Canada’s economy dragged down by the effects of the U.S. slowdown, says RBC Economics
High export prices continue to temper this weakness
TORONTO, July 2008 — The weakening U.S. economy contributed to Canada’s economic growth taking an unexpected drop in the first quarter of 2008. The national growth rate is forecast to slow to 1.4 per cent for 2008, according to the latest economic report from RBC. In 2009, Canada’s economy is expected to rise 2.5 per cent.
“Going forward, Canada’s economy will continue to be hampered by flagging U.S. demand for exports, but domestic demand will more than offset the drag this year,” said Craig Wright, senior vice-president and chief economist, RBC. “The surprise economic contraction will be short-lived as growth prospects for the remainder of the year should brighten, with financial market pressures starting to ease, the U.S. economy getting a boost from the issuance of tax rebate cheques, and commodity prices remaining historically high.”
Canada’s strong terms of trade, boosted by rising export prices, will drive economic growth. Commodities continue to experience solid demand from emerging markets such as China. Over the past five years, Canada’s gross domestic income has outpaced gross domestic product by an average of 1.2 percentage points, also providing steady support for government revenues, corporate profits and the labour market.
Inflation has become the predominant worry for central banks given the elevated level of commodity prices, especially oil. As a result, concern is growing about an upward boost to inflationary expectations. However, the modest pace of growth and ease in labour markets are expected to be sufficient enough to offset these pressures.
The RBC report forecasts that Canada’s core inflation rate will likely trend higher this year though remain below the Bank of Canada’s two per cent target. Mitigating factors that have pushed the inflation rate lower, such as the impact of the rising Canadian dollar in 2007 and the retail discounting that Canadian companies have had to offer to compete for market share, will start to dissipate through 2008. By 2009, RBC expects the inflation rate to average close to the two per cent range.
Canada’s housing market is also poised to cool in the face of deteriorating affordability. Housing affordability in most major markets across the country have deteriorated to their worst levels in almost 20 years. However, the extent of any weakening is expected to be much less pronounced than what is occurring currently in the U.S. as the Canadian market did not experience many of the excesses evident south of the border.
RBC forecasts U.S. economic growth to be modest this year rising 1.5 per cent. However, the risks are largely on the downside as greater-than-expected restraint could emerge from still high energy prices, tight credit conditions and weakening labour markets. Growth is projected to strengthen to 2.0 per cent in 2009. This modest growth outlook will help keep inflation pressures under control through the forecast.
“We believe that the U.S. economy will avoid a contraction this year and should start to see sustained upward growth momentum in 2009,” said Wright.
In a separate report, the Provincial Outlook continues to uphold the theme of divergent paths taken by the Eastern and Western parts of the country. Record-high commodity prices and strong global demand for resources sustain unprecedented prosperity in the Western provinces, while the strong Canadian dollar, downturn in the U.S. economy and high energy prices continue to cause hardship in key sectors in provinces east of Manitoba. Saskatchewan is projected to lead all of the provinces in economic growth for both 2008 and 2009, followed by Alberta, while Newfoundland and Labrador and Ontario are expected to lag the group this year, but should show some improvement next year.
The RBC Economics Provincial Outlook assess the provinces according to economic growth, employment growth, unemployment rates, personal income growth, retail sales, housing starts, and the Consumer Price Index.
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