Canadian economy headed for solid, albeit slower 2018 - RBC Economics

• Canada's economy started 2018 on a soft footing and growth will likely pickup modestly in the quarters ahead: RBC expects GDP to grow 2.0 per cent in 2018
• Recent U.S. tariffs have relatively small impact on Canada: Steel and aluminum production account for just 0.5 per cent of Canadian GDP and jobs
• Provincial economic growth slowing: All 10 provinces are expected to see their economic growth rate slow compared with last year

TORONTO, June 14, 2018 /CNW/ - In spite of looming concerns over U.S. imposed tariffs, the Canadian economy is gaining momentum, according to the latest RBC Economic Outlook Report. After a sluggish second-half of 2017 and weak Q1 2018, the economy has strengthened and could be on the upswing for the remainder of 2018. An increase in consumer spending, wage growth and business investment have all contributed to positive signs for Canada. While not nearing the 3.0 per cent growth pace of 2017, RBC Economics expects real gross domestic product (GDP) to average 2.0 per cent in 2018, followed by a slight slowing to 1.8 per cent in 2019.

"Our baseline view is that Canada's economy will grow at a mildly faster clip in the remaining quarters of 2018," said Craig Wright, Senior Vice-President and Chief Economist, RBC. "Financial conditions remain solid and the labour market is healthy. Wage growth continues to accelerate and it will blunt the impact that rising interest rates will have on household debt service costs."

So far, the impact of U.S. imposed tariffs to Canada's steel and aluminum industries, which only account for 0.5 percent per cent of Canadian GDP and jobs, has been relatively small. Fears over trade and the slow pace of NAFTA negotiations have also not dissuaded Canada's companies from using their capital this year. RBC expects business spending to rise by 6.3 per cent in 2018, while the outlook in 2019 is for a slower 2.1 per cent lift. This assumes there is no further ramping up of tariffs or the end of NAFTA.

Canadian companies have so far looked past trade tensions, as business fixed investment grew at a 10.9 per cent annualized rate in the first quarter of 2018. But the potential for further tariffs levied on Canadian goods could dampen the outlook down the road.

Canadian dollar to stand firm
RBC forecasts that the Canadian dollar is likely to hover at its current trading range of 0.77 cents in 2018. In spite of rising oil prices, a recent widening in short-term interest rate differentials with the U.S. and concerns over trade negotiations have weighed heavily on the Canadian currency's trajectory. Further protectionist policies from the Trump administration could lead to trouble down the road for the Canadian dollar, says RBC.

Provincial economic growth slowing down
All 10 provinces will likely see the pace of economic growth slow compared with last year. Canada's western provinces are forecasted to lead in economic growth throughout 2018. BC, Alberta and Saskatchewan are each expected to rise 2.4 per cent in 2018 – well ahead of the national average. BC and Alberta have both been boosted by impressive job growth numbers. Prospects in Saskatchewan also remain above-average, buoyed by positive returns in potash production and agriculture.

Ontario's economic outlook should remain close to the national average of 2.0 per cent. With the job market on solid ground, firms are using capital investment to boost output. However, Ontario's symbiotic trading relationship with the U.S. means that uncertainty around NAFTA could throw a wrench in future investment plans. In Quebec, the economy is expected to slow to 1.7 per cent 2018 following an impressive 2017. RBC expects that the Quebec labour force will remain fully employed throughout 2018.

Outside of Canada

Global Economy continues to grow in spite of protectionism
As the world economy comes to grips with the Trump administration's America-first policies, there is room for optimism. Business investment trended higher last quarter and trade flow continues to be solid. There is also strong demand for workers in countries already operating at close to full employment. Given these favourable conditions, RBC forecasts the world economy will expand by 3.9 per cent in 2018.

What remains to be seen is whether the global economy will stay on its current growth trajectory. There are numerous risk factors that have the potential to push the economy onto a slower growth trajectory and global rate hikes further into the future- including uncertainty surrounding the anti-trade rhetoric from the Trump administration.

U.S economy heats up
The U.S. economy continues to rebound after a moderate start to 2018. RBC forecasts real GDP growth to average 2.9 per cent, outpacing 2017's 2.3 per cent gain.

As companies take advantage of the corporate tax cut, it is expected that there will be a 6.7 per cent jump in business investment. But the U.S. decision to impose tariffs on its closest allies could pose a risk toward further investments.

Labour conditions continue to be positive in the U.S. The unemployment rate fell to 3.8 per cent in May matching the lowest level since 1969. A rise in inflation and decline in the unemployment rate will keep the Fed on track to gradually reduce monetary policy stimulus. The Fed will likely increase the fed funds target by 25 basis points each quarter of 2018 and 2019, shifting monetary policy toward a mildly restrictive stance by the end of next year.

A complete copy of the RBC Economic and Financial Market Outlook is now available. A separate RBC Economics Provincial Outlook assesses the provinces according to economic and employment growth, unemployment rates, retail sales, housing starts and consumer price indices.

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SOURCE RBC