canadian q2 gdp growth bounces higher ......canadian q2/18 gdp growth rose to 2.9% from 1.4% in q1....

CANADIAN Q2 GDP GROWTH BOUNCES HIGHER

GLOBAL ECONOMY LOSING ALTITUDE THOUGH REMAINS ON POSITIVE

GROWTH PATH

SOME PROVINCES NOW FACE THE DOWNSIDE OF TIGHT LABOUR MARKETS

September 2018

ECONOSCOPE, © ROYAL BANK OF CANADA

IN BRIEF

Volume 42, Number 9

September 2018

RBC ECONOMICS

RESEARCH

Craig Wright

SENIOR VICE PRESIDENT &

CHIEF ECONOMIST

Dawn Desjardins

VICE PRESIDENT &

DEPUTY CHIEF ECONOMIST

Paul Ferley

ASSISTANT CHIEF ECONOMIST

MACROECONOMICS

Robert Hogue

SENIOR ECONOMIST

REGIONAL ECONOMIES

Nathan Janzen

SENIOR ECONOMIST

MACROECONOMICS

Josh Nye

SENIOR ECONOMIST

FINANCIAL MARKETS & MACROE-

CONOMICS

Joseph Allegritti

RESEARCH ASSOCIATE

Rannella Billy-Ochieng’

ECONOMIST

Ramya Muthukumaran

ECONOMIST

Andrew Agopsowicz

SENIOR ECONOMIST

EDITOR

Adrianna Pineda

[email protected]

SUBSCRIPTION INFORMATION

[email protected]

Highlights This Month

2 CANADIAN Q2 GDP GROWTH BOUNCES HIGHER

Canadian Q2/18 GDP growth rose to 2.9% from 1.4% in Q1, backed

by a jump in exports and strengthening in consumer spending.

6 GLOBAL ECONOMY LOSING ALTITUDE THOUGH REMAINS

ON POSITIVE GROWTH PATH

With policy uncertainty high and unemployment rates running below

their pre-recession averages, the risk is rising that the peak in global

growth is behind us.

10 SOME PROVINCES NOW FACE THE DOWNSIDE OF TIGHT

LABOUR MARKETS

As baby boomers reach retirement age in greater numbers, these

labour issues are poised to get worse.

ECONOSCOPE® is published and produced monthly by RBC Economics Research. Address all correspondence to the Editor, RBC Economics Research, RBC, 9th Floor,

South Tower, 200 Bay Street, Toronto, Ontario, M5J 2J5.

© Royal Bank of Canada. The material contained in Econoscope is the property of Royal Bank of Canada and may not be reproduced in any way, in whole or in part,

without express authorization of the copyright holder in writing.

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CURRENT TRENDS Paul Ferley, Dawn Desjardins, Nathan Janzen, Josh Nye

HIGHLIGHTS

▲ Canadian Q2/18 GDP growth rose to 2.9% from 1.4% in Q1.

▲ Employment fell 52k in August to retrace most of a 54k increase in July.

▲ The 0.2% dip in headline retail sales — a 0.3% decline excluding the impact of prices — retraced little of a big 2.2% jump in May.

▲ August housing starts unexpected-ly dropped 2.3% in the month to an annualized 201.0k from 205.8k in July.

▲ The July trade deficit unexpectedly shrank to $0.1 billion from $0.7 billion in June.

▲ Canadian inflation report for July came in much stronger than expected with the year-over-year rate unexpect-edly jumping to 3.0% rather than ex-pectations for an unchanged 2.5%.

CANADIAN Q2 GDP GROWTH BOUNCES HIGHER

LATEST AVAILABLE: JUNE

RELEASE DATE: AUGUST 30, 2018

Canadian Q2/18 GDP growth rose to 2.9% from 1.4% in Q1. The

Q2 gain was marginally below market expectations of a 3.1% in-

crease though slightly above the Bank of Canada’s forecasted

2.8% gain. Q2 GDP strength largely reflected both exports rising

an annualized 12.3% after increasing only 2.4% in Q2 along with a

strengthening in consumer spending growth to 2.6% from 1.0% in

Q1. The bounce in consumer spending contributed to domestic

demand rising 2.1% from a 1.7% Q1 increase with the gain re-

strained by residential and business investment rising 1.1% and

1.9%, respectively. The strengthening largely reflected a rebound

in exports along with some strengthening in consumer spending.

Both areas had been negatively impacted by adverse winter

weather in the first quarter with these pressures easing in Q2. The

wage measures in the GDP report, along with the separate May

‘SEPH’ employment earnings numbers, point to the Bank of Cana-

da’s ‘wage-common’ measure rising 2.4% in Q2 little changed

from the increase in the first quarter.

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

2012 2013 2014 2015 2016 2017 2018

Real GDP % change, month-over-month

Source: Statistics Canada


CANADIAN LABOUR MARKET IMPROVE-

MENT TOOK A BREATHER IN AUGUST

LATEST AVAILABLE: AUGUST

RELEASE DATE: SEPTEMBER 7, 2018

Employment fell 52k in August to retrace most of a 54k in-

crease in July. Sectors of strength in July (like education

hiring) were generally not areas of weakness in August.

The unemployment rate ticked up to 6.0% from the 5.8% in

July that matched a more-than 4-decade low. Wage growth

for permanent workers slowed to 2.6% from 3.0% in July.

