Expect Canada’s economy to snap back this year, says RBC

Canadian economic growth will snap back after a second-quarter contraction, and it will get a further lift in 2017 from rising energy prices, low interest rates and federal stimulus, says the latest RBC Economics Outlook report.

The forecast calls for real GDP growth of 3.7% (annualized) in the third quarter of 2016, as rebuilding takes place in Alberta, followed by a slower 1.9% gain in the fourth quarter.

“The Alberta wildfires and sharp pullback in oil sands production in May took the Canadian economy on a brief detour into negative growth,” says Craig Wright, senior vice-president and chief economist at RBC. “Yet the recovery should spur a similarly sharp rebound in growth in the latter half of this year, and we anticipate that momentum will carry over into next year.”

Canadian GDP growth is expected to accelerate to 1.8% in 2017 from 1.3% in 2016.

Also, with core inflation likely to hover around the Bank of Canada’s 2% target, there is little reason for the central bank to take any action on interest rates. RBC expects the Canadian central bank to hold its overnight rate steady through the remainder of 2016 and 2017 as well.

Read: Bank of Canada raises concerns about economy, holds rate

Limited upside for Canadian dollar

RBC projects that oil prices will gradually rise to $50 per barrel in 2016 and that they push higher toward $60 per barrel in 2017.

Read: Oil: $60 is the new $90

However, the Canadian dollar is expected to see minimal benefit from higher oil prices.

Plus, a U.S. Federal Reserve interest rate hike is likely in the first half of 2017 and that would bolster the U.S. dollar, while the Bank of Canada is expected to hold steady on rates.

Provincial outlooks more balanced for 2017

The economies of Alberta, Saskatchewan, and Newfoundland and Labrador will contract further this year, says RBC, as the oil-producing provinces continue to struggle. But some of the recent weakness in Alberta from the wildfires in Fort McMurray should start to reverse in the second half of 2016.

All other provinces, except New Brunswick, are expected to continue to expand in 2016, albeit at varying paces.

“Momentum appeared to slow this spring in several oil-consuming provinces, including Ontario, Quebec and Manitoba, and we lowered our 2016 growth forecasts for eight provinces,” says Wright. But, “our 2017 outlook shows more balanced growth across the country, with Alberta and Saskatchewan returning to positive growth and economic activity moderating in British Columbia.”

Read the RBC Economic and Financial Market Outlook and the RBC Economics Provincial Outlook, which looks at each of the provinces according to economic growth, employment growth, unemployment rates, retail sales, housing starts and consumer price indices.

Outside of Canada

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U.K. economic outlook downgraded

In the wake of the Brexit vote, RBC expects the U.K. economy will barely muster any growth in 2017, which is a massive downgrade from the previous projection for a 2.1% rise. Also, growth in its largest European trading partners is aforecasted to slow down.

Read: Don’t be fooled by positive U.K. data

Still, Brexit repercussions should exert little pressure on Canada and the United States due to their proportionately smaller trade flows with the U.K.

U.S. consumers on a roll

U.S. real GDP growth averaged a meagre 1% in the first half of 2016, largely due to weakness in business fixed investment and inventories, while consumer spending ramped up. Strong labour markets, accelerating wage growth and low financing rates should keep U.S. consumers spending.

However, uncertainty about the U.S. presidential race in the near term may produce periods of volatility for the U.S. dollar. Yet RBC maintains that the U.S. currency will post modest gains against the Euro, Canadian dollar and sterling, as markets look for a U.S. Federal Reserve policy rate increase in the first half of 2017.

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