Canadian Treasurer

June 11 , 2014

Canada's economic growth hinges on external demand

Toronto , ON  –  External demand for   Canada's  goods is central to the country's economic growth story this year and next, says the ‘Economic and Financial Market Outlook’ by RBC Economics. It is forecasting real GDP growth of 2.4 per cent in 2014 and 2.7 per cent in 2015.

"Our outlook for Canada is predicated on the fact that U.S. economic growth will be broadly based and that slowing global import demand that started in early 2012 will reverse course," says Craig Wright, senior vice-president and chief economist, RBC. "With global demand improving, the weakening Canadian dollar will provide that extra lift needed to shift the export sector into more than a bit player in Canada's  economic growth story."

Demand for Canadian exports will strengthen the pace of hiring, RBC says, and move the labour market closer to full employment. Against this backdrop, an uptick in wages will result in incomes rising faster than household mortgage and credit growth, according to Wright, which should cap the upside in the debt-to-income ratio. The cost of servicing debt remains historically low at this point, staving off increases in delinquencies and bankruptcies by consumers.

A strengthening in demand from abroad will also underpin business confidence in 2014 and 2015, says RBC. This was substantiated in the latest Bank of   Canada  business outlook survey, which showed a growing number of firms experienced faster sales growth over last year with the majority expecting to see sales increase further in the year ahead.

The report notes that the housing market is set to slow later this year as sales and construction activity gear down. As the housing market cools, RBC expects a transition from investment in residential real estate to spending on non-residential projects. Furthermore, the housing sector will provide limited support to the economy next year as home resales ease, prices stabilize, and building activity slows.

RBC's forecast anticipates that the economy will quickly bounce back from the weather-related slowing in the first quarter of 2014 and grow at an accelerated pace for the remainder of the year. Wright says this will limit the downside risks to core inflation, and should be sufficient enough to convince the Bank of   Canada  that conditions warrant the re-insertion of a tightening policy bias before year-end. Still, it is likely to maintain a policy rate of one per cent for the remainder of this year.

"As the economy approaches its full potential, the labour market will tighten and wages will increase more rapidly, all of which will support the move to higher inflation," says Wright. "We expect that both the headline and core inflation rates will approach the two per cent target in the second half of 2015."

On the provincial front, most economies felt the winter blues, but appeared to maintain a forward momentum. This year, RBC expects Alberta  will far outpace all other provinces in terms of growth.

"The contrast between booming conditions in Alberta  and a more moderate pace of growth elsewhere across   Canada has rarely been as stark: we expect Alberta  to be the only economy to grow faster than the national average in 2014," says Wright.




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