Canada’s GDP to grow 2.2% in 2016: RBC

Canada’s economy switched into higher gear in the latter half of 2015, and this momentum is expected to continue throughout 2016, according to an RBC report. The bank is forecasting real GDP growth of 1.2% in 2015, 2.2% in 2016 and 2.7% in 2017.

“A surge in exports, firm consumer spending and housing market activity supported a boost in the Canadian economy halfway through 2015,” says Craig Wright, senior vice-president and chief economist, RBC. “Growth in these sectors more than offset a decline in business investment and ongoing weakness in the energy sector. Moving into 2016, we expect to see sustained economic growth.”

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A large part of the mid-year recovery was due to an improvement in exports with most sectors across Canada posting gains. Export volumes increased at a 9.4% annualized pace in Q3 backed by increases in energy, industrial machinery, transportation equipment and consumer goods. In 2016, RBC expects the strengthening U.S. economy, coupled with a weaker Canadian dollar, will generate export growth of about 6%.

Canadian currency expected to weaken

The Canadian dollar lost 15% against its U.S. counterpart in 2015, largely due to low oil prices and a looming Fed rate hike. RBC expects divergent monetary policies from the Fed and Bank of Canada to result in further downward pressure on the Canadian dollar in the early part of 2016.

As expectations shift toward the BoC removing the insurance rate cuts implemented earlier in the year, and as oil prices recover, RBC expects the Canadian currency to start to recover mid-way through 2016.

Consumer spending acts as key supporter

Strong consumer spending, particularly on housing and goods and services, contributed to overall economic growth, with both home sales and motor vehicles on track for record or near-record levels of activity.

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Modest gains in employment combined with an increase in the labour force resulted in a mild rise in unemployment in the second half of 2015 to 7.1%. However, this only shifted the unemployment rate from a below-trend level to one that is close to its long-term average.

“Wage growth acceleration began in May and provided households with the means to spend in the latter half of 2015,” says Wright. “Due to the low interest rate environment and recent job gains in most areas of the country, we do not expect to see any tapering in consumer spending in 2016.”

Canada’s housing market remains mixed

The report notes increased momentum in Vancouver’s and Toronto’s housing markets, with sales rising even as prices post double-digit increases. Affordability in these two cities remains stretched, especially for single-family homes.

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“Outside of Vancouver and Toronto, housing across Canada is truly a mixed bag with challenges persisting for oil-producing provinces, while others are facing balanced conditions and a steadier affordability backdrop,” says Wright. “Looking ahead to 2016, we expect a modest increase in overall house prices with a somewhat slower pace of sales activity.”

Additional reductions in energy investment

A large part of the economy’s subpar performance in 2015 was due to an estimated 30% drop in spending by energy companies and support services in the wake of oil price shocks. While the energy sector is likely to continue to curtail investment in 2016, RBC expects a gradual increase in oil prices to limit the magnitude of investment cuts by Canadian oil producers to 13% in the year ahead.

New federal government may boost economy

The Liberal’s plans to provide fiscal stimulus to the Canadian economy has the potential to lift 2016 growth. Government expenditures announced to date are expected to boost real GDP by 0.4 percentage points in 2016, with further upside if the government enacts additional stimulus measures in its 2016 budget.

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RBC also expects the BoC will maintain the overnight rate at 0.5% until late 2016 to ensure the economy grows at a strong enough pace to eliminate excess supply and reduce any downside risks to inflation. RBC anticipates the overnight rate will close 2016 at 1%, and will rise to 2% by the end of 2017.

Meanwhile, in the U.S., the economy picked up speed over the course of 2015 and is teeing up for a strong 2016. RBC expects the U.S. economy to grow by 2.5% in 2015 and by 2.8% in 2016.