Economy to grow by 2.7 per cent in 2007: RBC

DAVID PARKINSON

Globe and Mail Update

Canada's economy should grow by 2.8 per cent in 2006 and 2.7 per cent in 2007, amid strong domestic markets but weakening demand for Canadian exports, according to a new economic forecast issued by Royal Bank of Canada.

The bank said domestic spending by businesses and consumers continues to be the driving force for the economy, mitigating a slowdown in exports.

The RBC forecasts are below the Bank of Canada's forecasts of 3.2 per cent real GDP growth (excluding the impact of inflation) this year and 2.9 per cent next year, released in the central bank's most recent monetary policy report update in July. The central bank will issue a new monetary policy report on Oct. 19, in which it will update its forecasts. The RBC forecasts also imply an economy operating slightly below full capacity, which the Bank of Canada typically regards as a 3-per-cent growth rate. Canadian GDP grew by 3.3 per cent in 2004 and 2.9 per cent in 2005.

RBC predicted that Alberta would post the strongest growth of any province, at 6.3 per cent this year and 4.5 next, driven by the booming energy sector. But it warned that the province's booming growth is leading to building inflationary pressures, as wages have soared 8 per cent this year and the province suffers from labour and materials shortages.

It said the country's traditional economic driver, Ontario, would be the big growth laggard, expanding by a mere 1.5 per cent this year and 2 per cent next year, barely escaping a recession. “The economy isn't very far from a standstill,” the bank said in its report, noting that the province is suffering from a contraction in the manufacturing sector, weak retail sales, and a slowing construction and housing sector.

It said Ontario's critical manufacturing sector should “emerge on much stronger footing towards the end of the decade” as new investment in the auto sector kicks in, but it should remain weak this year and next.

The bank predicted growth in Quebec of 2 per cent this year and 2.1 per cent next year. It said the province's manufacturing sector has held up reasonably well, with shipments up 4 per cent this year, but the sector will remain under pressure from a strong currency and overseas competition.

British Columbia's growth is expected to be 4.8 per cent in 2006 and 3.7 per cent in 2007. It said strong demand from Asian markets, together with the economic stimulus provided by investment in facilities for the 2010 Winter Olympics, should help bolster the province.

The bank dropped Newfoundland down to the third-best growth rate this year from previous predictions that it would lead the country in growth. It blamed technical problems at the massive Terra Nova offshore energy project, which was shut down for almost half of the year. It forecast growth in the province of 4.7 per cent this year and 4 per cent next year, driven by its growing energy sector.

Among other provinces, RBC forecasts growth of:

Prince Edward Island — 2.1 per cent in 2006, 1.9 per cent in 2007;

Nova Scotia — 2.6 per cent in 2006, 2.4 per cent in 2007;

New Brunswick — 2.7 per cent in 2006, 2.4 per cent in 2007;

Manitoba — 3.3 per cent in 2006, 2.7 per cent in 2007;

Saskatchewan — 3.8 per cent in 2006, 3.1 per cent in 2007.

RBC said Canada's trade sector has pulled down national gross domestic product growth over the past two years, as the growth in imports has outpaced exports. The bank said it expects this to persist in 2006, “as waning U.S. demand for products like motor vehicles and lumber weigh on exports.”

“Despite slower growth for the second quarter of 2006, Canada's domestic economy actually grew at a robust 4 per cent annual rate,” said Craig Wright, vice-president and chief economist at RBC, in a news release Friday. “The trade sector subtracted more than four percentage points from the quarterly growth rate.”

“The weaker, but still strong, Canadian dollar will continue to fuel import demand for machinery and equipment as Canadian businesses bolster investment,” it said.

“With a Canadian economic outlook of near-potential growth and only a modest increase in core inflation, we expect the Bank of Canada to hold the policy rate at 4.25 per cent to ensure that the domestic economy is strong enough to withstand a period of slower U.S. demand for Canadian exports,” Mr. Wright said. “The Bank of Canada's next move is likely to be an ease, but not until the fourth quarter of next year as Canada's domestic economy will remain buoyant.”

The Bank of Canada announces its next decision on interest rates on Tuesday.

RBC predicted that the U.S. economy would grow at about a 2.5-per-cent annualized rate in the second half of 2006 and in 2007, amid slowing consumer spending and a cooler housing market. It predicted that the Canadian dollar would decline to 85.5 cents (U.S.) by the end of 2006 and to 80.6 cents by the end of 2007, from 88 cents currently.

On Thursday, another of Canada's major banks, Bank of Nova Scotia, trimmed its Canadian growth targets slightly for 2006 and 2007, due primarily to slower growth and a fading housing market in the United States. It forecast Canadian GDP growth of 2.8 per cent this year and 2.5 per cent next year. Scotiabank's forecast called for U.S. growth of 3.3 per cent for all of 2006, but slowing to 2.4 per cent in 2007. It trimmed its year-end Canadian dollar forecast to 87.5 cents, citing falling commodity prices, but predicted the currency would rebound to the 90-95 cents range next year amid renewed weakening in the U.S. dollar.