0.2% C US - RBC I&TSand that housing starts will resume a gradual downward trend. Our forecast calls for starts to slow to an overall pace of 181,000 this year from the 188,000 units

ISSN 0712-2012Printed in Canada

May 2014

CANADIAN GDP GREW BY 0.2% IN FEBRUARY

FINANCIAL MARKETS PAUSE

CANADIAN ECONOMY’S WEATHER HIT WAS MILDER THAN IN US

ECB TO ADDRESS LIQUIDITY ISSUES IN JUNE

CANADIAN HOUSEHOLD & BUSINESS CREDIT GROWTH EDGEUPWARD IN MARCH

2 CANADIAN GDP GREW BY 0.2% IN FEBRUARY

February 2014 GDP rose an expected 0.2% following January’s 0.5% gain and

December 2013’s revised 0.4% dip.

5 FINANCIAL MARKETS PAUSE

Despite a growing list of stronger data, financial markets did not stray materially

from their 2014 trading ranges.

7 CANADIAN ECONOMY’S WEATHER HIT WAS MILDER THAN IN USCanada’s economy managed to escape the hit from the harsh weather with less

damage than in the US.

8 ECB TO ADDRESS LIQUIDITY ISSUES IN JUNE

Continued strength in recent indicators, including April’s cycle high in the euro

area composite PMI, prompted us to revise our growth forecast upward to 0.4%

in both the first and second quarters from 0.3% previously.

9 CANADIAN HOUSEHOLD & BUSINESS CREDIT GROWTH EDGE UPWARD IN MARCH

Canadian household credit growth edged upward in March to mark the first month

of acceleration following three consecutive months of steady accumulation.

Business financing also edged higher to sustain an upward trend in March.

I N B R I E F

HIGHLIGHTS THIS MONTHVolume 38, Number 5

May 2014

R B C E C O N O M I C S R E S E A R C H

CRAIG WRIGHT

SENIOR VICE PRESIDENT &CHIEF ECONOMIST

DAWN DESJARDINS

ASSISTANT CHIEF ECONOMISTFinancial Markets & Financial System

PAUL FERLEY

ASSISTANT CHIEF ECONOMISTMacroeconomics

ROBERT HOGUE

SENIOR ECONOMISTRegional Economies

LAURA COOPER

ECONOMISTPublic Policy

NATHAN JANZEN

ECONOMISTMacroeconomics

JOSH NYE

ECONOMISTFinancial Markets and Microeconomics

E D I T O R

Pattie [email protected]

S U B S C R I P T I O N I N F O R M A T I O N

[email protected]

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.

The statements and statistics contained herein have been prepared by RBC Economics Research based on informa-tion obtained from sources considered to be reliable. Royal Bank of Canada makes no representation or warranty, express or implied, with respect to its accuracy or complete-ness. This publication is for the information of investors and business persons and does not constitute an offer to sell or a solicitation to buy securities. Econoscope is indexed in the Canadian Business Index available online in the Canadian Business & Current Affairs Database.

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2 ECONOSCOPE, © ROYAL BANK OF CANADA

C U R R E N T T R E N D S


LATEST AVAILABLE: FEBRUARY

RELEASE DATE: APRIL 30, 2014

February 2014 gross domestic product (GDP) rose an expected 0.2% follow-ing January’s 0.5% gain and December 2013’s revised 0.4% dip. Output in the goods-producing industries posted a solid 0.5% increase. Service-sector output rose at a moderate 0.1% pace. The rise in real GDP in February 2014 supported the view that December 2013’s drop in activity was largely due to harsh weather conditions dampening economic growth. While the sharp drop in December (-0.4%) set the stage for the first-quarter 2014 quarterly average growth rate to come in below the

fourth quarter of 2013’s 2.9% annualized pace, the report suggested an upside risk to our monitoring for a 1.5% annualized increase in the quarter. Furthermore, as the weight from the unseasonably poor weather in the first quarter reverses, we expect the economy’s growth rate to rebound to 3.0% in the second quarter of 2014.

