Canada to benefit from a strengthening U.S. economy in 2014: RBC Economics

Craig Wright, RBC's chief economist, discusses Canada's outlook

TORONTO, Dec. 12, 2013 /CNW/ - After another year of mediocre growth, Canada's economy is expected to perk up in 2014, supported by a pick-up in exports and strengthening business investment, according to the latest Economic and Financial Market Outlook issued today by RBC Economics. RBC is forecasting real GDP growth of 1.7 per cent in 2013, 2.6 per cent in 2014 and 2.7 per cent in 2015.

"The U.S.'s slow and subpar recovery has no doubt played a part in the underperformance of Canadian exports through 2013," said Craig Wright, senior vice-president and chief economist, RBC. "Looking ahead to 2014, we anticipate that stronger growth south of the border will translate to increased demand for Canadian exports, especially as the expansion fans out and business investment accelerates. This expected uptick in both exports and business investment is a critical component of our outlook for Canada's economy."

The report indicates that strong exports relative to imports in 2014 will result in trade contributing more than it has in a decade to Canada's annual growth rate. RBC anticipates that this will cause a rebound in investment activity particularly in the manufacturing and mining and oil and gas sectors.

Extra support to external trade will come from a weakening Canadian dollar over the course of next year, says RBC. The softer currency reflects a leveling off in commodity prices alongside a generally firmer tone for the U.S. dollar.

RBC also assumes that neither the Bank of Canada nor the Fed is likely to adjust the overnight policy rate in 2014, meaning short-term interest rate spreads will hold steady. Longer-term yields on government bonds, however, are likely to rise in line with the gradual, upward shift in U.S. treasury yields; RBC indicates that the pace of increase will be gradual enough to ensure that the economy doesn't falter and that the Canadian housing market stabilizes.

Canada's labour market has been resilient with 148,000 jobs created so far in 2013 and the unemployment rate falling to a cycle low of 6.9 per cent, RBC says. This increase in employment has driven up wages by close to 2.0 per cent on average so far this year while inflation has only increased at an average 0.9 per cent pace. As labour markets tighten further, wage pressures are expected to have a greater upward impact on inflation through the forecast moving it closer to the Bank of Canada's 2.0 per cent target rate. RBC notes that real wage gains will continue to fuel consumer spending going forward.

"Rising incomes and improving household balance sheets will be the key factors supporting consumer spending which we expect to grow by 2.5 per cent in 2014, up from 2.2 per cent this year," added Wright.

On the provincial front, RBC says that an improvement in underperforming provincial economies will be reflected in Canada's real GDP growth rising in 2014. The country will continue to see the West out-performing the East with the dividing line shifting slightly east to the Ontario-Quebec border.

A complete copy of the RBC Economic and Financial Market Outlook is available as of 8 a.m. ET. A separate publication, RBC Economics Provincial Outlook, assesses the provinces according to economic growth, employment growth, unemployment rates, retail sales, housing starts and consumer price indices.

SOURCE RBC

For further information:

Craig Wright, RBC Economics Research, 416 974-7457
Paul Ferley, RBC Economics Research, 416 974-7231
Elyse Lalonde, Communications, RBC Capital Markets, 416 842-5635