Canada to skirt global turbulence, record healthy growth this year: RBC

OTTAWA – Canada’s recovery is getting a vote of confidence from economists at the Royal Bank, who in a new report judge the economy sufficiently resilient to withstand turbulence from abroad.

The RBC’s new quarterly forecast anticipates the economy will rebound to 3.1 per cent growth this quarter, which ends in June, and record a 2.6 per cent gain in gross domestic product overall for both 2012 and 2013.

But fresh data from the Conference Board suggests headwinds from abroad are already impacting Canada’s corporate sector.

The board’s May index on industry profitability found 13 of 49 industries reporting a decline in profitability and several that had been posting strong increases at the beginning of the year now showing a slowdown.

“The weaker profitability outlook is linked to the ongoing European debt crisis,” the think-tank said, also citing slowing growth in emerging markets and depressed prices in the commodities that Canada sells to the world.

The RBC economists acknowledged the external difficulties and have incorporated a slower 3.5 per cent global growth profile for this year. But they are buoyed by Canada’s strong fundamentals and believe policy-makers will be successful in preventing a European financial meltdown.

“We’re relatively bullish,” said Craig Wright, RBC’s chief economist. “On balance, conditions for growth are positive, supported by a continuation of a low interest rate environment and a Canadian financial sector that is healthy and ready to provide credit.”

Wright said the recent bad news has dampened confidence but has not changed the overall outlook.

“It’s still basically a risk story,” he said of Europe. “In a sense it’s more of the same: we get dragged to the edge of the cliff and then get dragged back.”

The other risks the bank says must be averted are the possibility of a harder than expected landing for China, and the danger that political gridlock in the U.S. will prevent a compromise to extend stimulative fiscal measures beyond this year.

The RBC’s view of the economy is at the upper limit of private sector economists’ range, as well as being above the Bank of Canada’s 2.4 per cent growth expectation for both years.

Last week, the central bank signalled it may downgrade its own forecast in the future. In a statement, it noted that “global economic growth has weakened,” citing European debt problems and weaker than expected performances in emerging markets, the U.S. and even Canada, which recorded a disappointing 1.9 per cent growth rate in the first quarter.

Last Friday, Statistics Canada confirmed that the strong job gains seen in March and April had petered out in May.

The RBC, however, sees last month’s tepid 7,700 jobs increase as cementing expansion in the previous two months since there was no reversal.

The economists attribute the soft first quarter to temporary factors — a mild winter that reduced demand on utilities and temporary shutdowns in both energy and mining production facilities.

They believe the economy will catch up in the second quarter, noting the outsized 140,000 employment increase recorded in March and April.

RBC sees jobs growth continuing in the next two years, taking the unemployment rate from 7.3 per cent at present to 6.9 at the end of 2013.

Continuing, if modest, growth in the United States, along with domestic strength in housing, consumer spending and business investment will help the Canadian economy stay on the path to recovery, the RBC said.

Given the positive growth, Wright said he expects the Bank of Canada will start raising interest rates later this year.

Meanwhile, the report cautions that growth will not be evenly spread.

The picture is marred somewhat by a deepening East-West divide, with resource-rich Alberta and Saskatchewan benefiting from the commodities boom with near four per cent growth rates.

Meanwhile, Quebec and all four Atlantic provinces will be under two per cent this year, with only Nova Scotia and New Brunswick getting above that level next year, RBC said.

Provincial forecasts for 2012 and 2013 are:

— Newfoundland and Labrador 1.9, 3.4.

— Prince Edward Island 1.8, 1.9

— Nova Scotia 1.6, 3.2

— New Brunswick 1.6, 2.1

— Quebec 1.6, 1.9

— Ontario 2.5, 2.4

— Manitoba 3.1, 3.0

— Saskatchewan 3.7, 3.9

— Alberta 4.0, 3.9

— British Columbia 2.6, 2.9