CANADIAN EMPLOYMENT DROPPED IN APRILLATEST AVAILABLE: APRIL

RELEASE DATE: MAY 9, 2014

Canadian employment dropped by 29,000 in April 2014 to retrace much of the 43,000 jump in March. Contrary to the drop in employment, the unemployment rate held steady at 6.9% as the labour force declined by a similar 26,000. The drop in the labour force resulted in the participation rate falling to 66.1% from 66.2% in March. The drop in overall employment was led by a 31,000 drop in full-time workers with part-time employ-ment up 2,000. Public (-17,000) and pri-vate (-29,000) employment both declined, with a 17,000 increase in the number of

H I G H L I G H T S

▲ February GDP rose an expected 0.2% following January’s 0.5% gain and December 2013’s revised 0.4% dip.

▲ Canadian employment dropped by 29,000 in April to retrace much of the 43,000 jump in March.

▲ Retail sales in February rose an expected 0.5% in the month, following a downwardly revised increase in January of 0.9%.

▲ A bounce-back in new home con-struction activity in April had been expected following the sharp outsized drop in the previous month that likely refl ected the negative, although transi-tory, effect of lingering severe winter weather.

▲ Despite a strengthening in the volume of exports, on balance, during February and March, a sharp, although likely weather-related, drop in January left the measure down a disappointing 5.6%, at an annualized rate, in the fi rst quarter of 2014 as a whole.

▲ Canada’s headline infl ation rate rose more than expected in March.

Real GDP % change, month-over-month

Source: Statistics Canada

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

2010 2011 2012 2013 2014

Unemployment Rate% of labour force


5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

2007 2008 2009 2010 2011 2012 2013 2014

DAWN DESJARDINS, PAUL FERLEY,LAURA COOPER, NATHAN JANZEN

ECONOSCOPE, © ROYAL BANK OF CANADA 3

self-employed providing some offset. Hourly wage growth for permanent employees moderated to a 1.6% year-over-year rate from 2.4% in March. Looking through the monthly volatility, employment was still up 149,000 from April 2013, thereby mark-ing an, albeit modest, 12,000 average monthly increase compared to that period, and the unemployment rate, which is typically more stable than the employment num-bers, is still down from 7.2% a year ago. Conditions in labour markets are likely to improve going forward as the Canadian economy benefits from a US economy that is showing increasing signs of gaining momentum.

CANADIAN RETAIL SALES RISE AGAIN IN FEBRUARYLATEST AVAILABLE: FEBRUARY


Nominal retail sales in February 2014 rose an expected 0.5% in the month. The increase in February followed a downwardly revised increase in January of 0.9% (1.3% previously). Excluding both the auto and gasoline station components, sales rose 0.8% following a 0.6% increase in January 2014 and a 1.5% drop in December 2013. On a volumes basis, retail sales rose a modest 0.1% following a 1.0% gain in January 2014 and a 1.9% plummet in December 2013. The minimal gain in the vol-ume of February retail sales was disappointing and likely due to the intensification of the colder than normal winter weather in that month.

HOUSING STARTS SURGED IN APRILLATEST AVAILABLE: APRIL


Housing starts rebounded in April 2014, rising by 24.4% to 194,800 annualized units (see Housing Starts chart on page 4). The increase in overall housing starts reflected broad-based gains with urban multiple-units starts (35.1%), urban single-unit starts (6.5%), and rural starts (29.1%) posting gains. A reversal of the earlier weather-induced slowdown likely contributed to a strong monthly reading in Ontario (68.7%) and to a lesser extent in Quebec (7.3%). Starts activ-ity also improved in the Prairies (18.8%) while declines in British Columbia (-5.0%) and Atlantic Canada (-15.9%) provided partial offset. The dissipation of unseasonable winter weather effects along with the possibility for pent-up demand to play out in the near term provide upside risk to homebuilding activity (starts in April came in 11.4% above the 175,000 average in the first quarter of 2014); however, we anticipate that the rebound will be relatively short lived

E C O N O M Y A T A G L A N C E

% change from: Latest Previous Year month month agoReal GDP Feb 0.2 2.5Industrial production Feb 0.9 3.6Employment Apr -0.2 0.8Unemployment rate* Apr 6.9 7.2Manufacturing Production Feb 0.6 2.7 Employment Apr 0.0 0.1 Shipments Feb 1.4 3.3 New orders Feb 18.8 29.4 Inventories Feb 1.1 5.6Retail sales Feb 0.5 3.7Car sales Feb 0.3 1.7Housing starts (000s)* Apr 194.8 177.5Exports Mar -1.4 7.3Imports Mar 0.4 6.1Trade balance ($billlions)* Mar 0.1 -0.4Consumer prices Mar 0.6 1.5