CANADIAN RETAIL SALES GIVE BACK

LITTLE OF MAY GAIN IN JUNE

LATEST AVAILABLE: JUNE


The 0.2% dip in headline retail sales — a 0.3% decline ex-

cluding the impact of prices — retraced little of a big 2.2%

jump in May. Sales of motor vehicles and parts edged

down 0.7% on a monthly basis but sale volumes in the sec-

tor were still up almost 2% from year-ago levels that were

already historically very high. Sales posted a 0.3% in-

crease in June excluding autos and a price-led 2% drop at

gasoline stations. That built on a 1.1% jump in May. Sale

volumes in Q2 as a whole still bounced back 3.7% at an

annualized rate after falling almost 5% in Q1. Including

spending on services not captured in the retail report, un-

derlying consumer spending growth trends still look re-

spectable, albeit down from the unsustainably strong pace

in 2017.

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Unemployment rate% of labour force


-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

2012 2013 2014 2015 2016 2017 2018

Retail sales% change, month-over-month



CANADIAN AUGUST HOUSING STARTS

MODERATE

LATEST AVAILABLE: AUGUST


August housing starts unexpectedly dropped 2.3% in

the month to an annualized 201.0k from 205.8k in July.

Market expectations had been a rebound in August

starts to 216.3k largely premised on indications of still

very robust housing permits data.

August’s decline was largely split between urban single

-detached units dropping 2.6% to 52.2k while the usual-

ly more volatile urban multiples dropped a marginally

lesser 2.4% 132.7k. Rural starts averaged 16.1k little

changed from July’s level.

CANADA’S TRADE DEFICIT NARROWED

FURTHER IN JULY

LATEST AVAILABLE: JULY


The July trade deficit unexpectedly shrank to $0.1 bil-

lion from $0.7 billion in June. The July shortfall was the

smallest since a small surplus was posted in December

2016. Markets expected a $1 billion deficit in July.

Exports rose 0.8% in nominal terms but fell 0.8% in vol-

ume terms. Import volumes declined 1.6% in volume

terms but despite an increase in equipment imports that

is a good sign for Q3 Canadian business investment

spending.

Non-energy export volumes inched lower on a month-

over-month basis in July but were still up 4% from a

year ago.

100

120

140

160

180

200

220

240

260

280

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Housing startsThousands

Source: Canadian Mortgage and Housing Corporation

300

350

400

450

500

550

600

650

2010 2011 2012 2013 2014 2015 2016 2017 2018

Exports

Imports

Merchandise tradeC$ billions, annualized



CANADIAN JULY CPI JUMPS SIGNIFICANTLY

HIGHER

LATEST AVAILABLE: JULY


Canadian inflation report for July came in much stronger

than expected with the year-over-year rate unexpectedly

jumping to 3.0% rather than expectations for an unchanged

2.5%. A lion’s share, though not all, of the upward surprise

could be attributed to sizeable increases in airfares and

travel services. Despite evidence of price pressure emerg-

ing in the overall CPI, the Bank of Canada will likely take

some comfort from the annual increase in its core measures

remaining at 2.0% in July and thus in line with its inflation

target.

-2

-1

0

1

2

3

4

5

2012 2013 2014 2015 2016 2017 2018

Consumer price index% change, year-over-year


Lastest

month

Previous

month

Year

ago

Real GDP Jun 0.0 2.4

Industrial production Jun -0.3 2.5

Employment Aug -0.3 0.9

Unemployment rate* Aug 6.0 6.2

Manufacturing

Production Jun 0.3 0.8

Employment Aug -0.5 -1.5

Shipments Jun 1.1 6.9

New orders Jun -1.8 14.0

Inventories Jun 0.5 9.2

Retail sales Jun -0.2 3.8

Car sales Jun -0.1 -1.6

Housing starts (000s)* Aug 201.0 225.5

Exports Jul 0.8 16.3

Imports Jul -0.4 10.1

Trade balance ($billlions)* Jul -0.1 -2.6

Consumer prices Jul 0.5 3.0

* Levels are shown for the latest period and the same period a year earlier.

Source: Statistics Canada, RBC Economics Research

% change from:

ECONOMY AT A GLANCE


The global economy has been

hitting more patches of turbulence

over the past few months. Trade

tensions are high, with the US

keeping the pressure on two of its

top three trading partners - Cana-

da and China. Although the US

and Mexico came to an agree-

ment on trade in late August,

Canada has yet to sign on to a

revamped NAFTA, and the White

House is threatening auto tariffs if

a resolution can’t be found. The

US is also threatening to put tar-

iffs on $200 billion of Chinese imports. Global trade activity has started to ease with the persistence of these trade

frictions opening the door to further slowing ahead. Business activity indicators remain consistent with growth

however they have started to turn lower in some countries. In the emerging market economies, indices have fall-

en in China, Turkey and Russia since the beginning of the year while among advanced economies the Euro-area

has turned down. With policy uncertainty high and unemployment rates running below their pre-recession averag-

es the risk is rising that the peak in global growth is behind us. Despite the headwinds, we expect the global econ-

omy to post a strong gain in 2018 and to avoid a significant downturn next year. Monetary policy stimulus re-

mains, and some countries have opened the spigot on the fiscal front. The US tax cuts and large infrastructure bill

will keep the economy on a firm growth path for the remainder of 2018. In 2019, growth is likely to slow modestly

as the Federal Reserve continues to retract policy support via interest rate increases and as the lift from fiscal

policy fades. In Canada and the Euro-area, our forecast is for growth to be more modest, although both regions

will likely expand close to their economy’s potential rate. The UK economy will lag its trading partners as Brexit

uncertainty dampens activity.

