A pair of reports forecasts Canada’s gross domestic product (GDP) growth to perk up a bit in the second half of 2018 but the trend for the next two years is for slower growth .
The Canadian economy looks set to shake off a weak start to this year, according to the latest economic outlook from RBC economics.
“An increase in consumer spending, wage growth and business investment have all contributed to positive signs for Canada,” the outlook states.
Nevertheless, annual GDP growth is expected to slow from last year’s pace. RBC forecasts real GDP growth of 2% this year, down from 3% growth in 2017. It forecasts the economy will slow further to 1.8% growth in 2019.
“Our baseline view is that Canada’s economy will grow at a mildly faster clip in the remaining quarters of 2018,” says Craig Wright, senior vice-president and chief economist at RBC, in a statement.
“Financial conditions remain solid and the labour market is healthy. Wage growth continues to accelerate and it will blunt the impact that rising interest rates will have on household debt service costs.”
RBC’s forecast is echoed by report from Fitch Ratings, which predicts “the pace of growth to pick up slightly in the remainder of 2018.”
Fitch also forecasts Canada’s economy producing 2% growth this year, before slowing over the next couple of years.
Trade-related risks are weighing on the outlook for Canada, according to both reports, after the recent imposition of tariffs by the U.S. and a lack of progress on NAFTA negotiations.
The impact of the tariffs so far has been “relatively small,” the RBC report states, but that the prospect for further tariffs “could dampen the outlook down the road.”
Against this backdrop, RBC forecasts that the Canadian dollar will likely remain its current trading range of around US77¢ in 2018. “Further protectionist policies from the Trump administration could lead to trouble down the road for the Canadian dollar,” the RBC report states.
As for interest rates, Fitch expects the Bank of Canada to deliver one more 25-basis point (bps) rate hike this year. RBC forecasts rates rising by 50 bps this year, and by another 50 bps in the first half of 2019.
“Once the rate gets to 2.25%, we expect the bank will step to the sidelines to assess the ability of households to manage their debt balances in this higher rate environment,” the RBC report states.