Consumers and businesses keeping Canada’s economy on firm footing, says RBC Economics
TORONTO, October 13, 2006 — Canada’s economy is expected to grow by 2.8 per cent in 2006 and 2.7 per cent in 2007, according to the latest economic forecast from RBC.
Thanks to a strong domestic economy, Canada performed well in 2004 and 2005, despite an appreciating Canadian dollar and rising energy prices. Growth in 2006 is expected to be only slightly slower, as consumer and business spending mitigates the drag coming from the trade sector.
“Despite slower growth for the second quarter of 2006, Canada’s domestic economy actually grew at a robust four per cent annual rate,” said Craig Wright, vice-president and chief economist, RBC. “The trade sector subtracted more than four percentage points from the quarterly growth rate.”
According to the report, Canada’s trade sector has pulled down GDP growth over the past two years, with import growth outpacing exports. RBC expects this to persist in 2006, as waning U.S. demand for products like motor vehicles and lumber, weigh on exports. The weaker, but still strong, Canadian dollar will continue to fuel import demand for machinery and equipment as Canadian businesses bolster investment.
The U.S. economy is expected to grow at about 2.5 per cent in the second half of 2006 and in 2007. The report cites slower consumer spending and a cooling in the housing market as the main factors moderating U.S. economic growth.
Although RBC forecasts that short-term Canadian interest rates have peaked, market rates will edge a bit higher in late 2006. The Canadian dollar is expected to weaken to 85.5 U.S. cents at year-end 2006 and 80.6 U.S. cents at year-end 2007.
“With a Canadian economic outlook of near-potential growth and only a modest increase in core inflation, we expect the Bank of Canada to hold the policy rate at 4.25 per cent to ensure that the domestic economy is strong enough to withstand a period of slower U.S. demand for Canadian exports,” said Wright. “The Bank of Canada’s next move is likely to be an ease, but not until the fourth quarter of next year as Canada’s domestic economy will remain buoyant.”
In the U.S., slowing growth and rising inflation pressures will keep the U.S. Federal Reserve on the sidelines. A sustained period of below potential growth and moderating inflation are likely to spur the U.S. Federal Reserve to cut rates in the third quarter of 2007.
A complete copy of the forecast is available as of 8 a.m. E.D.T., at www.rbc.com/economics/market/pdf/fcst.pdf.
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