US ECONOMY REAPING THE BENEFITS OF POLICY STIMULUS

The US economy hit warp speed in the second quarter, with real GDP posting the fastest gain since the middle of

2014. Growth is likely to gear down modestly in the second half of the year as Q2’s surge in exports unwinds.

GLOBAL ECONOMY LOSING ALTITUDE THOUGH REMAINS ON POSITIVE

GROWTH PATH

ECONOMICS AND FINANCIAL MARKETS OUTLOOK

Craig Wright, Dawn Desjardins, Paul Ferley, Nathan Janzen

“With policy uncertainty high and unemployment rates

running below their pre-recession averages the risk is

rising that the peak in global growth is behind us.”


Outside of the trade sector, most areas of the US economy are projected to maintain their positive momentum. US

consumer spending was volatile in the first half of the year with a weak first quarter followed by a surge in consump-

tion which clocked in at a 3.8% rate in Q2. The combination of a robust labour market, rising asset values and an

elevated savings rate will support spending activity in the second half of the year. The economy will likely benefit

from healthy consumer spending again in 2019, albeit at a someone slower pace as interest rate increases curb bor-

rowing activity. The key support for the US consumer continues to be a strong labour market. The unemployment

rate stands at 3.9%, the lowest since late 2000. Demand for workers remains strong and the pool of labour is shrink-

ing, suggesting wages will rise as employers compete for increasingly scarce labour. That said, wage growth to-date

has been uncharacteristically slow, raising the prospect that structural changes in the economy are at work. Busi-

ness investment is on the rise with some industries hitting capacity limits. The US Tax Cuts and Jobs Act spurred

businesses to spend to take advantage of the full expensing of equipment purchases while the cuts to the CIT saw

after-tax profits rise at a 15½% pace compared to the first half of 2017. We estimate that fiscal stimulus will add

0.4ppt and 0.3ppt to the economy’s output in 2018 and 2019, respectively. These policy measures will however am-

plify the rise in the debt-to-GDP ratio. Providing stimulus this late in the cycle with the unemployment rate at its cycli-

cal low is uncommon and creates inflation risks. This raises the possibility that the Fed may need to hike rates at a

faster clip. Inflation pressures are already showing signs of picking up. The headline CPI rate is close to 3% and alt-

hough a portion of the increase reflects surging energy prices, the core measure which excludes both energy and

food prices, has also accelerated to stand at the highest level since the recession. Government spending is aug-

menting the positive momentum in consumption and business investment and will likely keep the economy growing

at an above-potential rate in the second half of this year. The expansion is likely slow mildly in 2019 with real GDP

up 2.4% as the Fed reduces the amount of policy stimulus via interest rate increases. The Fed has arguably

achieved its dual mandate with the economy at (or even beyond) full employment and inflation around the 2% target.

Our forecast assumes the fed funds target will rise 25 bps each quarter and reach 3.5% by the end of 2019. A fed

funds rate above 3% implies that policy will turn restrictive for the first time in over a decade. We project ten-year

yields will reach 3.75% by the end of next year, close to 100bps above today’s level.

CANADA’S ECONOMY CHUGGING ALONG DESPITE TRADE UNCERTAINTY

Canada’s economic performance was uneven over the first half of 2018 with Q1’s mild 1.4% gain followed by an out-

sized 2.9% rise in Q2. We expect the second half will be much the same, with a shutdown at a major oil sands pro-

ducer in July expected to weigh on the quarter’s performance to be followed by a rebound in Q4 as production recov-

ers. On net, the economy is forecast to grow by 2.1% in 2018 and slow just a shade in 2019 to 2%. Despite the un-

certain trade backdrop, consumer and business confidence remains high. Canada’s trade gap narrowed in the sec-

ond quarter with exports surging as US buyers got ahead of US import tariffs. Given the tense trade backdrop with

tariffs being levied on both sides of the border, exports and imports are forecast to rise at a significantly slower pace

going forward. The consumer will continue to underpin the expansion although spending growth will slow markedly

from 2017’s 3.5% pace. The persistence of solid job gains is generating modest upward pressure on wages although

-10

-8

-6

-4

-2

2

4

6

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Bureau of Economics Analysis, RBC Economic Research

Real GDP growth: U.S. Quarter-over-quarter annualized % change

Annual Growth Rates

Real GDP2016

1.6

Forecast:

2017

2.2

2018f

2.82019f

2.4

-10

-8

-6

-4

-2

0

2

4

6

8

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Real GDP growth: Canada Quarter-over-quarter % change, annualized rate

Forecast:

Source: Statistics Canada, RBC Economic Research

Annual Growth Rates

Real GDP2016

1.42017

3.02018f

2.1

2019f

2.0


disposable income growth softened a bit in the first half of 2018. In part this reflects a rise in tax payments. House-

holds’ net worth also dipped slightly, but remains historically elevated and sufficient to sustain consumer spending

growth of 2% in 2018. The outlook for 2019 is for somewhat softer activity as higher interest rates push up debt ser-

vice costs.

