Canadian Economic Growth to Strengthen Modestly in 2013 as Global Uncertainty Eases: RBC Economics

Canadian Economic Growth to Strengthen Modestly in 2013 as Global Uncertainty 
Eases: RBC Economics 

    --  Real GDP growth to increase to 2.4 per cent in 2013
    --  Interest rates set to rise modestly in second half of next year
    --  Significant downside risk expected in near-term
    --  Global economy to strengthen moderately in 2013

TORONTO, Dec. 13, 2012 /CNW/ - As downside risks to the global economy ease, 
the Canadian economy is headed for a period of gradual improvement in 2013, 
according to the latest Economic and Financial Market Outlook issued today by 
RBC Economics. Although there were concerns that Canada's strong economic 
performance had run its course after limited domestic growth in the third 
quarter of 2012, export strength is likely to fuel an increase in real GDP 
growth through next year. Real GDP growth is set to increase to 2.4 per cent 
in 2013.

"We expect that factors weighing on growth in late 2012 and early 2013 will 
reverse course, which, alongside accommodative financial conditions and low 
household borrowing rates, will set the stage for better economic growth," 
said Craig Wright senior vice-president and chief economist, RBC. "And, as the 
cloak of uncertainty is removed from the global economy, demand for Canadian 
exports will rise, as will investment and hiring."

External risks, slowing domestic investment and a drop in exports depressed 
Canada's economic growth in the third quarter to a 0.6 per cent annualized 
rate, which influenced the Bank of Canada in maintaining its stimulative 
policy rate of 1.0 per cent.

However, RBC says this slowing largely reflected temporary factors. With 
growth expected to rebound and Canada edging closer to full employment, it is 
unlikely that interest rates will stay where they are. As the economy 
continues to show signs of strength, the Bank of Canada is expected to 
implement a plan of gradual rate increases over the second half of next year.

RBC anticipates that the trade sector will boost growth in both 2013 and 2014. 
As the so-called "fiscal cliff" cloud lifts, stronger U.S. demand is expected 
to emerge. Elevated demand for commodities, especially as China shifts into 
higher gear, bodes well for a continued rise in energy and metal exports.

Import growth is also expected to accelerate, though the pace of increase is 
likely to be slower than exports given the very rapid increases recorded in 
2010 and 2011. Still, RBC predicts overall import growth will rise over the 
next two years.

"Net trade is forecast to make the most significant contributions to real GDP 
growth since 2001," added Wright.

RBC's Outlook notes that while businesses are facing generally supportive 
conditions, the uncertain global environment and some weakening in commodity 
prices hampered spending on capital goods in the first three quarters of 2012. 
RBC anticipates corporations will take advantage of their enviable balance 
sheet positions and resume spending as the uncertainty gripping the world 
economy ebbs.

Low interest rates, access to loans, and a robust housing market, have 
recently driven the debt-to-income ratio in Canada to an all-time high (163 
per cent), says RBC.

The continued tightening of mortgage rules and further cooling in housing 
market activity are likely to contribute to a steady moderation in debt 
accumulation. In fact, RBC affirms that this trend is already underway with 
household credit growth in September and October running at the slowest rate 
since 2002.

"The slower pace of debt accumulation is a step in the right direction, 
although it has been tempered by the fact that the pace of personal income 
growth has been lacklustre to date," said Wright. "Tightening labour market 
conditions and stronger wage increases may act to remedy this situation soon, 
paving the way for an eventual leveling off in the debt-to-income ratio."

RBC's near-term outlook calls for the housing market to weaken, albeit at a 
modest pace. This reflects affordability strain relative to historical 
averages, as well elevated debt-to-income ratios and the lack of certainty 
with respect to the future of the global economy. Some offset to this weakness 
will be provided by interest rates remaining historically low in the near-term.

In 2012, the Canadian dollar traded around parity against the U.S. dollar and 
RBC remains bullish on the loonie with strong underlying factors; commodity 
prices will remain historically high; interest rates in Canada will rise 
quicker than in the U.S.; and, foreign investors will continue to put their 
money into Canadian assets. As a result, the Canadian dollar is likely to 
remain on the strong side of parity though the forecast horizon.

At a regional level, there have been a number of transitory factors hampering 
economic growth across several provinces in recent months, though most of 
these factors should reverse in 2013, says RBC.

The most visible movement will be a sharp swing in Newfoundland and Labrador's 
outlook from bottom in the 2012 rankings to top spot in 2013. Alberta and 
Saskatchewan will also rank at the top-end of provincial economic growth, with 
Manitoba following closely behind. British Columbia and Ontario are positioned 
to grow at rates just below the national average, while the remaining 
provinces are expected to grow below that average.

A complete copy of the RBC Economic and Financial Market Outlook is available 
as of 8 a.m. ET. A separate publication, RBC Economics Provincial Outlook, 
assesses the provinces according to economic growth, employment growth, 
unemployment rates, retail sales, housing starts and consumer price indices.

Craig Wright, RBC Economics Research, 416 974-7457 Paul Ferley, RBC Economics 
Research, 416 974-7231 Elyse Lalonde, RBC Corporate Communications, 416 


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ST: Ontario

-0- Dec/13/2012 10:00 GMT

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