Published On: Wednesday, 13 December 2017

Canada's Economy Leads G7 for 2017, Forecast Strong for 2018

Canada's Economy Leads G7 for 2017, Forecast Strong for 2018

CANADA - 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 Royal Bank of Canada (RBC) Economic Outlook.

Buoyed by consumer spending and housing activity delivering strong gains early in the year, RBC Economics expects real Gross Domestic Product (GDP) to grow an impressive 2.9 per cent in 2017. The forecast calls for slower but still above-potential growth of 1.9 per cent in 2018, with growth moderating to 1.6 per cent 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," said Craig Wright, Senior Vice-President and Chief Economist at RBC.

He predicted Canada's robust growth in 2017 will moderate somewhat in 2018 due to shifts in key economic drivers but the economy will still continue to outperform its potential.

Growth in 2017 was powered by Canadian consumer spending and an active housing market. RBC predicts the dominant forces driving the economy will to change in 2018 to government spending on infrastructure and a moderate increase in business investment.

Canadian exports are expected to strengthen mildly in 2018, although the outcome of the North America Free Trade Agreement (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, rivaling the gain recorded over the same period in 2007, before the Great Recession.

The Bank of Canada raised interest rates for the first time in nearly seven years with two increases made over the summer.

In the near term, RBC expects the overnight rate to remain at 1.0 per cent. However, with the economy forecast to stay on its current path, the bank predicts additional rate increases to ensue in the second quarter of 2018 and forecasts the overnight rate will reach 1.75 per cent by the end of 2018.

Canada's dollar is trapped between expectations of continued policy normalization from the Bank of Canada and concerns about NAFTA and competitiveness against US tax reforms.

The bank predicts Canada's dollar will weaken modestly early in the year but anticipated rate hikes will likely cause the dollar to modestly 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 will grow in 2018, albeit at a slower pace relative to 2017 for most provinces. In many cases, including British Columbia, 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 we expect a rise in oil production will more than offset a drop in capital spending and weakness in other sectors of the economy.

Click here for a complete copy of the RBC Economic and Financial Market Outlook.

RBC Economics Provincial Outlook is a summary forecast for each province, including economic and employment growth, unemployment rates, retail sales, housing starts and consumer price indices.