HOUSING MARKET CORRECTION RAN DEEPER AND LONGER THAN WE EXPECTED

New stress tests for borrowers and rising interest rates weighed on Canada’s housing market in the first part of

2018. While the correction proved deeper and lasted longer than we had anticipated, we believe it has largely run its

course with sales rising in the three months to July. We expect the recovery in sales activity will continue in the sec-

ond half of the year, limiting the annual decline to 11.5%. The annual drop masks the divergence in housing market

activity across regions with BC and Ontario experiencing more substantive declines while Quebec will likely see

sales increase on average this year. The correction in sales activity was accompanied by a decline in listings, result-

ing in most markets shifting into better balance. This took some of the heat off of prices which as of July were up

2.1% from a year earlier. Prices in Vancouver and Montreal are up while after falling prices in Toronto have levelled

off. Our forecast looks for price gains to average just 1.8% this year with little change expected in 2019, a marked

slowdown from the close to 10% gains recorded in 2016 and 2017. Canadian households remain heavily indebted

although the debt -to - income ratio fell 0.8 ppts in Q1 from a year earlier to mark the largest annual decline since

2001. While the debt service ratio held steady at 13.9 cents per dollar of PDI, this masked an increase in interest

costs with higher rates bumping up the interest portion 10.5% relative to early 2017. Further rate increases will put

more pressure on service payments given the large stock of debt outstanding. The recent acceleration in wage

growth will help slow, though won’t stop, an uptick in the debt service ratio meaning households will need to direct an

increasing amount of their incomes to make their loan payments.

BUSINESSES KEEPING A STIFF UPPER LIP

Business investment continued to firm in the first half of 2018 as companies expanded their capacity. Since bottom-

ing in late 2016, investment is up more than 12% and an elevated number of Canadian businesses still report they

would have difficulty meeting stronger demand. A significant number also reported labour shortages. The June sur-

vey was conducted before the US levied tariffs on Canadian steel and aluminum. While 39% of companies still in-

tended to address supply constraints by upping spending on M&E, the number came down sharply from previous

surveys. Uncertainty about NAFTA, US tax cuts, and tariffs likely played some role in the pullback. A resolution on

NAFTA could fuel further gains in investment activity while the dissolution of the trade pact could see companies pull

back significantly. Canada’s headline inflation touched 3% in July in large part due to energy prices as well as an

unusually large surge in airfares while the bank’s core inflation measures converged at 2%. A growing number of

businesses expect inflation will be 2% or higher in the year ahead suggests inflation rates are unlikely to slide below

target in a meaningful way. Additional, albeit modest, upward pressure on inflation is being generated by Canada’s

retaliatory tariffs on US imports.

14.9

Q1/1813.9

15.3

9

10

11

12

13

14

15

16

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Debt payments as a % of household disposable income

Household debt service ratio: Canada


Forecast

-20

-10

0

10

20

30

40

2013 2014 2015 2016 2017 2018

Vancouver

Toronto

Montreal

Composite

Year-over-year % change

MLS Home Price Index

Source: CREA, TREB, REBGV, RBC Economic Research


POLOZ AND TEAM ON HIKING PATH

The Bank of Canada raised the overnight rate to 1.50% in July. Another hike is likely in the fourth quarter as the

bank works to move the policy rate closer to neutral given limited slack in the economy and core inflation running at

the 2% target. The bank will continue to act with caution in order to minimize the pressure being exerted on house-

hold balance sheets as debt service costs go up. Further rate increases in the first half of 2019 are forecast to bring

the overnight rate to 2.25% by mid-year. Canada’s currency is down 4.3% against the US dollar so far this year how-

ever it is holding up against the other majors. The effective exchange rate excluding the USD is down just ½%. To

be sure, being part of the countries with a rate-hiking central bank has helped Canada’s currency versus the other

majors. Looking ahead with both the Fed and the BOC likely to continue to bump up the policy rate at a measured

pace, the upside for Canada’s currency against USD will be limited. Our bullish outlook for oil will provide some sup-

port for CAD, although renewed uncertainty about the Trans Mountain Pipeline will lessen the impact.

THE COST OF TARIFFS FOR CANADA’S ECONOMY

To-date the US government has levied tariffs on 5% of Canadian goods exports. Should the Trump Administration

follow through with its threat to levy tariffs on Canadian autos and parts it would mean that 20% of Canadian exports

would face tariffs when entering the US. Canada retaliated with tariffs on $16.6 billion of imports from the US that will

cut into Canadian import demand in the second half of 2018 and will put upward, albeit modest, pressures on prices.

Our forecast assumes that the US tariffs and Canada’s retaliatory measures to-date will lower the level of GDP by

~0.2 ppts by the end of 2018. Should the Trump administration levy 20-25% tariffs on Canada’s auto sector, the im-

pact would be more dramatic. Just how much, though, depends on a myriad of factors: how big the tariffs ultimately

are, the range of products targeted and any retaliation from the Canadian side along with offsets from Canadian dol-

lar depreciation – just to name a few. Tariffs on production and an assumed decline in auto sales activity would gen-

erate an estimated 0.5ppt hit to the economy. Adding on sectors indirectly impacted, could more than double the hit

to the economy’s growth rate.

