Canada yielded a disappointing economic performance in the second quarter of 2012 and is expected to grow at a moderate pace through 2013, according to an Economic and Financial Market Outlook by RBC Economics Research.
Accommodative monetary policy, continued business spending, supportive labour market conditions and an improving trade balance will lay the foundation for real GDP growth of 2.1 per cent in 2012.
"The tone of global economic data was somewhat disappointing in the second quarter and Canada was no exception, with only marginal increases in exports, a decline in manufacturing sales and weak consumer spending," said Craig Wright, senior vice-president and chief economist at RBC. "Canada should, however, continue to take global headwinds in stride. The economy continues rumbling along and will likely pick up as temporary factors ebb and global growth prospects improve."
Lingering downside risks will diminish in the months ahead and clear the way for the Bank of Canada to gradually begin raising interest rates next year, said RBC. As such, the outlook on inflation remains benign, as the economy is still growing at a rate close to its long-run potential.
"As progress is made by European policymakers to deliver a cohesive and credible plan to address fiscal and financial market imbalances, and a more moderate fiscal austerity program in the U.S. is implemented, we will get an improved picture of international and domestic growth prospects for 2013," said Wright.
Demand for household credit has slowed significantly during the quarter in response to warnings about the dangers associated with elevated debt-to-income ratios and recent regulatory changes, said RBC.
"An uptick in earnings growth will help add a little more welcomed padding to Canadians' pocketbooks. This, in turn, should also boost consumer confidence, which has been waning due to global economic uncertainty and is expected to translate into mild increases in consumer spending," said Wright. "Looking ahead, credit growth is also likely to remain moderate, as the bite from mortgage lending rule changes weighs on home buyer demand."
At a regional level, Western Canada is again expected to dominate the growth rankings both in 2012 and 2013. Alberta is forecast to take the lead for the second consecutive year, with Saskatchewan and Manitoba following closely behind. British Columbia and Ontario are positioned to grow at rates just above the national average, while the remaining provinces are expected to grow below that average.
British Columbia’s economic performance has been mostly positive this year, with encouraging signs developing in key export markets and vibrant activity in domestic sectors, according to the RBC Economics Provincial Outlook.
Looking ahead, softness in the provincial trade sector will be a key factor in slowing real GDP growth to 2.3 per cent this year, down from 2.9 per cent in 2011, and slightly stronger than the national average of 2.1 per cent for 2012.
“Year-to-date employment in British Columbia grew at one of the fastest rates in Canada and retail sales outpaced the national average,” said Wright. “At the same time, sales of new motor vehicles increased by nearly 10 per cent and home-building activity remained strong. More plainly put: B.C.’s economic indicators are largely positive.”
Alberta’s economic growth will remain in pole position ahead of all other provinces in 2012, according to RBC. The province’s economy will grow by 3.8 per cent in 2012, the fastest rate in Canada and well above the national average of 2.1 per cent.
“Alberta started 2012 on a high note with strong gains across the majority of sectors, including continued massive capital investment in the provincial energy sector,” said Wright. “Employment, retail sales, home resales and housing starts are all up, while the jobless rate is trending down. Alberta’s current economic boom is built on a solid foundation and we expect the rapid growth trend to continue in 2013 at a pace of 3.6 per cent.”
Alberta’s employment rose on strong hiring by oil and gas extraction, construction and public sectors. The jobless rate continues to decrease and now sits at 4.4 per cent — the lowest among the provinces in August.
Strong increases in farm incomes will be a key factor driving growth in Saskatchewan’s economy to a rate well above the national average this year, according RBC. Real GDP is expected to rise by 3.6 per cent in 2012, one of the strongest rates in the country.
“In mid-2012, we saw key agricultural areas around the world, including the drought-ravaged U.S. farm belt, fall victim to declining production. This put upward pressure on agricultural prices,” said Wright. “Saskatchewan’s agricultural sector, on the other hand, experienced large increases in production, with volume estimates for the province’s three major crops up by almost nine per cent. Solid increases in provincial output paired with rising prices should bode well for a healthy jump in farm incomes.”
