With the global economy on track to post the strongest growth since 2014, Canada is poised to be the G7’s growth leader in 2017, according to the latest RBC Economic Outlook.
Buoyed by consumer spending and housing activity delivering strong gains early in the year, RBC expects Canada’s real GDP to grow 2.9% in 2017. The forecast calls for slower but still above-potential growth of 1.9% in 2018, with growth moderating to 1.6% in 2019.
“This was a highly unusual year for the global economy with heightened political uncertainty accompanied by strong financial market performance and accelerating economic growth,” says Craig Wright, senior vice-president and chief economist at RBC, in a release. “Canada’s robust growth in 2017 is likely to moderate somewhat in 2018 as key economic drivers shift, but we still anticipate the economy will continue to outperform its potential.”
While the Canadian consumer and an active housing market powered growth in 2017, the dominant forces driving the economy are likely to change in 2018, notes the report. Government spending on infrastructure and a moderate increase in business investment, which began to recover in 2017, are forecast to support economic growth next year. Canadian exports are expected to strengthen mildly in 2018, although the outcome of the NAFTA negotiations has the potential to stymie both exports and investment next year.
The housing market finally entered the early stages of a cooling phase in mid-2017 after the impact of changes to regulations and rising interest rates took root. Housing resales and ancillary purchases are forecast to slip in 2018. Meanwhile, the Canadian economy added jobs at a blockbuster pace, generating 344,000 jobs in the first 11 months of the year, rivalling the gain recorded over the same period in 2007, before the recession.
The BoC raised interest rates for the first time in nearly seven years with two increases made over the summer and subsequently assumed a cautious tone regarding further hikes. In the near term, RBC expects the overnight rate to remain at 1%. However, with the economy forecast to stay on its current path, the firm expects additional rate increases in the second quarter of 2018, and forecast the overnight rate will end the year at 1.75%.
Canada’s dollar finds itself trapped between expectations of continued policy normalization from the BoC and concerns about NAFTA and competitiveness stemming from U.S. tax reforms, notes RBC. While the bank expects Canada’s dollar to weaken modestly early in the year, it says anticipated rate hikes will likely lead to a modest rebound. On balance, RBC forecasts that Canada’s currency will trade between 75 U.S. cents and 80 U.S. cents in 2018.
For the first time since 2011, RBC forecasts all provincial economies to grow in 2018, albeit at a slower pace relative to 2017 for most provinces. In many cases, including B.C., Ontario, Manitoba and Quebec, economic slack has diminished considerably following long periods of expansion, making it harder to repeat 2017’s rapid growth rates.
Bucking this trend, Saskatchewan and Newfoundland and Labrador are the two provinces forecasted to grow faster in 2018 than the previous year. Saskatchewan’s economy should benefit from a rebound in its agricultural sector, while in Newfoundland and Labrador the bank expects a rise in oil production will more than offset a drop in capital spending and weakness in other sectors of the economy.
Outside of Canada
The pickup in the global economy reflects activity in a number of countries accelerating backed by favourable conditions and improving labour markets. The euro-area is experiencing strong momentum, although the Brexit negotiations are likely to see the pace slow somewhat. The U.K. economy is likely to bear the brunt of Brexit-related uncertainty, but RBC says the odds of a severe downturn are low. The bank forecasts global growth of 3.6% in 2017 and 3.7% in 2018.
U.S. economy on warp speed
The U.S. economy took off in the middle of the year, and is expected to ease only slightly in the fourth quarter. A return of business investment and solid consumer spending contributed to the rapid growth and are expected to continue in the coming year. RBC projects the U.S. economy to grow 2.3% in 2017 and 2.5% in 2018.
RBC adds the U.S. Federal Reserve is expected to continue to gradually raise rates in 2018, after a final hike in December 2017, even when Jerome Powell takes over as chair in February. The bank forecasts that the Fed will raise the funds target each quarter in 2018 to end the year at 2.5%.