Export surge boosts Canadian economy

Solid net exports in the final quarter of 2010 helped Canada’s economy finish the year with stronger than expected gains, according to the latest Economic Outlook released today by RBC Economics.

Net exports added 4.5 percentage points to the quarterly growth rate, the report explains. Consumer spending also played a vital role in driving overall GDP, marking the fastest increase in spending since late 2007.

RBC is calling for real GDP to increase 3.2% in 2011, as U.S. demand for Canadian exports increases. Growth in 2012 is expected to rise by 3.1%.

“We expect net exports to continue to bolster economic growth in 2011 and 2012, as long as demand for motor vehicles and commodity-related products remains robust; these industries account for two-thirds of Canadian goods sold abroad,” said Craig Wright, senior vice-president and chief economist, RBC.

“A sharp rise in commodity prices will help maintain a strong Canadian dollar throughout 2011. The strong dollar will support Canadian businesses importing capital equipment to improve productivity growth,” Wright added.

RBC expects the Bank of Canada to resume tightening in late May, and the overnight rate to rise from 1% to 2% by year-end. Incremental rate increases combined with anchored inflation expectations will result in less upward pressure on long-term interest rates.

Labour market conditions will remain firm in 2011, according to the report, and disposable income is expected to post a 4.1% gain that will provide continued support to consumer spending.

“Consumers’ earlier confidence in taking on increasing amounts of debt was based on a combination of lower interest rates, a strengthening labour market and a 4.6 per cent rise in disposable income,” explained Wright. “An expected slowing in the housing market, rising interest rates and tightening mortgage lending standards all add up to a levelling out in consumer debt relative to income.”

The report also suggests Saskatchewan will lead the country in growth this year. Alberta is expected to return to the top three, closely trailing growth in Newfoundland and Labrador. Ontario and Manitoba will hover close to the national average while both Quebec and British Columbia will fall slightly below. Nova Scotia, New Brunswick and Prince Edward Island are still projected to lag behind at the lower end of the scale for 2011.

On the U.S. economy, RBC is calling for growth of 3.4% in 2011 and 3.6% in 2012. These expectations reflect the passage of the tax cut package in December, continued labour market improvements, ultra-low interest rates and tame underlying inflation (when measured in consumer prices).

Staff

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