Craig Wright, RBC's chief economist, discusses Canada's outlook
TORONTO, March 19, 2014 /CNW/ - As the global economy continues to
recover, demand for Canada's exports will pick-up, fuelling real GDP
growth in the period ahead, according to the latest Economic and Financial Market Outlook issued today by RBC Economics. RBC is forecasting real GDP growth of
2.5 per cent in 2014 and 2.7 per cent in 2015.
"For the last four years the household sector has been the key driver of
Canada's economic growth. We expect that to change in 2014 - as the
global economy continues on its path to recovery, exports will become
increasingly central to Canada's growth story," said Craig Wright,
senior vice-president and chief economist, RBC. "Not only will the
drivers of growth change, but the pace of economic activity will gather
speed following two years of sub-potential increases."
RBC notes that this transition has already started to happen. Net
international trade contributed a relatively modest 0.3 percentage
points to growth in 2013, which represented the first positive
contribution since 2001.
Export volumes stood 5.0 per cent below their pre-recession peak at the
end of 2013. A large part of this underperformance is attributable to
the subpar U.S. recovery, says RBC. Competitiveness issues also weighed
on growth; the relatively strong Canadian dollar during the
post-recession period was one of these factors.
"It is the changing fortunes of both the U.S. economy and the Canadian
dollar that will act as catalysts for stronger exports in the year
ahead," added Wright.
The report notes that the sharp selling pressure on the Canadian dollar
that surfaced in late-October 2013 and subsequently picked up momentum,
stalled in February. RBC still anticipates a further depreciation in
the period ahead, though at a slower pace with weakness attributed to
optimism about the U.S. economy rather than any made-in-Canada factors.
In fact, RBC expects the loonie will trade at $0.87 U.S. at the end of
2014 and $0.85 U.S. at year-end 2015.
"A weaker Canadian dollar enhances the competitiveness of Canadian goods
in the U.S. market - historically, a 10 per cent depreciation boosting
export volumes by 3.3 per cent in the following two years," explained
The household sector is unlikely to be a significant factor in the
strengthening in the economy in 2014, RBC says, largely owing to a
pause in the housing market. Spending on goods and services is expected
to accelerate relative to the past couple of years rising by 2.5 per
cent in 2014 and 2.3 per cent in 2015. Historically low interest rates
coupled with a well-functioning financial system and persistent, but
moderating, employment growth will provide needed support.
The Outlook notes that market interest rates will continue to move
higher in 2014 led by increases in longer-dated yields. Fed tapering of
its bond buying program will exert upward pressure on treasury yields
and Canadian bond yields will move in sync, says RBC. Shorter-term
yields in Canada are also forecast to increase in 2014 as a
strengthening in economic growth, tightening labour market conditions
and accelerating wage growth fuel a steady, albeit slow, increase in
inflation. This is expected to occur despite the official overnight
rate remaining unchanged at 1.00 per cent through this year.
"As the downside risks to the inflation outlook dissolve, the Bank of
Canada is likely to re-establish a tightening policy bias over the
course of this year - we expect the first hike to the overnight rate in
the second quarter of 2015," said Wright.
RBC expects the majority of provincial economies in Canada to accelerate
their pace of growth in 2014. Alberta will stand atop the provincial
growth rankings, well ahead of Ontario, the only other province to grow
at or above the national rate. The remaining provinces will grow at
varying paces below the national average.
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
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