* Levels are shown for the latest period and the same period a year earlier.Source: Statistics Canada, RBC Economics Research

Retail Sales% change, month-over-month


-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

2010 2011 2012 2013 2014


and that housing starts will resume a gradual downward trend. Our forecast calls for starts to slow to an overall pace of 181,000 this year from the 188,000 units recorded in 2013 and decline further to 174,000 in 2015.

TRADE SURPLUS NARROWS IN MARCHLATEST AVAILABLE: MARCH


The Canadian merchandise trade surplus narrowed to $0.1 billion in March 2014, from a revised $0.8 billion (was $0.3 billion) surplus in February and a $0.3 bil-lion deficit in January. Nominal exports declined 1.4% following a revised 5.9% increase (was 3.6%) in February. Imports inched upward 0.4% in March following a 3.1% (was 2.1%) increase in February and a 1.0% (was 0.8%) decline in January. Controlling for the effect of prices, the volume of exports declined 0.1% following a 2.2% (was 2.3%) increase in February and a 3.9%, likely weather-related, plunge in January. Import volumes dipped a similar 0.2% in March, which left the real trade balance little changed in the month. Despite a strengthening in the volume of exports, on balance, during February and March, a sharp, although likely weather-related, drop in January left the measure down a disappointing 5.6%, at an annualized rate, in the first quarter of 2014 . Imports posted a 6.5% drop that was similar to the decline in exports suggesting little net effect from net trade on gross domestic product (GDP) growth in the quarter.

CANADA’S HEADLINE INFLATION RATE ROSE MORE THAN EXPECTED IN MARCH; CORE RATE INCREASEDLATEST AVAILABLE: MARCH


Canadian consumer prices increased by 0.6% on a not seasonally adjusted basis in March 2014, which was double the pace expected by financial markets. The year-over-year rate rebounded to 1.5% from 1.1% in February. The Bank of Canada’s core mea-sure rose 0.3% on an unadjusted basis. The year-over-year core rate crept up to 1.3% from 1.2%. The Bank of Canada revised its inflation forecast to incorporate the higher than expected headline rate for the first two months of 2014, the effect of the weaker Canadian dollar, and a higher projected trajectory for natural gas and gasoline prices. This revision was validated with data for March indicating that the headline rate aver-aged 1.4% and that the core inflation rate was 1.3% in the first quarter of 2014.

Housing StartsThousands

Source: Canadian Mortgage and Housing Corporation

100

120

140

160

180

200

220

240

260

280

300

06 07 08 09 10 11 12 13 14

Merchandise TradeC$ billions, annualized


Imports

Exports

2008 2009 2010 2011 2012 2013 2014300

350

400

450

500

550

Consumer Price Index% change, year-over-year

Source: Statistics Canada06 07 08 09 10 11 12 13 14

-2

-1

0

1

2

3

4

5


Despite a growing list of stronger data, financial markets did not stray materi-ally from their 2014 trading ranges. The MSCI world stock index recorded a small monthly gain of 0.5% in April following a marginal 0.2% dip in March. Government bond yields also stayed within their established ranges with 10-year yields gravitat-ing toward the low end while shorter-term rates headed toward the top. In part, the limited movement in markets may have reflected a growing sense of unease about developments in the Ukraine and the implications for the global economy. With that said, the geopolitical tensions did not dampen economic activity in April, with many indicators surprising to the upside.

GROWTH MOMENTUM IMPROVED EARLY IN THE SECOND QUARTERThe composite purchasing managers’ indices (PMI) for the US, the euro area, and the UK posted strong gains in April, batting away concerns that any previous slow-ing was a harbinger of another down-leg for the advanced economies. Canada’s manufacturing PMI posted a small decline in April relative to March although was still higher than the first quarter of 2014’s average. The emerging markets economies continue to underperform their counterparts as indicated by China’s manufacturing PMI index hovering just above the 50-mark for the fourth consecutive month while the non-manufacturing index inched upward in April. The divergence in the PMI indicators in April supports our view that any improvement in global growth in 2014 will be driven by a strengthening in the advanced economies as the emerging econo-mies grapple with domestic issues and tighter financial conditions.

