Canadian GDP is expected to grow by 2% in 2017, followed by a slightly firmer 2.1% in 2018, reveals an economics outlook report by RBC.

Ontario is expected to lead the way for the first time since 2000, with a growth rate of 2.5%. Two of Canada’s oil-producing provinces, Alberta and Saskatchewan, will swing back to positive growth in 2017 after two years of economic contraction.

Growth in 2017 will be supported by federal infrastructure spending — expected to add almost half a percentage point to GDP — and better performance by Canadian exports. The latter are projected to accelerate slightly following a subpar performance in 2016.

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But for now, “don’t think that the desired rotation away from the consumer and housing toward non-energy manufacturing is underway,” says Nick Exarhos, director of CIBC World Markets, commenting on Canadian equities in an economics outlook report. “We still see [those areas] having constructive fundamentals for equity investors in the medium term.”

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While a pickup in U.S. business investment and modest U.S. export growth are likely to bolster Canadian exports in 2017, the RBC report warns that “the threat of protectionist [trade] policies has the potential to hurt Canada’s small, open economy.”

Another potential economic downer: a slowdown in real estate activity, as lack of affordability and legislative changes cool overheated urban housing markets.

Interest rates pressure

And, moving into 2018, consumer spending could be further challenged as rates rise, effectively increasing debt-service costs for consumers. However, any increase in rates is expected to be implemented at a grinding pace.

“The Bank of Canada will be more patient than the Fed in returning to higher rates,” says Avery Shenfeld, chief economist at CIBC World Markets, in CIBC’s outlook report. That’s because of risks from U.S. trade policy and also because Canada’s labour market is slack compared to that south of the border.

“Canada is running a lap behind in the race to full employment,” he says, citing an hourly wage rate of 2% (from Canada’s payrolls survey) and an unemployment rate of 5.4% (seasonally adjusted by CIBC). Those figures are 2.8% and 4.7%, respectively, for the U.S., indicating a tighter U.S. labour market.

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Further, “Canada’s greater weight in the energy sector and lack of momentum in manufacturing meant that 2015–16 saw a retreat in high-productivity, high-paid sectors,” says Shenfeld. “An energy sector engineer working a full week as a waiter doesn’t constitute full employment.”

In contrast, stronger-than-expected U.S. economic data will likely prompt the Fed to increase its policy rate by 25 basis points this month, and a further 50 basis points later in 2017. The Bank of Canada is expected to start tightening in 2018, which will stabilize the interest rate differential next year.

As such, RBC forecasts the Canadian dollar will end 2017 lower, at 72.5 U.S. cents, after trading around 76 U.S. cents in the first two months of the year. The Canadian dollar is projected to reverse most of this depreciation in 2018, rising to 75.2 U.S. cents by the end of 2018.

Read the full RBC report here, and find the provincial outlook here.

Read the CIBC economics update here.