Exports to buoy Canada's economic growth in 2014: RBC Economics

Craig Wright, RBC's chief economist, discusses Canada's outlook 
TORONTO, March 19, 2014 /CNW/ - As the global economy continues to recover, 
demand for Canada's exports will pick-up, fuelling real GDP growth in the 
period ahead, according to the latest Economic and Financial Market Outlook 
issued today by RBC Economics. RBC is forecasting real GDP growth of 2.5 per 
cent in 2014 and 2.7 per cent in 2015. 
"For the last four years the household sector has been the key driver of 
Canada's economic growth. We expect that to change in 2014 - as the global 
economy continues on its path to recovery, exports will become increasingly 
central to Canada's growth story," said Craig Wright, senior vice-president 
and chief economist, RBC. "Not only will the drivers of growth change, but the 
pace of economic activity will gather speed following two years of 
sub-potential increases." 
RBC notes that this transition has already started to happen. Net 
international trade contributed a relatively modest 0.3 percentage points to 
growth in 2013, which represented the first positive contribution since 2001. 
Export volumes stood 5.0 per cent below their pre-recession peak at the end of 
2013. A large part of this underperformance is attributable to the subpar U.S. 
recovery, says RBC. Competitiveness issues also weighed on growth; the 
relatively strong Canadian dollar during the post-recession period was one of 
these factors. 
"It is the changing fortunes of both the U.S. economy and the Canadian dollar 
that will act as catalysts for stronger exports in the year ahead," added 
The report notes that the sharp selling pressure on the Canadian dollar that 
surfaced in late-October 2013 and subsequently picked up momentum, stalled in 
February. RBC still anticipates a further depreciation in the period ahead, 
though at a slower pace with weakness attributed to optimism about the U.S. 
economy rather than any made-in-Canada factors. In fact, RBC expects the 
loonie will trade at $0.87 U.S. at the end of 2014 and $0.85 U.S. at year-end 
"A weaker Canadian dollar enhances the competitiveness of Canadian goods in 
the U.S. market - historically, a 10 per cent depreciation boosting export 
volumes by 3.3 per cent in the following two years," explained Wright. 
The household sector is unlikely to be a significant factor in the 
strengthening in the economy in 2014, RBC says, largely owing to a pause in 
the housing market. Spending on goods and services is expected to accelerate 
relative to the past couple of years rising by 2.5 per cent in 2014 and 2.3 
per cent in 2015. Historically low interest rates coupled with a 
well-functioning financial system and persistent, but moderating, employment 
growth will provide needed support. 
The Outlook notes that market interest rates will continue to move higher in 
2014 led by increases in longer-dated yields. Fed tapering of its bond buying 
program will exert upward pressure on treasury yields and Canadian bond yields 
will move in sync, says RBC. Shorter-term yields in Canada are also forecast 
to increase in 2014 as a strengthening in economic growth, tightening labour 
market conditions and accelerating wage growth fuel a steady, albeit slow, 
increase in inflation. This is expected to occur despite the official 
overnight rate remaining unchanged at 1.00 per cent through this year. 
"As the downside risks to the inflation outlook dissolve, the Bank of Canada 
is likely to re-establish a tightening policy bias over the course of this 
year - we expect the first hike to the overnight rate in the second quarter of 
2015," said Wright. 
RBC expects the majority of provincial economies in Canada to accelerate their 
pace of growth in 2014. Alberta will stand atop the provincial growth 
rankings, well ahead of Ontario, the only other province to grow at or above 
the national rate. The remaining provinces will grow at varying paces below 
the national 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, Communications, RBC Capital Markets, 
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ST: Ontario
-0- Mar/19/2014 09:00 GMT
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