Business spending, U.S. restraint to slow economic growth: RBC

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Cautious business spending and looming fiscal restraint in the U.S. will slow Canadian economic growth, says a new Royal Bank of Canada report just ahead of Thursday's federal budget.

Greater-than-expected fiscal discipline in the U.S. as it implements its sequestration expenditure cuts in March is likely to act as a drag on Canadian exports, according to the bank's latest Economic and Financial Market Outlook.

And while Canadian business investment going forward should be strong, for now high household-debt levels will curb spending on housing and goods and services although this will be partly offset by modest gains in income and employment, says the bank.

"With household spending set to fall slightly, we need a pick-up in not only business investment but exports as well if we want to see the economy return to above-potential growth," Craig Wright, RBC's chief economist, said in a news release Tuesday.

"After boasting a relatively strong economic performance over the past several years, Canada's economy hit a speed bump in late 2012. That said, financial conditions continue to support growth. As confidence recovers, business spending should accelerate, albeit at a less rapid pace than we saw in the early days of expansion."

RBC is forecasting GDP growth of 1.8 per cent in 2013.

Meanwhile, Toronto-Dominion Bank said in its quarterly economic forecast, also published Tuesday, it expects the Canadian economy to grow by 1.6 per cent in 2013 before picking up speed to 2.6 per cent in 2014.

It says the global economy expanded by 2.9 per cent last year, the weakest showing since the 2009 recession.

"This year should see a slightly better uptake towards 3.1 per cent, as developing economies gain momentum and the U.S. economy accelerates above 2.5 per cent growth in the second half of the year," says the TD Economics outlook.

The RBC report says pent-up U.S. demand for housing and vehicles should help boost Canadian exports, while gains in U.S. business investment are set to strengthen demand for Canadian machinery exports.

That push, however, will be tempered by looming U.S. spending cuts, it said.

Globally, central banks and governments have implemented policies that help reduce the risks of a severe downturn this year, says RBC.

But, "despite all the constructive policy announcements, the global economy is headed for another year of mediocre growth in 2013."

Global growth is likely to be limited to 1.4 per cent this year, according to RBC's outlook. Among factors hobbling growth are continued uncertainty over U.S. fiscal issues and worries over Europe's ability to absorb more fiscal cutbacks, it says.

It adds that "the underpinnings are in place for the second half of 2013 to mark the beginning of a sustained period of above-trend growth for the world economy."

Canada's economy was hampered in the third quarter of 2012 by slumping mining, oil and gas production, a situation made worse by a slowdown in manufacturing and construction activity, said the RBC report.