Canada’s economy regained momentum in the second half of 2016 and is poised for sustained growth throughout 2017, reveals an RBC report. GDP growth of 1.3% is expected for 2016, 1.8% for 2017 and 2.1% for 2018.
“The Canadian consumer drove growth again in 2016,” says Craig Wright, senior vice-president and chief economist at RBC, in a release. “Despite falling energy investment and the Alberta wildfires weighing on the economy, strong consumer spending and housing market activity supported growth in 2016. In 2017, a bounce-back in energy investment and anticipated fiscal stimulus are expected to provide a further boost.”
Consumer spending increased 2.2% in 2016, while home sales rose 4.4%, with average prices jumping 9.5%. While the sources of economic strength are expected to shift in 2017, the net impact will be continued forward momentum in the Canadian economy.
Although core inflation is likely to top the Bank of Canada’s 2% target, RBC expects the Canadian central bank will hold the overnight rate steady throughout 2017 with the first rate hike expected to come in 2018.
Key Canadian economic developments for 2017
Business investment will offset a declining housing market. Regulatory changes at both the federal and provincial levels are expected to slow the pace of new home building, home-resale activity and housing price increases across the country. RBC forecasts an 11.5% decline in home resales, with price increases slowing to 1.6%.
Conversely, business investment, which has been sluggish over the past two years, will inch higher. An expected recovery in energy prices should lead to a modest rise in investment from energy companies, with additional increases in investment by service-sector companies and exporters.
Consumers remain in the driver’s seat. Disposable income will continue to grow, supported by job gains and changes to the federal Canada Child Benefit that came into effect on July 1, 2016.
While Canadians’ debt levels remain elevated, the debt-to-net-worth ratio eased for three consecutive quarters, and owners’ equity in real estate remained encouragingly high at 74%.
Canadian dollar finds stability amid contrasting forces. Volatility in oil prices and uncertainty about monetary policy in 2016 contributed to a seesaw in the Canadian dollar. In 2017, two contrasting forces will vie for influence: rising oil prices will exert positive pressure on the dollar, while tighter monetary policy in the U.S. is expected to have the opposite effect. As a result, RBC forecasts a mild overall depreciation in currency in 2017 to 72.5 U.S. cents.
Provincial growth becomes more uniform across Canada. As global energy markets enter a recovery phase, a turnaround in oil-producing provincial economies is expected to provide more uniform growth performance across Canada. Barring any unexpected adverse events, RBC forecasts modest to moderate growth for all provincial economies, except Newfoundland and Labrador, where a drop in capital investment and persistent fiscal austerity are anticipated to cause a further contraction.