After rapid gains in the early part of the year, Canada’s economy slowed in the second quarter and is expected to rebound only modestly over the second half of the year, according to the latest Economic Outlook report from RBC Economics.

RBC slightly pared back its 2010 forecast, calling for GDP growth of 3.3%, down from 3.6% projected last quarter.

“While Canada’s second quarter growth put real GDP close to its pre-recession high, concerns in the U.S. and nervousness about the health of the global economy are weighing on the outlook for the second half of the year,” said Craig Wright, senior vice-president and chief economist, RBC.

RBC forecasts that the economy will continue to grow and that the output gap will be completely eliminated by mid-2012. The labour market has recovered 94% of the jobs lost during the recession, the bank notes. It expects the unemployment rate to decline to 7.3% by the end of 2011, from the 8% that prevailed the second quarter of this year.

With government infrastructure spending to be exhausted in the first quarter of 2011, RBC expects to see pressure on the private sector to fill the void and sustain economic growth.

GDP is expected to rise 3.2% in 2011, down 0.3 percentage points from projections in the bank’s previous outlook. RBC notes that core inflation has been stable through the economic downturn and expects it to remain anchored around the Bank of Canada’s 2% mid-range target.

“Global financial conditions have not been severely damaged by the European sovereign debt crisis as previously feared,” said Wright. “With central banks pledging to do whatever is necessary to keep the recovery on track, interest rates will remain low, supporting business and consumer spending once confidence is restored.”

RBC reduced its U.S. GDP forecast to 2.7% in 2010 and 3.0% in 2011, compared to 3.1% and 3.4% the previous quarter. The bank pointed to a sharp weakening in real GDP in the second quarter and disappointing reports on the housing and labour markets over recent months.

The Canadian dollar has been hurt, along with commodity prices, by uncertainty around the U.S. and global recovery. RBC expects the loonie to remain under pressure, finishing the year at 93.45 U.S. cents, and then again trending upward toward parity by mid-2011.

Saskatchewan to lead growth

At the provincial level, RBC expects all provincial economies to grow in 2010, but the downshift in economic momentum prompted the bank to reduce growth forecasts for most provinces. Exceptions included Saskatchewan, where the growth projection was raised to 6.3% from 3.8%, and Alberta, where growth is expected to be 3.5%, up from 3.1%.

The sharp increase in the forecast for Saskatchewan is mainly related to potash production, the bank said.

“Large cutbacks in potash production were a main factor contributing to the contraction in Saskatchewan’s economy in 2009,” said Wright. “The positive outlook this year reflects recent indications of a sharp reversal of the weakness in potash production, in addition to projected gains in the manufacturing, wholesale and retail trade industries.”

Alberta’s economy, meanwhile, is benefiting from a comeback in the oil and gas sector, according to RBC.

The largest downward revisions were made to Manitoba, down 0.9% to 2.0%, and Newfoundland & Labrador, down to 3.3% from 4.1%. All other adjustments were fairly modest.

IE