Canadian economy surges ahead in 2017

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The Canadian economy is humming along, 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% in 2017 and 2.1% 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% up from 0.50 per cent today.

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.

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% growth in 2017, showing few signs of a slowdown despite a 40% 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% in 2017.

Transcontinental Media G.P.