Canada's economy to weather global economic downdraft: RBC Economics

• Accommodative monetary policy continues to be popular in central bank circles
• Net exports increasingly important for Canada's growth
• Western Canada forecast to lead provincial growth rankings in 2012

TORONTO, June 12, 2012 /CNW/ - Canada's economic growth was somewhat subdued in the first quarter of 2012 but is expected to gain ground going forward, according to the latest RBC Economic Outlook issued today by RBC Economics Research. Looking ahead, strong gains in employment, brisk housing market activity, firm business investment flows and a pick-up in exports will increase the pace of expansion. RBC forecasts real GDP growth of 2.6 per cent in 2012.

"We expect that gains in consumer spending will be complemented by stronger business investment flows. Exports should also pick up as U.S. demand recovers," said Craig Wright, senior vice-president and chief economist, RBC. "On balance, conditions for growth are positive, supported by a continuation of a low interest rate environment and a Canadian financial sector that is healthy and ready to provide credit."

Following eight months of volatile and largely disappointing employment data in Canada, March and April posted extraordinarily strong gains. A total of 140,000 jobs were created over this two-month period. Additionally, the unemployment rate continues to be on a downward trajectory, though the pace has slowed from earlier in the recovery. Still, RBC says that recent improvements in labour market conditions may stimulate a return to the labour force and limit the pace of decline in the unemployment rate going forward.

Canada's housing market is not showing signs of significant stress, despite historically high home prices. To date in the second quarter, housing market activity stayed positive, although this is transitioning to a more moderate pace.

"Stark regional differences in the housing market are likely to persist in the near-term," commented Wright. "With the Bank of Canada likely to begin increasing interest rates in the fourth quarter of this year, we expect housing demand to ease and home prices to stabilize at the national level in 2013."

The Outlook notes that Canadian businesses are in an enviable position - holding high cash balances and having access to financing at low interest rates. Recent surveys indicate that Canadian businesses intend to invest in capital goods and non-residential construction, which RBC says will account for about one-third of GDP growth in both 2012 and 2013.

"Canada's net exports are forecast to take on an increasingly important role in the country's economic growth," explained Wright. "In 2012 and 2013, we expect that a strengthening U.S. economy, a soft landing in China and an eventual return to growth in the euro zone will support the fastest pace of Canadian export growth over a two-year period since 2000."

Given the domestic economy's relatively sound fundamentals, RBC expects the Bank of Canada will be in position to raise interest rates later this year, under the assumption that Canadian financial markets will weather the uncertainty associated with the European debt crisis. Momentum in the U.S. economy is also expected to continue to accelerate, with real GDP forecast to expand by 2.5 per cent in 2012 and 3.0 per cent in 2013.

At a regional level, Western Canada is expected to dominate growth again this year and next. Alberta is forecast to take the lead for the second consecutive year, with Saskatchewan and Manitoba following closely behind. British Columbia and Ontario are expected to grow at rates close to the national average, while the remaining provinces are positioned to grow 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 price indices.

Craig Wright, RBC Economics Research, 416 974-7457
Dawn Desjardins, RBC Economics Research, 416 974-6919
Elyse Lalonde, RBC Corporate Communications, RBC Capital Markets, 416 842-5635