The Canadian economy is humming along as the country nears its 150th birthday, according to the latest RBC Economic Outlook quarterly report. Consumer spending, housing starts, and a strong turnaround in business investment are largely responsible for the continued momentum that has built on the robust gains in the second half of last year. RBC Economics expects real gross domestic product (GDP) to grow by 2.6 per cent in 2017 and 2.1 per cent in 2018.
Continuing an eight-year trend, consumers are expected to provide a large lift to the economy in 2017. With business investment on the rise and government spending on infrastructure ramping up, RBC Economics projects the economy will grow at nearly double the average pace of the prior two years.
“Canada’s economy is on track to post its strongest gain in three years”, said Craig Wright, senior vice-president and chief economist at RBC. “While we don’t discount the risk of a slowdown resulting from the pending renegotiation of NAFTA or the expected cooling of the housing market, we remain confident the economy will continue to grow at an above-potential pace for the remainder of this year.”
Business investment in the first quarter provided the biggest lift to growth since 2012, following two years of significant declines. While future increases may be more muted, continued investment combined with government spending on infrastructure will help offset a slowdown in housing activity and will sustain the accelerated growth in 2017.
Amid uncertainty over the emergence of trade protectionist measures by the U.S., the Bank of Canada is expected to keep interest rates on hold through the remainder of 2017. However, the sustained above-potential growth that we forecast for next year will see the central bank start to tighten policy. The overnight rate is expected to finish 2018 at 1.25 per cent up from 0.50 per cent today.
A period of weakening ahead for the Canadian dollar
Political uncertainty will likely remain high in the near term, and stronger growth and more aggressive tightening by the U.S. Federal Reserve should result in strengthening the U.S. dollar. Even with oil prices forecast to see some recovery, the divergence in monetary policy between Canada and the U.S. and unease surrounding the outcome of the NAFTA renegotiations will continue to depress the Canadian dollar.
RBC forecasts the Canadian dollar will end 2017 at 71.4 U.S. cents. The outlook is brighter for 2018, when the Canadian dollar is expected to rise to 75.2 U.S. cents, as the Bank of Canada starts to raise the overnight rate and oil prices continue to march upward.
B.C.’s economy leading the provincial pack
Nearly all of the provincial economies are forecast to grow, at least modestly, in 2017. After revising our previous estimate, B.C. is projected to once again lead all provinces with 3.0 per cent growth in 2017, showing few signs of a slowdown despite a 40 per cent correction in the Vancouver housing market.
Alberta’s economy is on the path to recovery led by an improved outlook for oil prices, which will also contribute to positive growth for Saskatchewan in 2017. However, the upturn in the energy sector will not be enough for Newfoundland and Labrador to mask deep economic contraction in other sectors, leading the provincial economy to contract a projected 2.2 per cent in 2017.
Outside of Canada
Global economy advances despite uncertainty
Amidst an uncertain political backdrop, the global economy continues to build momentum. RBC forecasts global growth will reach 3.5 per cent this year, surpassing the 3.1 per cent growth in 2016.
The greatest source of uncertainty remains what policies the U.S. administration will implement in the months ahead. Election results in France and the Netherlands have lessened uncertainty concerning Europe, although the snap election in the U.K. and imminent Brexit negotiations have started to take a toll on the economy.
U.S. economy picks up steam
Despite a sluggish start to 2017, solid wage growth and rising confidence will see consumer spending rebound. Broad-based gains in U.S. business investment will contribute to the overall momentum. RBC projects the U.S. economy to grow 2.2 per cent in 2017 and 2.3 per cent in 2018.
Even with a slight weakening, the U.S. dollar remains strong and will likely act as an impediment to robust export growth. Imports are forecast to grow more quickly as U.S. companies take advantage of the relatively strong currency to purchase imported machinery and equipment.
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.