Canada’s economic growth curbed: RBC

Cautious business spending and increased U.S. fiscal restraint will weigh on Canadian growth, finds RBC Economics.

The bank trimmed its real GDP growth forecast to 1.8% through 2013, following softer-than-expected growth in 2012.

Read: Canada’s economic ranking improves “After boasting a relatively strong economic performance over the past several years, Canada’s economy hit a speed bump in late 2012,” says Craig Wright, senior vice president and chief economist, RBC. “That said, financial conditions continue to support growth. As confidence recovers, business spending should accelerate, albeit at a less rapid pace than we saw in the early days of expansion.”

Strong company balance sheets will help to abet business spending. Also, high levels of household debt will limit spending on housing as well as goods and services, although moderate gains in income and employment will partially offset this, RBC says.

Read: Fed to deliver U.S. economic outlook “With household spending likely to fall slightly, we need a pick-up in not only business investment but exports as well if we want to see the economy return to above-potential growth,” says Wright.

Pent-up demand in the U.S. for housing and vehicles will help fuel Canadian exports. RBC expects a rise in U.S. business investment, which should strengthen demand for Canadian machinery exports. However, greater-than-expected fiscal restraint emerging in the U.S. with the implementation of the sequestration expenditure cuts in March will temper this strength.

Read: U.S. unemployment rate edges down Looking at the BoC’s policy rate, RBC predicts it will remain at the current level due to weaker growth in Canada over the second half of 2012, which resulted in a widening output gap — the difference between actual and potential output — and lower inflation.

“The urgency to boost interest rates is now less compelling; concerns that low interest rates were fueling an untenable buildup in consumer debt are being alleviated because of the slowing pace of household debt accumulation,” says Wright. “RBC forecasts the overnight rate will remain at 1% in 2013, with conditions likely to support a gradual increase starting in mid-2014.”

Read: Canada vulnerable to global risks The downward revision to the national growth forecast contributed to lower growth expectations for a majority of provinces in 2013, with Newfoundland and Labrador being a main exception. However, provincial growth is expected to strengthen across most of the country in 2014.

Newfoundland and Labrador will emerge farther ahead of the pack at the top of the 2013 provincial growth rankings. The Prairies — Alberta, Saskatchewan and Manitoba — will continue to grow at the top-end. Nova Scotia is the only other province expected to grow just above the national average, while the remaining provinces stand below the national mark.

Staff

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