0

20

40

60

80

100

120

January February March April May June July

ProposedImplemented

2017 exports to the US of affected products, billions of C$

Proposed and implemented US tariffs on Canadian exports

Source: Statistics Canada, Bank of Canada, US Department of Commerce, RBC Economics Research

Softwood lumber

Newsprint & uncoated paper

Large diameter welded pipe(proposed)

Autos & parts

Uranium

Steel & aluminum (proposed)

Steel & aluminum (exemptionlifted)

0

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

10 Year bond yield BoC overnight rate

Source: Bank of Canada, RBC Economic Research

%

Interest rates: Canada

Forecast


When it comes to the labour mar-

ket, things haven’t been any bet-

ter for a generation in Canada.

This is especially true in BC, On-

tario and Quebec where the un-

employment rate plummeted to

levels that not long ago most ana-

lysts thought unachievable in this

day and age. But even more tell-

ing is how pervasive the tightness

is within these three provinces. In

Ontario for instance, more than

86% of local economic regions

boast an unemployment rate of

6% or lower—something unheard of in modern times. In Quebec, the proportion is 75% and it is just slightly lower

in BC at 71%.

No wonder workers feel pretty upbeat in these provinces despite growing trade uncertainty. Job prospects are

good all round and our outlook calls for more of the same in the period ahead.

It’s a different story for employers. It has become a bigger challenge to attract and retain workers. A rapidly in-

creasing number of positions are now going unfilled. Job vacancies in fact surged in Quebec, BC and other prov-

inces in the past year. There are more and more reports of labour shortages in certain industries and regions. As

baby boomers reach retirement age in greater numbers, these labour issues are poised to get worse.

We believe that a tight supply of labour is already restraining economic growth in several provinces this year. This

is especially the case in British Columbia where one in every 24 jobs (4.2%) was unfilled in the first quarter, which

no doubt inhibits the ability of many businesses to pursue growth opportunities. Tight labour supply also play a

key role in slowing growth down in Ontario, Quebec and Alberta, albeit to lesser extents.

There are signs that BC and Ontario employers are further challenged by accelerating wages (in part due to sig-

nificant boosts to the minimum wage over the last year) though such pressure is more contained than we’d expect

in the current circumstances. The absence of wage pressures in Quebec and other provinces—as well as nation-

SOME PROVINCES NOW FACE THE DOWNSIDE OF TIGHT LABOUR MARKETS

PROVINCIAL OUTLOOK

Robert Hogue, Ramya Muthukumaran, Paul Ferley

“There are more and more reports of labour shortages in

certain industries and regions. As baby boomers reach

retirement age in greater numbers, these labour issues

are poised to get worse.”


ally—is in truth quite surprising. Still, it may be just a matter of time before faster wage growth emerges more broadly.

GROWTH TO MODERATE IN ALL PROVINCES IN 2018

Tight labour markets are part and parcel of the Canadian economy operating at capacity. To prevent the emergence of

excess demand—a situation that leads to overheating—the Bank of Canada has embarked on an interest rate hiking

campaign to moderate GDP growth toward its long-run potential rate. Our view is that rising interest rates will have the

desired effect and contribute to overall growth in Canada easing from 3.0% last year to 2.1% in 2018. This constitutes a

slight upward revision of 0.1 percentage points in 2018 from our June Provincial Outlook report. We expect growth to

moderate from 2017 in all provinces. Cooling housing markets and the winding down of major capital projects will be

among the restraining factors in some of the provinces.

While decelerating, Central Canada is still going quite strong, with consumers at the helm. Quebec’s economy main-

tained solid momentum in the first half of 2018 led by growth in residential construction, service industries and manu-

facturing. Quebec’s merchandise exports are up year to date; however, tariffs on key commodities (including aluminum

and softwood lumber) and the threat of further tariffs might put these gains at risk over the remainder of this year.

Nonetheless, the economic vigour to date led us to revise our 2018 forecast for Quebec’s growth to 2.4% from 2.1%

previously. Trade concerns cast an even bigger shadow on Ontario’s economy where the threat of tariffs in the auto

sector could have a potentially devastating impact. Still, the trade uncertainty so far hasn’t really been more than a nui-

sance. A weaker housing market has been a bigger restraining factor. We project Ontario’s economy to grow at a still

respectful rate of 2.0%, down from 2.7% in 2017.

Out west, Alberta is in position to be the growth leader among all provinces for a second straight year. Recovery from

the tough 2015-2016 recession is continuing with more sectors of the economy contributing. Stronger oil prices are a

clearly positive development keeping the recovery on track. That being said, we expect growth to slow significantly to

2.5% from last year’s outsized rate of 4.7%. Last year’s burst spoke more about how deep the economy fell in 2016

than actual vigour in 2017. Capital expenditures in the oil and gas sector have yet to turn around—they fell 2% in the

first half of 2018. Despite growing labour headwinds and a sharp drop in housing market activity, we expect British Co-

lumbia’s economy to grow at a solid rate of 2.3% this year, though this will be down from 3.7% last year. Strong wage

gains and population growth will continue to provide support for household spending in the province.

Saskatchewan’s economy is still on track to grow slightly above the Canadian average at 2.2% though this was revised

downward by 0.2 percentage points in light of recent indications that crop production will be weaker than we previously

assumed. The outlook for the province would be even brighter were it not for a disappointing job market where employ-

ment remains stalled. Lower crop production expectations also dim Manitoba’s growth prospects this year. Recent agri-

cultural reports prompted us to reduce growth by 0.2 percentage points to 1.7%. The winding down of major capital

4.9

6.66.2 6.0

5.6 5.5

8.0 7.7

9.9

14.6

0

2

4

6

8

10

12

14

16

BC AB SK MB ON QC NB NS PE NL

BC and Central Canada are effectively at full employment...

