Canada's economy to accelerate after sluggish start to 2015: RBC Economics

TORONTO, June 3, 2015 /CNW/ - The broad-based weakness that knee-capped Canada's economy earlier this year will prove to be temporary with stronger performance expected in the latter half of 2015, according to the latest RBC Economic and Financial Market Outlook issued today by RBC Economics. RBC is projecting real GDP growth of 1.8 per cent in 2015 and 2.6 per cent in 2016.

Early 2015 proved challenging for Canada's economy as severe winter weather cut into domestic and external demand, auto sector retooling took the wind out of manufacturing, and low oil prices sapped investment activity in the energy sector. This combination of circumstances resulted in the economy contracting mildly in the first quarter of 2015.

"Our outlook for Canada's economy reflects a positive read on expectations for consumption and housing, and the notion that a strengthening U.S. economy and a more competitive domestic currency will fuel increased demand for Canadian exports," said Craig Wright, senior vice-president and chief economist, RBC.

The RBC report indicates that consumer spending will provide a solid contribution to growth in 2015 with labour market conditions gradually firming, wage growth accelerating, and lower gasoline prices lifting disposable incomes.

On the business side, investment is headed for a weak year with energy companies aggressively scaling back their spending.

"Our forecast assumes investment by energy companies will fall by 30 per cent this year," said Wright. "For companies outside the energy patch, accommodative financial conditions in tandem with stronger domestic and foreign demand will translate to a pickup in investment activity. This will partially mitigate the economic fallout from the drop in the price of oil."

As oil prices recover, the weight from the pullback by energy companies will lessen while non-energy companies continue their expansion plans in order to meet rising foreign and domestic demand.

RBC says a recent rise in housing sales signals oil-producing provinces may have hit their lows early in the year; however, given the uncertainty surrounding the near-term outlook for the price for oil, another round of selling cannot be ruled out. The rebound in sales activity in March and April in oil-consuming provinces will likely be maintained, resulting in overall sales rising 1.5 per cent and prices increasing an average of 3.8 per cent nationally in 2015.

"Another rise in average home prices should put some pressure on affordability, though it will be tempered by historically low rates," said Wright. "In 2016, a combination of price increases and rising rates will put more stress on affordability levels and re-sale activity will begin to soften."

RBC's outlook notes that a divergence in monetary policy between Canada and the U.S. will result in continued pressure on the Canadian currency, causing the dollar to depreciate to 77 U.S. cents, down from 81 U.S. cents - the average so far this year. Wright comments: "The Canadian dollar is likely to remain below 80 U.S. cents in 2016 with the BoC policy rate expected to stay below that of the Fed."

RBC also anticipates headline inflation to bottom in the second quarter of 2015 as the effects of lower energy prices lessen. In 2016, rising energy prices and above-potential growth will underpin stronger increases in the headline rate, which RBC expects will remain above the BoC's 2.0 per cent target.

"We maintain that the first increase in the overnight rate will be announced in the second quarter of 2016," said Wright. "By the end of next year, we forecast the overnight rate will be 1.75 per cent, 100 bps above today's rate."

RBC notes that early economic indicators for 2015 largely have disappointed on the provincial front, though this mainly mirrored a concentrated hit to capital spending in the energy sector, as well as stalled North American activity due to unusually cold weather in the east and labour disruptions along U.S. west coast port facilities. RBC says most provinces will kick into higher economic gear over the remainder of 2015.

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