The Canadian economic recovery is gaining momentum, setting the stage for above-trend real GDP growth of 3.1% this year and 3.9% next year, according to RBC Economics.

In their latest forecast, RBC economists say they’re encouraged by the strengthening momentum in Canada’s economy, along with a stronger-than-expected jump in U.S. GDP growth in the fourth quarter. Stimulus investment and a recovery in consumer spending will contribute to strong growth this year, the report says.

“An economic recovery is solidly taking root in Canada with the full impact of stimulus spending, historically low interest rates and improved credit markets all taking effect this year,” said Craig Wright, senior vice-president and chief economist, RBC. “Going forward, additional growth should be sustained by strength in the housing market and investment by the private sector, as corporations increase payrolls and investment.”

Stability in the auto sector and rising commodity prices should continue to support a gradual improvement in the labour market, according to RBC Economics. It expects unemployment rates to average 8.4% in 2010 before falling to 7.7% in 2011.

According to the report, consumer spending is expected to continue to expand by 2.8% this year and next, while business investment will surge by 5% this year and 6% next.

The economists note that recent indicators for the housing market have suggested a strong recovery in activity, with housing starts expected to grow to 184,000 in 2010 from 149,000 in 2009.

“The housing market should remain strong as improved labour conditions and low mortgage rates fuel demand,” added Wright. “We expect the market to slow by the second half of the year as interest rates begin to rise and affordability declines.

Among Canadian provinces, Newfoundland and Labrador is set to lead the country in economic growth in 2010, with GDP growth of 4.1%, after the province suffered the sharpest national decline of 4.5% in 2009. Increased production of crude oil and mineral products, along with a surge in capital spending, should fuel this growth, the economists say.

The report calls for growth of 3.6% in Saskatchewan, 3.4% in B.C., and 3.3% in Ontario. Alberta’s recovery is set to be slower, with growth of 2.5% this year, but will strengthen to 4.4% in 2011.

Meanwhile, with recent U.S. data showing a clear improving trend, RBC expects U.S. GDP to increase by 2.9% in 2010 and 3.4% in 2011. The report notes that U.S. domestic demand is increasing, along with rising consumer spending and improvements in residential construction and exports.

IE