Boost in commodity prices creates a net wealth benefit for domestic
TORONTO, June 9, 2011 /CNW/ - Canada's economy has been a frontrunner in
the race to expansion with real GDP standing two per cent above its
pre-recession peak and posting a 3.9 per cent annualized rate gain in
the first quarter of 2011. Aided by a projected continued recovery in
the U.S., Canada's economy is forecast to expand by 3.2 per cent in
2011 and 3.1 per cent in 2012, according to the latest Economic Outlook
released today by RBC Economics.
"With more than 50 per cent of Canadian exports linked to natural
resources, higher commodity prices have provided a substantive and
positive boost to our economy," said Craig Wright, senior
vice-president and chief economist, RBC. "Higher prices mean higher
domestic income growth."
Courtesy of an increased demand for commodities and a widening spread in
short-term interest rates, the Canadian dollar broke parity with the
U.S. dollar in early January. Canada's currency remains strong and is
likely to hold its current range for the remainder of 2011.
"The dollar has made a remarkable recovery from the all-time low we saw
in 2002, to within six per cent of its all-time high," explained
Wright. "This improvement has caused a dramatic fall in the price of
imported machinery and equipment and will likely drive Canadian
companies to purchase imported goods to update their capital stock and
improve Canada's productivity performance."
RBC forecasts a 7.1 per cent gain in imports; growing at about double
the average pace compared to the previous decade. Strong demand for
commodities and a revival in U.S. demand for autos will drive healthy
gains in exports - at an average of nine per cent per annum for the
next two years.
While the report notes that consumer spending was a key contributor to
growth through the recovery, a record high debt-to-income ratio will
restrain spending going forward.
Similarly, 2010's surge in Canada's housing market is unlikely to be
sustained, meaning little support will be derived from the residential
real estate market in 2011 and 2012. Housing affordability deteriorated
earlier this year because of a combination of rising home prices and
steady interest rates. Going forward, interest rates are expected to
"Rising interest rates will largely be balanced by growing income levels
and ultimately contribute to a stable home price environment," explains
Wright. "With interest rates heading higher, we anticipate that the
volume of home sales will calm and prices will post very modest gains."
Overall, RBC forecasts Canada's economy to grow at a respectable clip
over the next two years. The main support for growth will switch from
being household-driven, as consumer spending slows, to business-driven,
as investment by business strengthens. This forecast factors in the
assumption that Canada's output gap will be eliminated in the second
quarter of 2012 as the headline and core inflation rates gravitate
toward the Bank of Canada's two per cent target.
"At this point, the level of uncertainty about the global economic
outlook - worries about sovereign debt and fiscal balances - is driving
the Bank of Canada to hold the policy rate at its current level of one
per cent," says Wright. "As concerns start to dissipate, attention will
turn to domestic fundamentals."
RBC anticipates the next rate increase will likely happen in the fall;
the Bank of Canada is expected to raise the overnight rate to 1.75 per
cent by the end of 2011 and to three per cent at year-end 2012.
At the provincial level, Alberta is the one to watch in terms of
economic growth, with Newfoundland and Labrador following closely
behind. The other Prairie provinces are also making their mark -
Saskatchewan and Manitoba are expected to achieve above-average growth
this year and be among the top-four. Again, Ontario is expected to
hover close to the national average, while British Columbia's growth is
reduced in light of the somewhat sluggish start to 2011. The Atlantic
Provinces continue to show mixed results at the lower end of the pack.
RBC's report indicates that the U.S. economy is moving into expansion
mode. In the first quarter of 2011, real GDP exceeded the pre-recession
peak level by 0.6 per cent, although growth was moderate in comparison
to the previous two quarters. Special one-off factors, like poor
weather conditions, were to blame for this temperate growth. As these
factors pass, RBC projects growth in the U.S. economy to increase,
resulting in a 2.7 per cent gain this year and 3.4 per cent growth in
A complete copy of the forecast is available as of 8 a.m. ET, at www.rbc.com/economics/market/pdf/fcst.pdf. 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, RBC Media Relations, (416) 974-8810