Canada’s GDP will grow by 2.6%: RBC

Canada’s economic growth was subdued in the Q1 2012, but is expected to gain ground, says the latest RBC Economic Outlook.

Looking ahead, the country will see real GDP growth of 2.6% in 2012, says RBC. The bank forecasts strong gains in employment, brisk housing market activity, firm business investment flows, and a pick-up in exports will speed up expansion.

“We expect gains in consumer spending will be complemented by stronger business investment flows,” says Craig Wright, senior vice-president and chief economist, RBC Exports. “We should also pick up as U.S. demand recovers.

He says conditions for growth are positive, supported by a continuation of a low interest rate environment and a healthy Canadian financial sector ready to provide credit.

After eight months of volatile and largely disappointing employment data in Canada, March and April posted strong gains—a total of 140,000 jobs were created over this two-month period.

Read: Canada’s employment slowed in May, unemployment rate stalls

And, despite recent stats, the unemployment rate has continued on its downward trajectory over the long term. The bank says recent improvements in labour market conditions could stimulate a return to the labour force. The Canadian housing market isn’t showing signs of significant stress either, despite historically high home prices. To date, activity stayed positive in Q2, but is to a more moderate pace.

Read: Canada’s houses too expensive

“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 report notes Canadian businesses are in an enviable position—holding high cash balances and access to financing at low interest rates. Recent surveys indicate Canadian businesses intend to invest in capital goods and non-residential construction, which RBC says will account for approximately one-third of GDP growth over the next couple years.

Read: Macro concerns sap Canadian business confidence

“Canada’s net exports are forecast to take on an increasingly important role in the country’s economic growth,” says Wright.

He adds, “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.”

The domestic economy is enjoying relatively sound fundamentals and the bank expects the Bank of Canada will raise interest rates later this year. Canadian financial markets are expected to weather the uncertainty associated with the European debt crisis, while momentum in the U.S. economy will continue to accelerate, with real GDP forecast to expand by 2.5% next year.

Western Canada will dominate growth this year and next, with Alberta forecast to take the lead for the second consecutive year. Saskatchewan and Manitoba will follow closely behind, as B.C. and Ontario grow at rates close to the national average.

Read on for more about Ontario’s economy and its expected performance.

Ontario’s economy is showing positive signs and RBC forecasts growth will accelerate in 2012, closing much of the gap between current levels and the current national average, says RBC. Real GDP will climb to 2.5% in 2012, just shy of the 2.6% projected for Canada.

“We expect Ontario’s economic growth to pick up the pace this year. Improvements in provincial export performance will be the key to this growth, while brisk residential construction activity will play a significant supporting role,” says Wright.

He adds, “Still, restraint in public sector spending will slow the pace somewhat and contribute to Ontario ranking in the middle of our provincial growth forecast.”

A recovery in U.S. motor vehicle sales and production is clearly helping to reinvigorate Ontario’s key auto sector. In the first four months of 2012, auto production averaged just above 2.5 million units (annualized), only slightly lower than the 2.6-million average during the 10 years prior to the recession.

New motor vehicle production in Canada has stepped up significantly since the lows of the recession and has now virtually returned to pre-recession levels.

While the Ontario economy will gather some speed this year, it will continue to face headwinds, including reductions in public sector spending. Since June 2011, public sector jobs have fallen almost 5%.

The Ministry of Ontario’s provincial account estimates show public spending of goods and services, as well as capital investment, has reduced economic growth in every quarter of 2011, causing a drag that will persist.

Residential investment, though, shows no sign of letting up. The value of new home construction in Ontario was up by more than 17% in Q1 2012 from last year, and housing starts surged to a seven-year high in March and April.

“New home sales were particularly strong last year in the Greater Toronto Area, with a new record high set in the condo segment,” adds Wright. “With so many projects on deck, we have revised our provincial housing starts forecast higher for both 2012 and 2013.”

RBC expects export gains to level off in 2013, as the auto sector reaches capacity limits and housing starts slow, leading to projected provincial growth of 2.4%.