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RBC Economics downgraded its forecast for the Canadian economy due, primarily, to the ongoing weakness in the energy sector, according to an RBC report. Canada’s real GDP is projected to grow 1.2% in 2015, below the 1.8% forecast in June, and 2.2% in 2016 — 0.4% lower than earlier predictions.

RBC says that, while Canada’s economy contracted mildly in both the first and second quarters of 2015, the depth of the decline was marginal and the weakness was concentrated mostly in the energy sector. Further, RBC expects positive economic activity outside of the energy sector to offset momentum lost in the first half of the year.

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“The recent softening in the Canadian economy caused a flurry of recession talk, which we believe to be misplaced,” says Craig Wright, senior vice-president and chief economist, RBC. “Not only did the June GDP gain of 0.5% point to positive growth leading into the third quarter, a more compelling argument is the steadfast strength in Canada’s labour market.”

Despite the unemployment rate inching up to 7% in August from a consecutive six-month reading of 6.8%, RBC notes Canada’s labour market continued to generate approximately 14,000 new jobs per month in 2015. Additionally, wage gains accelerated starting in the month of May, suggesting that businesses were competing for workers instead of laying them off.

RBC’s report also shows an uptick in consumer spending in Canada in the second quarter of 2015, resulting from increased purchases of durable goods, including autos. It notes a one-time boost to incomes from the retroactive Universal Child Care payment likely underpinned an even stronger increase in spending in the third quarter.

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“Along with an increase in spending, Canadians continued to take advantage of low borrowing costs during the first half of 2015, with household debt balances rising at the quickest pace in more than two years,” Wright adds. “That said, historically low interest rates and, to a lesser extent, sustained income gains have kept the costs to service these debt balances at a record low.”

Due to lower gasoline prices and ongoing job creation and wage gains in the Canadian labour market, RBC expects stronger consumption growth in Canada for 2016.

Housing and business

On the housing front, low interest rates continue to stimulate demand in 2015, despite lingering effects from oil price declines and a spike in condo completions in certain regions.

However, the seemingly insatiable appetite for housing is not equally shared across the country, with home resale activity plummeting in oil industry sensitive markets such as Alberta and Saskatchewan. Home resales at the national level are expected to rise by 5% in 2015, making it the second-highest level on record. RBC expects home prices to rise by 4.6% in 2015, little changed from 4.8% in 2014. With interest rates expected to rise in 2016, the bank anticipates there will be a slight easing in resale activity, slowing to 3.2%.

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On the business side, investment fell at double-digit rates in both the first and second quarters of 2015. However, this was largely due to cuts within the energy sector. “Our forecast assumes that companies outside of the energy sector will gradually increase investment, and we expect this will sufficiently offset the pullback by energy producers in 2016, resulting in relatively flat business investment growth next year,” says Wright.

Outlook

Looking ahead, RBC expects exports to boost the Canadian economy. As the U.S. economy strengthens against a weakening Canadian dollar, demands for Canadian exports are likely to accelerate. The report notes the Canadian dollar is expected to remain under downward pressure in the near-term, which will further improve the competitiveness of Canadian export companies.

Also, the economy is entering a period of growth, reducing the need for the BoC to ease monetary policy any further. RBC expects the BoC to hold the overnight rate at 0.5% until the final quarter of 2016.

“With the economy approaching full capacity and the risk to the inflation outlook shifting to the upside, we expect the BoC to begin to increase the overnight rate late next year,” Wright says.

On the provincial front, economies continue to be divided between oil producers and oil consumers. The fallout from plunging oil prices significantly dims the outlook for economic activity in Newfoundland and Labrador, Alberta and Saskatchewan.

Prospects for Ontario, British Columbia, Quebec are brighter, as well as for most of the other oil-consuming provinces, although the expected liftoff in growth generally has been delayed.

The U.S.

South of the border, the U.S. economy roared back to life in the second quarter, following a subdued start to 2015. RBC indicates that real GDP increased at a 0.6% annualized pace in the first quarter with activity stifled by poor weather conditions, a west coast port strike and reduced investment by energy companies.

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In the second quarter, real GDP expanded at a 3.7% annualized pace due to a reversal in some of the factors that dampened activity at the start of the year. The bank expects the U.S. economy to grow by 3% in the second half of 2015, backed by strength in labour market conditions, accommodative financial conditions, lower energy costs, and improving access to credit.

Looking ahead to 2016, RBC maintains its call for growth in the U.S. economy to be 3%.

Originally published on Advisor.ca

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