Saskatchewan’s solid economic momentum was recently buoyed by an acceleration in provincial employment growth following surprisingly modest gains in 2011, said RBC. Recent stronger-than-expected gains in manufacturing sales, wholesale trade and retail sales also show the underlying strength in the provincial economy.
“Although we expect some slowing in agricultural production in 2013, strengthening activity in other natural resource industries will result in real GDP growth of four per cent — Saskatchewan will remain a growth leader among the provinces,” said Wright.
A significant turnaround in Manitoba’s agricultural sector this year will provide a boost to provincial economic growth that was missing in 2011, according to RBC. This swing in activity will be the main factor driving real GDP to 3.3 per cent in 2012 from 1.3 per cent last year.
“Following two years of adverse weather conditions and significant declines in agricultural production, recent estimates indicate that Manitoba is finally seeing some impressive gains in wheat and canola production,” said Wright. “This improved outlook for the agricultural sector should more than make up for some recent unexpected weakness in other sectors that are pivotal to the Manitoba economy.”
Brisk activity in Ontario’s housing sector and further recovery in provincial exports will drive economic growth in 2012, according to the RBC Economics Provincial Outlook. The provincial economy will grow at a slightly faster rate of 2.2 per cent this year compared to 1.9 per cent in 2011 — well short of the 3.4 per cent, 10-year average preceding the recession but slightly stronger that the projected national real GDP growth of 2.1 per cent.
“While the private sector is showing signs of strengthening, more restrained public sector spending continues to somewhat inhibit growth, keeping the overall pace moderate in Ontario,” said Wright. “Still, at a time when we expect the pace of national growth to slow this year relative to last year, the projected slight acceleration of provincial economic activity is encouraging.”
A hot housing market has been a key factor fuelling Ontario’s economy this year, said RBC. Sales of existing homes in the second quarter were the second best on record for that period, while housing starts during the first seven months of the year were the strongest since 2006.
Also encouraging has been the further recovery in manufacturing, said RBC. Although the recovery in manufacturing has not been uniform across the sector, there have been substantial gains achieved in the auto industry, the heart of manufacturing in Ontario.
Lacklustre activity across several sectors in Quebec has translated to slower momentum in the provincial economy so far this year, according to RBC, and the province will grow at a slower-than-average rate of 1.0 per cent in 2012.
“Consecutive monthly declines in real GDP from March to May disappointed and likely signified that Quebec’s economy ran in reverse in the second quarter,” said Wright. “However, we believe that some of the factors restraining growth were temporary and the pace of expansion will accelerate modestly next year.”
Key economic indicators, such as employment, have been particularly volatile in the past year in Quebec. A number of other factors — an unusually warm winter, months of university student protests and heightened uncertainty about the global economy — made the underlying provincial economic picture particularly difficult to decipher.
Quebec’s year-to-date economic performance is just slightly ahead of where it was during the same period last year, with real GDP up by only 0.4 per cent. A slowdown in several sectors, both private and public, including utilities, agriculture and forestry, arts and recreation, education services and public administration, have kept the economy in low gear, said RBC.
Economic growth in Atlantic Canada has faced some headwinds to date in 2012, but is expected to improve going forward, according to RBC.
Prince Edward Island should see the strongest economic growth in Atlantic Canada in 2012, enjoying a solid run in its export sector and continued resilience within the province. Overall performance in the province will maintain a moderate pace, with real GDP growth of 1.8 per cent this year.
“After soaring to new heights in 2011, machinery and equipment exports in P.E.I. have continued to glide on the wings of the provincial aerospace industry, rising a remarkable 176 per cent year-over-year in the second quarter of 2012. This helped total nominal exports surge this year,” said Wright. “We expect the trade sector to continue to support overall growth going forward, especially as U.S. growth is sustained and emerging industries in P.E.I. provide a foundation for long-term expansion.”
While the private sector is expected to remain healthy, the impact of fiscal restraint on public sector employment, along with slowing population growth, will weigh on domestic demand next year, said the report. Overall growth will be little changed, with the P.E.I. economy expected to grow by 1.9 per cent in 2013.
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