Unemployment rate in %, average between January and August 2018


Canada = 5.9

57.6

10.7

75.0

86.4

55.6

71.4

0

10

20

30

40

50

60

70

80

90

100

Canada Atlantic Quebec Ontario Prairies BC

August 2017 August 2018

Proportion of economic regions with a jobless rate of 6% or lower in %, 3-month average

...with most local areas having very little spare labour



Finally, Atlantic Canada is a mixed bag with PEI emerging as a bright spot once again with a growth of 1.4%. Solid

population growth—mainly thanks to immigration—is fueling substantial activity across several economic sectors on the

island including housing and household spending. At the other end of the spectrum, we expect virtually no growth from

Newfoundland & Labrador’s economy. With major investment projects winding down, employment will continue to fall in

the province. A shrinking working-age population will be a restraining factor in New Brunswick where we project growth

to be slow at just 0.6% in 2018. The pace won’t be much faster in Nova Scotia at 0.8%. Slower capital formation result-

ing from winding down construction investments as well as a letup in residential project investment will result in a slug-

gish pace.

REAL GDP GROWTH

REAL GDP GROWTH

0.7

0.8

1.6

1.7

1.8

1.9

1.9

2.0

2.5

2.6

2.8

NB

NS

PE

MB

QC

ON

BC

Canada

AB

NL

SK2019

0.2

0.6

0.8

1.4

1.7

2.0

2.1

2.2

2.3

2.4

2.5

NL

NB

NS

PE

MB

ON

Canada

SK

BC

QC

AB2018


FORECAST DETAIL - CANADARBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS

= Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019

Household consumption 4.0 4.3 3.1 2.2 1.0 2.6 1.9 2.0 1.8 1.7 1.6 1.7 2.4 3.5 2.2 1.9

Durables 12.2 7.2 -0.6 2.1 1.5 2.1 1.7 1.7 1.6 1.6 1.5 1.5 4.5 6.5 1.8 1.6

Semi-Durables 2.8 6.0 2.3 -0.7 -0.4 4.8 1.9 1.9 1.8 1.6 1.8 1.8 2.2 3.3 1.7 1.9

Non-durables 2.1 5.6 0.4 3.5 -0.5 1.0 1.7 2.5 2.0 1.7 1.7 1.8 1.7 2.6 1.5 1.9

Services 3.0 2.8 5.2 2.0 1.7 3.2 2.0 2.0 1.8 1.8 1.7 1.8 2.2 3.2 2.6 1.9

Government expenditures 4.8 0.8 3.5 3.8 2.6 1.6 2.5 2.5 2.0 2.0 2.0 2.0 2.2 2.3 2.6 2.1

Residential investment 7.1 -1.3 -0.1 13.5 -10.5 1.1 0.8 -4.0 -3.6 -2.0 -0.5 0.3 3.3 2.9 -0.4 -1.9

Business investment 14.3 7.5 5.9 8.0 11.4 1.9 2.3 2.1 2.0 2.0 2.0 2.0 -9.4 2.8 6.2 2.1

Non-residential structures 5.9 6.7 8.9 4.0 8.2 2.2 2.5 2.2 2.0 2.0 2.0 2.0 -11.5 0.7 5.1 2.1

Machinery & equipment 28.5 8.7 1.6 14.5 16.4 1.4 2.0 2.0 2.0 2.0 2.0 2.0 -6.0 6.0 8.0 2.0

Final domestic demand 4.9 3.2 3.6 4.1 1.7 2.1 2.0 1.8 1.5 1.5 1.6 1.7 1.1 3.0 2.6 1.7

Exports 2.6 6.4 -9.9 3.9 2.4 12.3 1.5 3.5 3.3 1.7 1.8 2.0 1.0 1.1 3.0 3.1

Imports 14.9 4.1 1.3 7.7 4.2 6.5 0.0 2.2 2.1 1.0 1.5 2.1 -1.0 3.6 4.2 1.8

Inventories (change in $b) 8.9 12.8 18.3 15.8 15.8 14.1 9.5 11.5 11.8 11.3 11.3 11.3 1.0 13.9 12.7 11.4

Real gross domestic product 4.0 4.6 1.7 1.7 1.4 2.9 1.6 2.6 1.9 1.7 1.7 1.7 1.4 3.0 2.1 2.0

OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED

Business and labour

Productivity 2.2 2.6 1.1 1.1 -0.2 0.2 0.8 1.2 1.6 1.3 1.4 1.0 0.6 1.8 0.5 1.3

Pre-tax corporate profits 25.7 35.4 14.5 7.9 0.0 4.6 4.8 3.5 4.4 2.0 2.7 1.6 -1.9 19.9 3.2 2.7

Unemployment rate (%)* 6.6 6.5 6.2 6.0 5.8 5.9 5.9 5.8 5.8 5.8 5.8 5.8 7.0 6.3 5.9 5.8

