The Canadian Press - ONLINE EDITION

After the stall, Canadian economy to pick up speed in 2013, says RBC

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OTTAWA - Canada's largest private sector bank is taking a relatively bullish stance on the prospects for the economy going forward.

The Royal Bank's latest quarterly outlook predicts growth will accelerate to 2.4 per cent next year and continue to expand to 2.8 per cent in 2014, following a year that saw the weakest growth since the recession and a virtual stall in the third quarter.

The forecast is slightly rosier than the Bank of Canada's call for 2.3 and 2.4 per cent growth in the two years, and even more at odds with the consensus forecast of 2.0 in 2013.

The bulwark of the economy continues to be the resource sector — with Alberta and Saskatchewan supporting much of the growth in both years.

But RBC chief economist Craig Wright says he believes the global economy is putting a number of hiccups that occurred in 2012 in the rear view mirror and is ready to start accelerating again.

That will be good for Canadian exports, he says, which is the key reason the country's economy underperformed this year, at an expected two per cent. It braked to as low as 0.6 per cent in the summer months.

The sanguine view on exports is despite the fact that RBC sees the Canadian dollar strengthening to about $1.05 US by the end of 2013. A strong dollar makes Canadian products more expensive and less competitive in foreign markets.

"I would say we are cautiously optimistic," Wright said. "We're slightly more upbeat than consensus, but not dramatically so."

The big difference going forward is in the trade side — which many still see as a continuing weakness.

But the RBC report notes that the American economy is picking up, particularly in the housing sector, and barring a budgetary crisis that sends the U.S. sliding toward recession — the so-called "fiscal cliff" scenario — that should be supportive of Canadian exports of autos, parts and wood products.

As well, China's economy has stabilized, which will likely lead to firmer prices for commodities Canada exports, such as oil and metals.

According to RBC, net trade in Canada will shift from a drag on growth to a 0.3 and 0.4 percentage point boost in 2013 and 2014 respectively.

"This represents the most significant support since 2001 after most of the intervening years showed the sector acted as a drag on growth," the report notes.

The other engines of growth, Wright said, will be business investment — which has been a strength for the past year or so — and consumers. But housing is weakening and the bank sees little contribution from government spending.

The report sees Canada's unemployment rate continue to inch down, breaking through the seven-per-cent threshold in 2014 to average 6.9 per cent.

The assumptions are contingent on U.S. policy-makers reaching a budget deal, if not before the Jan. 1 deadline, at least shortly afterward, Wright said.

"If that doesn't happen, we'll have to rewrite our forecasts," he said.

While brighter than the consensus, the RBC outlook can still be characterized as modest, or representing sluggish growth for Canada, now three years into a recovery period.

"It's discouraging to keep seeing sluggish growth, but it's not really surprising," said Wright.

"This was a crisis (2008-09) that was a decade in the making, so fixing it is probably going to take a decade as well. We're really just half-way through it."

In most respects, Canada is still relatively better off than many other advanced countries — the report calls it "the little economy that could."

U.S. growth rates have caught up to Canada's, but it is starting from a lower base because its recession was deeper and lasted longer. And next to Europe, which will have been in a slump through most of 2012 and is projected to be flat in 2013, Canada is positively booming.

Two advanced economies forecast to do better are Australia and New Zealand, whose economies are more tied to fast-growing emerging nations in Asia.

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