Solid economic growth in Canada is expected for 2007, says RBC Economics

Canada’s robust economic performance in the early part of the year is expected to moderate, though growth will still average a solid 2.6 per cent for 2007 and 2.9 per cent in 2008, according to the latest economic forecast from RBC.

“Canada’s economy gathered steam in the first quarter with an annualized growth pace of 3.7 per cent, supported by a strong domestic economy,” said Craig Wright, vice-president and chief economist, RBC. “While overall economic growth will remain robust, the trade sector will continue to weigh on growth as the strong Canadian dollar boosts imports and restrains exports.”

RBC notes that notwithstanding the expected tightening by the Bank of Canada, Canadian consumers will continue to spend, though at a slower pace in 2008. As for Canadian corporations, they are looking at strong balance sheet conditions and are expected to continue boosting investment in structures and capital goods. Profitability has been helped by high export prices for a number of key commodities produced in Canada, the RBC report said.

“We expect the Canadian dollar to remain elevated, trading to a high of 96.15 U.S. cents in the third quarter, ending 2007 at 94.35 U.S. cents and 89.30 U.S. cents at the end of 2008,” added Wright.

The U.S. economy is picking up after a disappointing first quarter performance, RBC said. As a result of this weakness, RBC is forecasting 2.2 per cent growth for the U.S. in 2007, a slight downward revision to its forecast from the previous quarter with growth of 2.9 per cent expected in 2008.

RBC expects that the U.S. economy’s underperformance in the first quarter will prove to be the low point for growth. The combination of firmer global demand and a weaker U.S. dollar will likely see the pace of export growth pick up with the trade sector turning from a drag to a support for the economy. Consumer spending and business investment will continue to drive the U.S. economy with little evidence of the weakness in the housing market spreading into other areas of the economy.

RBC notes that Canada’s core inflation rate popped up in April, raising concern for the Bank of Canada’s medium-term inflation target. Stronger growth and higher-than-desired inflation will see the Bank of Canada raise the overnight rate by 75 basis points in 2007 and 25 basis points in 2008.

U.S. core inflation has moderated though the upside risks require the U.S. Federal Reserve to remain vigilant. The Fed will hold the funds rate at 5.25 per cent in 2007 and tighten modestly in 2008 with this rate rising to 5.75 per cent by mid-year to ensure that inflation remains contained.

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.