"The tone of global economic data was somewhat disappointing in the second quarter and Canada was no exception, with only marginal increases in exports, a decline in manufacturing sales and weak consumer spending," said Craig Wright, senior vice-president and chief economist, RBC. "Canada should, however, continue to take global headwinds in stride. The economy continues rumbling along, and will likely pick up as temporary factors ebb and global growth prospects improve."
RBC projects that lingering downside risks will diminish in the months ahead and clear the way for the Bank of Canada to gradually begin raising interest rates next year. As such, RBC's outlook on inflation remains benign, as the economy is still growing at a rate close to its long-run potential.
"As progress is made by European policymakers to deliver a cohesive and credible plan to address fiscal and financial market imbalances, and a more moderate fiscal austerity program in the U.S. is implemented, we will get an improved picture of international and domestic growth prospects for 2013," Wright noted.
Canada's solid economic fundamentals, elevated commodity prices and growing expectations of a policy rate increase in 2013 drove the Canadian dollar above parity this quarter. RBC notes that even some volatility in commodity prices failed to discourage foreign investment in Canadian assets, as $90 billion of Canadian portfolio securities were bought by foreign investors in the 12 months ending June 2012.
According to the RBC Outlook, demand for household credit has slowed significantly during the quarter in response to domestic policymakers' continued warnings about the dangers associated with elevated debt-to-income ratios and recent regulatory changes.
"An uptick in earnings growth will help add a little more welcomed padding to Canadians' pocketbooks. This, in turn, should also boost consumer confidence, which has been waning due to global economic uncertainty and is expected to translate into mild increases in consumer spending," added Wright. "Looking ahead, credit growth is also likely to remain moderate, as the bite from mortgage lending rule changes weighs on home buyer demand."
As stronger signs of improvement in the global economy take shape, RBC forecasts that Canadian businesses will resume aggressively investing funds which will be a key source of growth.
Looking through the recent volatility in the labour market, the economy so far this year generated 20,000 jobs per month up to August 2012, above the average pace recorded last year, and consistent with the economy's growth rate.
Canada's exporters will also gain momentum, as the global economy makes another effort to right its sails. On the other hand, after increasing by 21 per cent over the past two years, import demand is likely to slow. On balance, the Canadian trade sector - which has only supported growth in one of the past 10 years - is positioned to boost growth by one-half percentage point this year and next.
At a regional level, western Canada is again expected to dominate the growth rankings both in 2012 and 2013. Alberta is forecast to take the lead for the second consecutive year, with Saskatchewan and Manitoba following closely behind. British Columbia and Ontario are positioned to grow at rates just above the national average, while the remaining provinces are expected to grow below that average.