Canadian economy picking up in 2017: RBC Economics

Canadian exports are projected to accelerate slightly following a subpar 2016

March 10, 2017
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TORONTO—The Canadian economy is showing strength in employment, housing starts and a rebound in energy investment, according to the latest RBC Economic Outlook report. RBC Economics expects real gross domestic product (GDP) to grow by 2.0 percent in 2017, followed by a slightly firmer 2.1 percent in 2018.

Consumers will continue to support growth in 2017, according to the report. Canadian exports are projected to accelerate slightly following a subpar performance in 2016.

“Economic conditions, including a pickup in U.S. business investment and modest U.S. export growth, are likely to bolster Canadian exports, but the threat of protectionist trade policies has the potential to hurt Canada’s small, open economy,” said Craig Wright, senior vice-president and chief economist at RBC.

Federal government spending on infrastructure projects will provide more significant support in 2017 and this activity is expected to add almost half a percentage point to the national growth rate. At the same time, a slowdown in real estate activity is likely to weigh down growth, as lack of affordability and legislative changes cool some overheated urban housing markets.

While a steady, modest increase in energy prices is positive for the Canadian dollar, a more significant factor in 2017 will be the interest rate differential between Canada and the United States. The US dollar is likely to appreciate against most major currencies as the Federal Reserve raises rates through the year. Stronger-than-expected US economic data will likely prompt the Fed to increase its policy rate by 25 basis points this month, and a further 50 basis points later in 2017.

The Bank of Canada is expected to start tightening in 2018, which will stabilize the interest rate differential next year.

RBC forecasts the Canadian dollar will end 2017 lower at 72.5 US cents, after trading around 76 US cents in the first two months of the year. The Canadian dollar is projected to reverse most of this depreciation in 2018 rising to 75.2 US cents by the end of 2018.

The outlook for the provincial economies is generally bright. Modest growth is seen in the Maritime provinces with more vigorous expansion to come in the central and western provinces. Ontario is expected to lead the way for the first time since 2000, with a growth rate of 2.5 percent.

Two of Canada’s oil-producing provinces, Alberta and Saskatchewan, will swing back to positive growth in 2017 after two years of economic contraction. However, despite a recovery in energy markets, RBC expects economic activity in Newfoundland and Labrador to decline the most (-3.6 percent) since 2012.

RBC forecasts global growth will hit 3.4 percent in 2017, the best pace since 2014, although geopolitical uncertainties stemming from the US administration’s economic policies, the UK’s Brexit negotiations with the European Union, and elections in France and the Netherlands have potential to negatively affect global trade flows and associated growth.

Global inflation is poised to rise alongside the rebound in energy prices. Nevertheless, RBC expects central banks in Europe, England and Canada to leave monetary policy unchanged as these economies continue to operate with excess capacity.

The US economy is projected to grow by 2.3 percent in 2017 and the same pace in 2018. While RBC assumes the US administration will lower taxes, which would boost consumer and business spending, the timing and configuration of tax policy changes are not clear.

If the administration’s anti-trade rhetoric results in actual levies on US imports, then consumers south of the border would face higher costs and countries affected by the tariffs would be expected to retaliate, negatively affecting US GDP and employment.