Consumer spending and exports to underpin Canada's economic growth in 2015: RBC Economics

TORONTO, March 12, 2015 /CNW/ - RBC Economics downgraded their forecast for the Canadian economy in 2015 after a sharp drop in energy prices. According to the latest RBC Economic Outlook issued today, Canada's real GDP is projected to grow by 2.4 per cent this year - a reduction of 0.3 percentage points from the forecast issued in December.

RBC notes that while the drop in energy prices is clearly a negative for Canada's oil and gas sector, much of the weakening will be offset by strength in consumer spending and exports.

"Lower gasoline prices puts more money in the pockets of consumers - we estimate that the drop in oil and corresponding fall in gas prices will pump up consumer purchasing power by $11 billion in 2015," said Craig Wright, senior vice-president and chief economist, RBC. "Consumption's contribution to real GDP growth in 2015 will be boosted by 0.2 percentage points."

RBC says that exports will provide a lifeline to Canada's economy this year after a strong performance in 2014 when volume increased by 5.4 per cent - the best showing in four years. More important, however, was the broadening export sales to non-commodity goods that make up more than 50 per cent of Canadian exports. These sales should compensate for any pullback in demand for energy and other commodity products.

The Canadian dollar is at the lowest level since the recession and RBC notes that two-thirds of this decline was because of the drop in oil prices. The relative movement in monetary policy expectations and weakening prices of other commodities accounted for the remainder of the decline. Even if oil prices recover this year, RBC expects the average price of WTI to be $53.00 per barrel, 43 per cent lower than the average in 2014.

"As market expectations turn from rate cuts to rate hikes in Canada, and assuming oil prices rise in 2016 to average $77.00, the Canadian dollar is likely to partially recover," said Wright.

The report indicates that capital spending by the oil and gas industry will fall by as much as 25 per cent this year, resulting in a one percentage point drag on GDP growth. Still, solid balance sheets, rising demand and a gradual rise in capacity utilization set the stage for an 8 per cent increase in investment outside the oil and gas sector, capping the drag from business investment on real GDP growth to 0.3 percentage points.

"We see the hit to the economy from a pullback in oil and gas activity as targeted and regional and unlikely to derail Canada's economy this year - offsets will be sufficient enough to allow the economy to grow above-potential in 2015," said Wright. "As firmer consumer spending and exports become increasingly evident, the BoC will be in a position to remove the insurance it has put in place around monetary policy."

On the provincial front, RBC expects a material reallocation of growth among oil-producing and oil-consuming provinces. Alberta's growth forecast was significantly reduced, as was to a lesser extent, the outlook for Newfoundland and Labrador and Saskatchewan. Brighter prospects are now in place for Ontario, British Columbia, Quebec and most of the other oil-consuming provinces.

South of the border, U.S. real GDP is forecast to post a strong 3.1 per cent increase in 2015, the fastest gain in a decade. RBC indicates that this projection is underpinned by broad-based acceleration in economic activity with the consumer, government and business all providing a lift to growth. Improvement in balance sheet health across all sectors, historically low interest rates and access to capital are key building blocks for RBC's above-potential call on growth this year.

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


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