TORONTO—The Canadian economy is on the rise, with GDP growth of 2 per cent expected in 2017 and 2.1 per cent in 2018.
This is according to the latest RBC Economic Outlook report.
The report reveals that the economy is showing strength in employment, housing starts and a rebound in energy investment.
Canadian exports are also projected to accelerate slightly, following a subpar performance in 2016.
Federal government spending on infrastructure projects will provide more significant support in 2017, and this activity is expected to add almost half a percentage point to the national growth rate.
At the same time, a slowdown in real estate activity is likely to weigh down growth, as lack of affordability and legislative changes cool some overheated urban housing markets.
Interest rates to pressure Canadian dollar
While a steady increase in energy prices is positive for the Canadian dollar, a more significant factor in 2017 will be the interest rate differential between Canada and the U.S.
The U.S. dollar is likely to appreciate against most major currencies as the Federal Reserve raises rates through the year. Stronger-than-expected U.S. economic data will likely prompt the Federal Reserve to increase its policy rate by 25 basis points this month, and a further 50 basis points later in 2017. The Bank of Canada is expected to start tightening in 2018, which will stabilize the interest rate differential next year.
RBC forecasts the Canadian dollar will end 2017 lower at 73 U.S. cents, after trading around 76 cents in the first two months of the year. The Canadian dollar is projected to reverse most of this depreciation in 2018, rising to 75 cents by the end of 2018.
Ontario to lead provinces in 2017 growth
The outlook for the provincial economies is generally bright. Modest growth is seen in the Maritime provinces, with more vigorous expansion to come in the central and western provinces. Ontario is expected to lead the way for the first time since 2000, with a growth rate of 2.5 per cent.
Two of Canada’s oil-producing provinces, Alberta and Saskatchewan, will swing back to positive growth in 2017 after two years of economic contraction. However, despite a recovery in energy markets, RBC expects economic activity in Newfoundland and Labrador to decline the most, -3.6 per cent, since 2012.
Outside of Canada
RBC forecasts global growth will hit 3.4 per cent in 2017, the best pace since 2014; although geopolitical uncertainties stemming from the U.S. administration’s economic policies, the U.K.’s Brexit negotiations with the European Union, and elections in France and the Netherlands have potential to negatively affect global trade flows and growth.
Global inflation is poised to rise alongside the rebound in energy prices. However, RBC expects central banks in Europe, the U.K. and Canada to leave monetary policy unchanged as these economies continue to operate with excess capacity.
Tax, trade questions hang over U.S. outlook
The U.S. economy is projected to grow by 2.3 per cent in 2017 and the same pace in 2018. While RBC assumes the U.S. administration will lower taxes, which would boost consumer and business spending, the timing and configuration of tax policy changes are not clear.
If the administration’s anti-trade rhetoric results in levies on U.S. imports, then U.S. consumers would face higher costs and countries affected by the tariffs would be expected to retaliate, negatively affecting U.S. GDP and employment.
Read the complete RBC Economic and Financial Market Outlook here. The bank has also released a separate RBC Economics Provincial Outlook, assessing economic and employment growth across Canada’s provinces.