RBC optimistic over 2013 growth
Trade and business investment expected to boost economy
Canada’s economy is poised to move out of the slow lane next year with trade and business investment supporting growth, the chief economist of the Royal Bank of Canada says.
The economy could go “a bit better than the speed limit,” with growth of 2.4 per cent next year, Craig Wright said during the bank’s 2013 Global Outlook conference call on Monday.
RBC’s forecast is more optimistic than that of other banks, which are predicting an expansion of 2 per cent in Canada for 2013. Wright said improving auto and housing sectors in the U.S. will support Canadian trade and exports.
By contrast, on this side of the border, the real estate market will moderate. On the bright side, debtto-income will also stabilize.
“One of the big worries in Canada is the high debt levels. The debt levels by themselves don’t cause a debt crisis, but they leave you vulnerable to shocks,” Wright said, adding that RBC expects a “cooling” rather than a “collapsing” housing market.
In the private sector, businesses are still sitting on cash, waiting out the U.S. fiscal cliff. “As the cloud lifts we will see continued support from the investment side, which has been strong,” Wright said.
RBC expects the Bank of Canada to start increasing interest rates by the end of next year, with the overnight rate, now at 1 per cent, rising to 1.5 per cent by the close of 2013.
The U.S. fiscal cliff — the slate of automatic tax hikes and spending cuts that will automatically take effect early in the new year unless lawmakers come up with an alternative plan — is keeping a lid on U.S. growth, said Tom Porcelli, chief U.S. economist with RBC.
“If we weren’t talking about the fiscal cliff at all, I would be talking about 2-per-cent growth, which would be a great outcome,” Porcelli said. “Unfortunately this is the single biggest known potential shock.”
Even worse, he added, “there’s very little clarity at this point. The noise-to-information ratio right now is stunningly high.”
Porcelli expects that U.S. lawmakers will eventually reach an agreement that will include some increase in tax rates on the wealthy.
Growth in the first half of next year could come in around 1 per cent and increase to 2 per cent for the second half, he said.
RBC economists are less optimistic about Europe.
“Is it a happy New Year in Europe? Not really, but 2013 should be able to build on the economic and political progress in 2012. It will certainly be better than 2011,” said Jens Larsen, chief European economist.
But there is reason to be hopeful. Greece has been through two rounds of debt relief and the troubled euro currency remains intact. Portugal, Ireland and Italy are sticking to their reform programs and in Spain, the government is “getting its hands around banking sector programs,” Larsen said.
There is also more confidence in the European Central Bank.
Meanwhile, emerging markets seem to be settling into “new normal” growth rates, said Nick Chamie, global head of foreign exchange strategy and emerging markets research at RBC.