Inflation

Headline CPI 1.9 1.3 1.4 1.8 2.1 2.3 2.8 2.7 2.3 2.7 2.4 2.3 1.4 1.6 2.5 2.4

Core CPI 2.0 1.4 1.4 1.6 1.8 1.8 2.3 2.4 2.2 2.3 2.3 2.4 1.9 1.6 2.1 2.3

External trade

Current account balance ($b) -55.9 -59.6 -71.7 -65.9 -69.9 -63.5 -63.7 -56.8 -54.4 -50.2 -48.3 -48.0 -65.4 -63.3 -63.5 -50.2

% of GDP -2.6 -2.8 -3.3 -3.0 -3.2 -2.9 -2.8 -2.5 -2.4 -2.2 -2.1 -2.0 -3.2 -2.9 -2.8 -2.2

Housing starts (000s)* 222 207 223 229 225 219 209 203 198 196 193 192 198 220 214 195

Motor vehicle sales (mill., saar)* 2.07 2.10 2.08 2.05 2.12 2.07 2.02 1.99 1.96 1.95 1.94 1.94 1.98 2.08 2.05 1.95

INTEREST AND EXCHANGE RATES %, END OF PERIOD

Overnight 0.50 0.50 1.00 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.25 2.25 0.50 1.00 1.75 2.25

Three-month 0.52 0.71 1.00 1.06 1.10 1.26 1.40 1.65 1.90 2.15 2.15 2.15 0.46 1.06 1.65 2.15

Two-year 0.75 1.10 1.52 1.69 1.78 1.91 2.10 2.30 2.45 2.45 2.40 2.35 0.75 1.69 2.30 2.35

Five-year 1.12 1.40 1.75 1.87 1.97 2.07 2.25 2.45 2.55 2.65 2.70 2.70 1.12 1.87 2.45 2.70

10-year 1.62 1.76 2.10 2.04 2.09 2.17 2.35 2.60 2.70 2.80 2.90 2.95 1.71 2.04 2.60 2.95

30-year 2.30 2.14 2.47 2.27 2.23 2.20 2.45 2.70 2.80 2.90 3.00 3.00 2.31 2.27 2.70 3.00

Canadian dollar 1.33 1.30 1.25 1.26 1.29 1.31 1.30 1.29 1.28 1.27 1.28 1.28 1.34 1.26 1.29 1.28

*Quarterly averages, level

Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts

GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED

Annual2017 2018 2019


FORECAST DETAIL - UNITED STATESRBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS

= Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018 2019

GROWTH IN THE ECONOMY PERIOD-OVER-PERIOD ANNUALIZED PERCENT CHANGE UNLESS OTHERWISE INDICATED

Consumer spending 1.8 2.9 2.2 3.9 0.5 3.8 3.2 2.7 1.7 2.3 2.3 1.8 2.7 2.5 2.6 2.4

Durables 1.9 8.6 7.8 12.6 -2.0 8.6 4.5 2.8 2.2 2.3 2.2 1.6 5.5 6.8 5.6 3.0

Non-durables 1.9 4.0 2.3 4.0 0.1 3.7 4.5 3.5 1.9 2.5 2.4 1.8 2.7 2.1 2.8 2.8

Services 1.7 1.7 1.4 2.6 1.0 3.1 2.6 2.5 1.6 2.3 2.3 1.8 2.3 2.0 2.1 2.2

Government spending -0.8 0.1 -1.0 2.4 1.5 2.4 2.4 2.7 2.4 2.4 2.4 2.4 1.4 -0.1 1.6 2.5

Residential investment 11.1 -5.5 -0.5 11.2 -3.4 -1.6 0.0 3.4 1.8 0.9 1.9 1.2 6.5 3.3 0.6 1.5

Business investment 9.6 7.3 3.4 4.9 11.5 8.5 3.9 5.7 2.8 2.8 2.6 2.6 0.5 5.3 7.1 3.8

Non-residential structures 12.8 3.8 -5.8 1.3 13.9 13.2 3.0 5.2 4.0 4.0 2.0 2.0 -5.0 4.6 6.2 4.3

Non-residential equipment 9.1 9.7 9.8 9.9 8.5 4.4 5.0 6.5 3.5 3.5 0.7 0.1 -1.5 6.1 7.6 3.7

Intellectual property 7.9 6.6 1.7 0.7 14.1 11.0 3.0 5.0 4.8 3.6 2.6 2.6 7.5 4.6 6.9 4.3

Final domestic demand 2.6 2.6 1.7 4.0 1.9 3.9 3.0 3.1 2.1 2.5 2.2 1.8 2.3 2.5 2.9 2.6

Exports 5.0 3.6 3.5 6.6 3.6 9.1 1.0 2.5 1.8 2.8 2.8 2.8 -0.1 3.0 4.8 2.6

Imports 4.8 2.5 2.8 11.8 3.0 -0.4 7.5 6.0 5.4 3.3 2.8 3.2 1.9 4.6 4.6 4.5

Inventories (change in $b) -2.4 11.9 64.4 16.1 30.3 -26.9 5.0 15.0 25.0 27.0 27.0 32.0 23.4 22.5 5.9 27.8

Real gross domestic product 1.8 3.0 2.8 2.3 2.2 4.2 2.8 2.8 1.8 2.4 2.2 1.8 1.6 2.2 2.8 2.4

