Economy to grow 2.8% in 2014, says RBC

The Canadian economy is expected to grow in the second half of 2013 and through 2014.

Fuelled by persistent support from low interest rates coupled with strong demand for exports, RBC Economics projects real GDP growth of 1.8% in 2013 and 2.8% in 2014.

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Exports have increased at the fastest pace since late 2011, and RBC expects even stronger Canadian export figures as the global economy perks up.

“The improvements in the U.S. housing market, rising motor vehicles sales and increasing U.S. business investment in machinery will augment the rising demand for Canadian exports coming from the Euro-area and the U.K. as the pace of economic growth improves,” says Craig Wright, senior vice president and chief economist, RBC.

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Employment data has been extremely volatile. However, the six-month average provides a more accurate view of Canada’s labour market conditions. As of August 2013, Canada had an average gain of 12,100 jobs per month for the previous six months.

“We expect this pace of job creation to rise slightly on average through the forecast,” says Wright. “This continuing support to household spending along with the improving external environment and rising investment will allow overall GDP growth to strengthen in 2014.”

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The unemployment rate has been oscillating in a narrow band between 7.0 and 7.2% since November 2012, most recently registering at 7.1% in August 2013. RBC expects the gradual narrowing of the output gap to be accompanied by a decline in the unemployment rate to 6.6% by the end of 2014.

Monetary policy remains supportive for the economy, with the BoC’s overnight rate at 1%. RBC’s bottom-line scenario assumes that Canada’s economy reaches full potential in the first half of 2015, when inflation is expected to approach the 2% target. Further, RBC anticipates housing activity will moderate and the recently established slowing trend in mortgage credit growth will continue to support what the BoC called a “constructive evolution of household balance sheet imbalances.”

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Against this backdrop, the BoC will begin to temper the policy stimulus in the second half of next year to accommodate the lags between changes in the policy rate and economic activity. To that end, RBC forecasts the overnight rate will remain at 1% in 2013 with 50 basis points of increases likely by the end of 2014.

The Canadian dollar has recently been trading off investor sentiment, as waves of risk appetite and risk avoidance continue. Commodity prices are range bound belying a steady decline in prices for minerals and metals and recovery in energy prices. Still, RBC indicates commodity price movements are providing no clear direction for investors in Canada’s currency.

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“As long as we don’t see a strong upward shift in commodity prices, we expect the Canadian dollar will maintain its weakening trajectory for the remainder of 2013,” says Wright. “Next year, as the economy propels itself forward, the loonie is likely to regain ground against the U.S. dollar.”

On the provincial front, RBC maintains the view that natural resource-intensive provinces will continue to top the growth rankings in 2013. Newfoundland and Labrador will lead the way, followed by Alberta, Saskatchewan and Manitoba. The pace of economic growth in all other provinces will be below the national average of 1.8%.