With the prospect of rising interest rates on the horizon, and an expected decline in consumer spending, economic growth in Canada is forecast to slow this year and next, according to the latest RBC Economic Outlook.
Gross domestic product (GDP) growth is forecasted to slow to 1.9% in 2018, followed by 1.6% in 2019, compared to 3% in 2017.
This year will likely shift the key drivers of economic activity, with the contribution from consumers declining and business investment and government spending playing a larger role.
“Consumer spending grew 3.5% in 2017, the fastest pace of increase since 2010. Rising interest rates will take a toll on the highly indebted household sector in 2018, but the softening should be limited by support from a healthy labour market and rising wages,” the report says, adding that the housing market will likely also come under pressure as interest rates rise.
Within Canada, Saskatchewan is expected to lead the way with 2.9% GDP growth in 2018, dipping to 2.5% in 2019. Ontario is forecast to grow at close to 2% this year, dropping to 1.6% next year, and, Quebec is expected to track the national average with 1.9% growth this year.
As for the Canadian dollar, which made gains in 2017, it will likely “face much uncertainty” this year, the report says.
“Although an increase in oil prices and short-term interest rates spreads have favoured the Canadian currency in the short run, NAFTA-related uncertainty will continue to put pressure on the Canadian dollar,” the report says. Royal Bank of Canada (RBC) economists currently expects the dollar to trade at around US78¢ early this year before rising to US82¢ towards the end of the year.
The U.S economy is expected to gain 2.5% this year, and 2.2% in 2019.
In terms of interest rates, the report forecasts that the Bank of Canada will raise the overnight rate each quarter in 2018, “against the backdrop of solid domestic activity and more robust global trade flows.”
“But it’s likely to move at a measured pace,” the report says. “That’s due to the impact that NAFTA uncertainty could have on exports and investment, as well as concerns about the ability of Canadian households to finance their elevated debt at higher rates.”