance continue. Commodity prices are range bound belying a steady decline in prices for minerals and metals and recovery in energy prices. Still, RBC indicates that commodity price movements are providing no clear direction for investors in Canada’s currency.

On the provincial front, RBC maintains the view that natural resource-intensive provinces will continue to top the growth rankings in 2013. Newfoundland and Labrador will lead the way, followed by Alberta, Saskatchewan andManitoba.

The pace of economic growth in all other provinces will be below the national average of 1.8%.

Download a copy of the report here.