Canada’s economy is expected to see higher export growth in 2015, despite the recent decline in oil prices, according to a report by RBC Economics. It’s forecasting real GDP growth of 2.5% in 2014, 2.7% in 2015 and 2.1% in 2016.
The report indicates that, after several years of export growth coming largely from the energy sector, 2014 marked a turning point with increased demand for non-energy exports. RBC anticipates this broadening in export demand to continue to accelerate in 2015, supported by increased U.S. investment in machinery and equipment, as well as rising U.S. auto sales and housing starts.
“Our outlook for Canada is predicated on the fact that the decline in oil prices and any weakening of investment in the oil and gas industry will be offset by increased demand for Canada’s non-energy exports,” says Craig Wright, senior vice-president and chief economist. “On a national level, looking ahead to 2015 the net impact of lower oil prices will be negligible in terms of real GDP growth.”
While falling oil prices may not be significant from a national real GDP perspective, it will likely have diverging outcomes among the provincial economies. RBC assumes that oil prices will remain low during 2015 — averaging US$70 per barrel on a WTI basis — which will result in slower projected real growth for oil-producing provinces than previously expected and slightly stronger growth for the majority of other provinces.
From an industrial sector perspective, lower oil prices will likely limit capital spending by oil and gas companies in 2015; however, industries outside oil and gas are likely to pick up this slack due to stronger demand for exports from the U.S.
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The prospect of firmer external demand will take some of the pressure off Canadian consumers. Households continue to add debt to their balance sheets in 2014 albeit at a slowing pace. Looking ahead to 2015, the possibility of higher interest rates will likely reduce households’ appetite for debt and limit increases in consumer spending with some offset from lower gasoline prices.
The report notes Canada’s labour market showed renewed strength in recent months with monthly job gains accelerating. RBC expects the unemployment rate to hold around 6.5% — within the range of what is considered to be the economy’s full employment rate. However wage growth has not kept pace with the improving labour market with the average increase running at about 2.0% throughout 2013 and 2014 year-to-date.
“Further improvements in labour conditions and an eventual pickup in wages will support consumer spending even as debt accumulation growth remains modest,” says Wright. “Our forecast is for consumer spending to increase by 2.4% in 2015 and 2.2% in 2016, somewhat slower than the 2.8% rise in 2014.”
Canada’s housing market continued to show strength throughout 2014 with both sales and prices rising. Housing affordability in most markets is only showing modest signs of stress as low interest rates and increases in income have largely offset the impact of rising home prices in most cities. In 2015, expected increases in interest rates will challenge affordability resulting in a mild pullback in sales activity.
RBC also assumes the recent decline in energy prices will translate into a lower headline inflation rate in the months ahead however excluding energy, inflation pressures are likely to continue to run at or above 2.0%.
“Our view remains that the persistence of core inflation and a firming in economic growth will convince the Bank of Canada to reduce the amount of policy stimulus by raising the overnight rate in the middle of next year,” added Wright. “We expect the Canadian dollar will remain under modest downward pressure in 2015, resulting in year-end values of 85 U.S. cents in 2015 and 82 U.S. cents in 2016.”