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RBC expects economy to beat predictions in 2013

Royal Bank of Canada said it expects interest rates will start to rise “modestly” in the second half of next year and that the Canadian dollar will stay above parity through much of 2013.

Kevin Van Paassen/The Globe and Mail

The Canadian economy will pick up steam next year as risks to the global economy subside and exports strengthen, a new forecast says.

The country's gross domestic product should expand 2.4 per cent next year, accelerating from this year's expected pace of 2 per cent, Royal Bank of Canada said Thursday. It expects interest rates will start to rise "modestly" in the second half of next year and that the Canadian dollar will stay above parity through much of 2013.

Its forecast comes as the Canadian economy hit a soft patch in the third quarter of this year, expanding just 0.6 per cent -- far below forecasts -- led by a slowdown in business investments and exports.

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That said, "we expect factors weighing on growth in late 2012 and early 2013 will reverse course, which, alongside accommodative financial conditions and low household borrowing rates, will set the stage for better economic growth," said Craig Wright, the bank's chief economist. As uncertainty ebbs in the global economy, "demand for Canadian exports will rise, as will investment and hiring."

The bank is at the more optimistic end of expectations for next year. The average median forecast among economists is 2 per cent growth in GDP next year, according to Bloomberg.

Trade will boost the economy next year and in 2014, the bank said. It sees U.S. demand rising -- as "fiscal cliff" debate gets resolved -- while elevated demand for commodities will support gains in energy and metal exports.

"Net trade is forecast to make the most significant contributions to real GDP growth since 2001," Mr. Wright said.

Household debt -- at a record high -- should become less of a threat next year as tighter mortgage rules and cooler housing activity slow the pace of debt accumulation.

The housing market will weaken, "albeit at a modest pace." The bank expects lower resale activity and home prices in Canada in 2013 and 2014.

Among provinces, Newfoundland and Labrador will lead the country's economic growth next year, fuelled by a rebound in oil production and higher mining output, followed by Alberta and Saskatchewan. Quebec will see the slowest growth, held back by fiscal restraint and a softer housing market.

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About the Author

Tavia Grant has worked at The Globe and Mail since early 2005, covering topics from employment and currency markets to trade, microfinance and Latin American economies. She previously worked for Bloomberg News in Toronto and Zurich, writing on mining, stocks, currencies and secret Swiss bank accounts. More

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