External Demand Can Fuel Growth – RBC

TORONTO – Business – The RBC is out with predictions for the Canadian economy. The latest Economic and Financial Market Outlook states that Canada is poised for growth with growing demand for raw materials. The Bank also states that Ontario’s economy is also poised for positive economic gains for the rest of the year.

External demand for Canada’s goods is central to the country’s economic growth story this year and next, according to the latest Economic and Financial Market Outlook issued today by RBC Economics. RBC is forecasting real GDP growth of 2.4 per cent in 2014 and 2.7 per cent in 2015.

“Our outlook for Canada is predicated on the fact that U.S. economic growth will be broadly based and that slowing global import demand that started in early 2012 will reverse course,” said Craig Wright, senior vice-president and chief economist, RBC. “With global demand improving, the weakening Canadian dollar will provide that extra lift needed to shift the export sector into more than a bit player in Canada’s economic growth story.”

Demand for Canadian exports will strengthen the pace of hiring, RBC says, and move the labour market closer to full employment. Against this backdrop, an uptick in wages will result in incomes rising faster than household mortgage and credit growth, according to Wright, which should cap the upside in the debt-to-income ratio. The cost of servicing debt remains historically low at this point, staving off increases in delinquencies and bankruptcies by consumers.

A strengthening in demand from abroad will also underpin business confidence in 2014 and 2015, says RBC. This was substantiated in the latest Bank of Canada business outlook survey, which showed a growing number of firms experienced faster sales growth over last year with the majority expecting to see sales increase further in the year ahead.Despite poor weather conditions restraining Ontario’s economy in the early months of this year, the province is still on track for accelerated growth in 2014, according to the latest RBC Economics Provincial Outlook released today.

The slow start to 2014 prompted RBC to revise its real GDP forecast slightly lower to 2.3 per cent from the 2.5 per cent previously forecasted. However, RBC says the revised rate is still a notable improvement from the 1.3 per cent growth in 2013.

“Ontario’s economic growth appears to be fairly broad-based so far this year with the housing sector being one of only a few sectors showing a decline,” said Craig Wright, senior vice-president and chief economist, RBC. “We expect the province to benefit disproportionately from a strengthening U.S. economy and more competitive Canadian dollar on a go-forward basis.”

RBC anticipates the lift from abroad will be even greater in 2015 with a fully revitalized U.S. economy contributing to a faster pace in Ontario’s real GDP growth at 2.8 per cent.

Manufacturing activity still managed to advance despite this winter’s difficult weather, which disrupted the flow of goods transported across and outside the province – manufacturing sales grew by 3.3 per cent in Q1 2014 compared to the same period last year. Weather-related issues also did not appear to hold back Ontario’s exports as the value of merchandise sold abroad rose for the fourth straight quarter on a year-over-year basis.

“A sustained momentum in exports despite poor weather conditions bodes well for stronger gains throughout the rest of this year,” added Wright. “We expect the improving trade trend to provide a compelling basis for Ontario businesses to ramp up capital investments.”

The February release of Statistics Canada’s investment intention survey indicates that businesses plan to boost their spending on non-residential outlays by 3.7 per cent in 2014 – a welcome turnaround from a decline of 4.5 per cent in 2013, RBC says.

The report notes there was some indication of Ontario firms starting to follow through on their intentions in Q1, as business spending on non-residential building construction rose by 3.5 per cent from Q4 2013. This represented the first quarterly increase in nearly a year and a half.

On the residential housing front, an unusual situation developed in Ontario’s largest market – Toronto; despite moderate activity, the housing market heated up thanks to a limited supply of homes available for sale. RBC says that the housing market heat is likely temporary as a growing number of condos currently under construction are close to complete, which should fuel supply.

“We project housing construction to slow this year and represent a modest drag on economic growth in the province,” added Wright.