Canada's economy dragged down by the effects of the U.S. slowdown, says RBC Economics



    High export prices continue to temper this weakness

    TORONTO, July 3 /CNW/ - The weakening U.S. economy contributed to
Canada's economic growth taking an unexpected drop in the first quarter of
2008. The national growth rate is forecast to slow to 1.4 per cent for 2008,
according to the latest economic report from RBC. In 2009, Canada's economy is
expected to rise 2.5 per cent.
    "Going forward, Canada's economy will continue to be hampered by flagging
U.S. demand for exports, but domestic demand will more than offset the drag
this year," said Craig Wright, senior vice-president and chief economist, RBC.
"The surprise economic contraction will be short-lived as growth prospects for
the remainder of the year should brighten, with financial market pressures
starting to ease, the U.S. economy getting a boost from the issuance of tax
rebate cheques, and commodity prices remaining historically high."
    Canada's strong terms of trade, boosted by rising export prices, will
drive economic growth. Commodities continue to experience solid demand from
emerging markets such as China. Over the past five years, Canada's gross
domestic income has outpaced gross domestic product by an average of
1.2 percentage points, also providing steady support for government revenues,
corporate profits and the labour market.
    Inflation has become the predominant worry for central banks given the
elevated level of commodity prices, especially oil. As a result, concern is
growing about an upward boost to inflationary expectations. However, the
modest pace of growth and ease in labour markets are expected to be sufficient
enough to offset these pressures.
    The RBC report forecasts that Canada's core inflation rate will likely
trend higher this year though remain below the Bank of Canada's two per cent
target. Mitigating factors that have pushed the inflation rate lower, such as
the impact of the rising Canadian dollar in 2007 and the retail discounting
that Canadian companies have had to offer to compete for market share, will
start to dissipate through 2008. By 2009, RBC expects the inflation rate to
average close to the two per cent range.
    Canada's housing market is also poised to cool in the face of
deteriorating affordability. Housing affordability in most major markets
across the country have deteriorated to their worst levels in almost 20 years.
However, the extent of any weakening is expected to be much less pronounced
than what is occurring currently in the U.S. as the Canadian market did not
experience many of the excesses evident south of the border.
    RBC forecasts U.S. economic growth to be modest this year rising 1.5 per
cent. However, the risks are largely on the downside as greater-than-expected
restraint could emerge from still high energy prices, tight credit conditions
and weakening labour markets. Growth is projected to strengthen to 2.0 per
cent in 2009. This modest growth outlook will help keep inflation pressures
under control through the forecast.
    "We believe that the U.S. economy will avoid a contraction this year and
should start to see sustained upward growth momentum in 2009," said Wright.
    In a separate report, the provincial outlook continues to uphold the
theme of divergent paths taken by the Eastern and Western parts of the
country. Record-high commodity prices and strong global demand for resources
sustain unprecedented prosperity in the Western provinces, while the strong
Canadian dollar, downturn in the U.S. economy and high energy prices continue
to cause hardship in key sectors in provinces east of Manitoba. Saskatchewan
is projected to lead all of the provinces in economic growth for both 2008 and
2009, followed by Alberta, while Newfoundland and Labrador and Ontario are
expected to lag the group this year, but should show some improvement next
year.

    The RBC Economics Provincial Outlook assess the provinces according to
economic growth, employment growth, unemployment rates, personal income
growth, retail sales, housing starts, and the Consumer Price Index.
    A complete copy of the forecast is available as of 8 a.m. E.D.T., at
www.rbc.com/economics/market/pdf/fcst.pdf.





For further information:

For further information: Craig Wright, RBC, Economics, (416) 974-7457;
Jackie Braden, RBC, Media Relations, (416) 974-2124


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