Canada’s economy appears to be headed for much a rosier outlook in 2017, bolstered by signs of strength in employment, housing starts and energy, according to a new report from Royal Bank of Canada (RBC) released on Friday.
The latest edition of RBC Economic Outlook, the bank’s latest quarterly forecast, projects that Canada’s real gross domestic product (GDP) will expand by 2% in 2017 and by 2.1% in 2018.
“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,” says Craig Wright, senior vice president and chief economist with RBC, in a statement.
Federal infrastructure spending is also expected to lift the national growth rate by almost half a percentage point. Still, a cooling real estate market will likely dampen growth, the report notes.
Although the modest rebound in energy prices is a boost for the loonie, the U.S. Federal Reserve Board’s anticipated interest rate hikes will place pressure on the Canadian dollar as the interest rate differential begins to play a much bigger factor.
It’s expected that the Fed will raise its policy rate by 25 basis points (bps) this month and then by an additional 50 bps later this year. In turn, RBC anticipates that the Bank of Canada will seek to stabilize the interest rate differential by tightening interest rates in 2018.
RBC projects that the loonie will close this year off at US72.50¢, lower than its value of US76¢ during the first two months of 2017.
The report, which also produces an economic snapshot of the provinces, says that consumer spending and a slight surge in exports will underpin growth, in part.
The view is generally optimistic for the provincial economies, with Ontario leading the pack — a first since 2000 — with an expected growth rate of 2.5% thanks to strong employment and retail sales figures, the report notes.
The only province likely not to see growth is Newfoundland and Labrador, the report notes. With a plunge in investments, high taxes and fiscal restraint dragging down the labour market and consumer spending, RBC expects a protracted contraction of its economy.
Meanwhile, energy stalwarts Alberta and Saskatchewan are projected to post positive growth this year at a rate of 2.1% following two years of battered oil prices. This projection is based on the assumption that, with a rebound in oil prices, there will be infusion of spending on energy infrastructure, putting the provinces on a growth trajectory.
Other highlights from the report include gains in employment as well as retail and manufacturing sales in Vancouver. But that momentum may be undercut by a cooling off in its housing market, slowing its economy down from an estimated 1.9% in 2017 from 3.3% in 2016
As for the global economy, the prospect of its growth rate hitting 3.4% in 2017 — its “best pace” since 2014 — is mildly positive. But that expectation may be undermined by the impact that geopolitical uncertainties — such as the election in France, the U.S.’s trade policies, the U.K.’s Brexit plans, to name a few — could have on global trade flows.
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