OTHER INDICATORS YEAR-OVER-YEAR PERCENTAGE CHANGE UNLESS OTHERWISE INDICATED

Business and labour

Productivity 1.0 1.2 1.5 0.8 0.9 1.4 1.1 1.7 1.7 1.2 1.2 1.0 0.2 1.1 1.3 1.3

Pre-tax corporate profits 3.0 3.6 2.8 3.3 5.9 7.7 8.2 7.0 6.3 3.9 3.5 2.5 -1.1 3.2 7.2 4.0

Unemployment rate (%)* 4.7 4.3 4.3 4.1 4.1 3.9 3.9 3.7 3.7 3.6 3.6 3.6 4.9 4.4 3.9 3.6

Inflation

Headline CPI 2.5 1.9 2.0 2.1 2.2 2.7 2.7 2.7 2.5 2.6 2.6 2.4 1.3 2.1 2.6 2.5

Core CPI 2.2 1.8 1.7 1.8 1.9 2.2 2.3 2.3 2.2 2.2 2.3 2.4 2.2 1.8 2.2 2.3

External trade

Current account balance ($b) -431 -487 -414 -465 -496 -427 -477 -513 -544 -556 -563 -571 -433 -449 -478 -558

% of GDP -2.3 -2.5 -2.1 -2.4 -2.5 -2.1 -2.3 -2.4 -2.6 -2.6 -2.6 -2.6 -2.3 -2.3 -2.3 -2.6

Housing starts (000s)* 1231 1171 1172 1259 1317 1254 1300 1315 1315 1315 1325 1325 1177 1208 1297 1320

Motor vehicle sales (millions, saar)* 17.1 16.8 17.1 17.6 17.1 17.2 16.8 17.3 17.3 17.3 17.4 17.4 17.5 17.1 17.1 17.4

INTEREST RATES %, END OF PERIOD

Fed funds 1.00 1.25 1.25 1.50 1.75 2.00 2.25 2.50 2.75 3.00 3.25 3.50 0.75 1.50 2.50 3.50

Three-month 0.76 1.03 1.06 1.39 1.73 1.93 2.15 2.35 2.65 2.90 3.15 3.35 0.51 1.39 2.35 3.35

Two-year 1.27 1.38 1.47 1.89 2.27 2.52 2.65 2.80 3.00 3.25 3.40 3.55 1.20 1.89 2.80 3.55

Five-year 1.93 1.89 1.92 2.20 2.56 2.73 2.95 3.10 3.25 3.45 3.55 3.65 1.93 2.20 3.10 3.65

10-year 2.40 2.31 2.33 2.40 2.74 2.85 3.15 3.30 3.45 3.60 3.70 3.75 2.45 2.40 3.30 3.75

30-year 3.02 2.84 2.86 2.74 2.97 2.98 3.35 3.50 3.65 3.75 3.80 3.85 3.06 2.74 3.50 3.85

Yield curve (10s-2s) 113 93 86 51 47 33 50 50 45 35 30 20 125 51 50 20

*Quarterly averages, level

Source: Bank of Canada, Statistics Canada, RBC Economics Research forecasts December 2016

Annual2017 2018 2019


CANADA - US COMPARISONS CURRENT ECONOMIC INDICATORS

FROM

PRECEDING

MONTH

FROM

YEAR AGO

YEAR-TO-

DATE

LATEST

MONTH

FROM

PRECEDING

MONTH

FROM

YEAR AGO

YEAR-TO-

DATE

LATEST

MONTH

Industrial production* -0.3 2.5 1.7 Jun. 0.4 4.8 0.1 Aug.

Manufacturing inventory -

shipments ratio (level) 1.4 1.4 1.4 Jun. 1.4 1.4 1.4 Jul.

New orders in manufacturing -1.8 14.0 1.6 Jun. -0.8 9.0 -0.8 Jul.

Business loans - Banks 2.7 9.8 7.2 Jul. -0.1 5.3 6.8 Aug.

Index of stock prices** -1.0 6.9 2.2 Aug. 2.3 16.4 9.6 Aug.

Retail sales -0.2 3.8 4.8 Jun. 0.1 6.6 3.5 Aug.

Auto sales -3.1 -2.3 2.9 Jul. -4.3 -16.7 -8.0 Aug.

Total consumer credit*** 0.5 4.1 4.0 Jul. 0.4 4.6 5.1 Jul.

Housing starts -2.3 -10.9 4.9 Aug. 0.9 -1.4 6.5 Jul.

Employment -0.3 0.9 1.2 Aug. -0.3 1.3 1.6 Aug.

Consumer price index 0.5 3.0 1.5 Jul. 0.2 2.7 1.37 Aug.

Producer price index**** -0.2 6.6 0.9 Jul. 0.0 3.6 0.1 Aug.

Policy rate 1.5 0.75 - Aug. 2.0 1.25 - Aug.

90-day commercial paper rates 1.9 1.2 - Aug. 2.1 1.2 - Aug.

Government bonds -

(10 years) 2.3 1.9 - Aug. 2.9 2.2 - Aug.

Seasonally adjusted % changes unless otherw ise indicated. Interest rates are levels.

*The U.S. series is an index.

**Canada = S&P/TSX; United States = S&P 500

***Excludes credit unions and caisses populaires

****Canada's producer price index is not seasonally adjusted

Business

Households

Prices

Interest rates

CANADA US

canadian q2 gdp growth bounces higher ......canadian q2/18 gdp growth rose to 2.9% from 1.4% in q1....

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