Canada’s economic growth to pick up pace in 2007, says RBC Economics

Canada is poised for stronger economic performance through 2007 with growth of 2.5 per cent and three per cent in 2008, according to the latest economic forecast from RBC.

“Canada’s economy softened in the latter half of 2006 with the trade sector as the main culprit; but solid growth is expected to return in 2007,” said Craig Wright, vice-president and chief economist, RBC. “The tight labour market, rising incomes and high levels of liquidity in investment portfolios will continue to support consumer spending and offset ongoing adjustments in trade and inventories.”

RBC notes that while growth slowed for much of 2006, the economy regained momentum by year end. In December, broad-based gains in manufacturing, trade and retail spending saw the economy grow at its fastest monthly rate in more than a year -- setting up for stronger activity in early 2007, especially given the sharp increase in employment numbers and construction projects.

“We expect Canada’s trade sector to finally recover, softening its weakening influence on economic growth over the past few years,” added Wright. “With a strong global outlook and energy prices remaining high, demand for Canadian exports is likely to pick up, while the pace of import demand slows alongside the modestly weaker Canadian dollar. Overall, the drag from the trade sector is expected to trim only a tenth of a percentage point from 2007 real GDP, a marked improvement from the one and a half to two percentage point impact of the previous two years.”

In the U.S., RBC is forecasting 2.4 per cent growth for the U.S. economy in 2007, compared to 3.3 per cent growth in 2006. U.S. consumers are likely to pull back a bit in early 2007, but strong employment gains, rising wages and growing overall net wealth will support stronger gains in the second half of 2007. Looking ahead growth is expected to jump to 2.9 per cent in 2008.

After reaching a high of 91 U.S. cents in May 2006, the Canadian dollar slipped 6.5 per cent against the U.S. dollar and could weaken to 82.5 U.S. cents in the middle of this year. In 2008, Canada’s strong economic performance should boost Canada’s currency back to the 87 U.S. cent range.

RBC expects the Bank of Canada will hold the policy rate steady in 2007. Longer-term rates will rise in the second half of the year in line with U.S. Treasury yields, with rate hikes likely in 2008.

In the U.S., rising core inflation will keep the U.S. Federal Reserve from significantly easing interest rates this year. Stronger growth in 2008 will see the Fed shift into rate hike mode with a 50 basis-point increase expected in the second half of the year.