WEATHER HURT US GROWTH IN THE FIRST QUARTER…The US economy stalled in the first quarter of 2014 according to the early estimate of activity with real gross domestic product (GDP) posting a marginal annualized 0.1% increase, which was much slower than anticipated and a marked drop from the 3.4% average gain in the second half of 2013. The report showed a broad-based weakening in housing, business investment, and exports, all of which were affected by harsher than normal weather early in 2014. Government spending was also slower than expected in part due to uncertainty about the ability of the US government to pass its debt legislation. Importantly, this combination of factors did not weigh on consumer spending that increased at 3.0% annualized pace in the quarter.

...HOWEVER, DATA SHOW QUICK REBOUNDOur assessment that it was colder than normal weather rather than deterioration in the fundamental factors supporting US growth augurs well for the weakening in activity in the first quarter of 2014 to be recovered in the second quarter. Recent data support this view, with weakness in December 2013 and January 2014 retail, manufactur-

F I N A N C I A L M A R K E T S


H I G H L I G H T S

▲ Limited movement in interest rates and equity market values in April.

▲ Data support the view that advanced economies emerged from a weak spot earlier in 2014, although emerging mar-kets are still struggling.

▲ The US economy slowed in the fi rst quarter due to bad weather and inven-tory destocking.

▲ The fi rst quarter’s weak showing is expected to be followed by a snapback in the second quarter.

DAWN DESJARDINS


ing, and labour market data being reversed in February and March. This pattern was echoed in the composite PMI, which further improved in April to stand at the high-est level since October 2013. The labour market report for April showed non-farm payroll employment posted the largest monthly increase in almost two years, which combined with upward revisions to previous months, lifted the three-month trend pace to 238,000 alongside a drop in the unemployment rate to 6.3% according to the household labour survey. On the back of this string of data, we upwardly revised our forecast for second-quarter 2014 real GDP growth to an annualized 3.8%.

FED LOOKS THROUGH TEMPORARY ECONOMIC WEAKNESSThe Federal Reserve, at its meeting in late April, acknowledged the sharp slowing in the economy during the winter and like us, attributed this weakening to the dampen-ing effect of the unseasonable weather conditions. Furthermore, the Fed also sug-gested that the dampening effect will prove short lived given that recent data point to the economy growing with “sufficient underlying strength” to support a further improvement in labour market conditions. Against this backdrop, the Fed maintained the fed funds target band of 0.00% to 0.25% and announced another $10 billion cut to its monthly securities purchase program. This marked the fourth consecutive meeting that resulted in the Fed paring back the size of its monthly purchases and shrinking the program to $45 billion in May 2014 from $85 billion in December 2013.

The economic backdrop provides little reason for the Fed to change the course of monetary policy with a “highly accommodative” stance still deemed to be appropri-ate to ensure that the economy reaches maximum employment and price stability. While the employment picture has improved, there has been little movement in infla-tion with the Fed’s preferred measure, the core personal consumption expenditure (PCE) deflator, averaging just 1.1% in the first quarter. We still see little reason to change the outlook for the timing of an increase in the fed funds target band, which is still likely to occur in 2015 when our forecast calls for both the unemployment rate and inflation rate to be closer to the Fed’s objective.

Lingering geopolitical uncertainty combined with a gradual improvement in growth but limited inflation pressures suggests that US Treasury yields are likely to remain lower than we projected at the beginning of 2014. We, therefore, trimmed back our 2014 interest rate forecasts by incorporating the recent move downward in longer-term rates. The profile still expects that rates will rise; however, the magnitude is likely to be less than our previous forecast with the 10-year US Treasury yield pro-jected to stand at 3.30% at year end, which would be about 70 basis points higher than today’s rate but 30 basis points below our April forecast.

US Real GDPQuarter-over-quarter annualized % change

Source: Bureau of Economics Analysis, RBC Eco. Research2007 2008 2009 2010 2011 2012 2013 2014 2015

Forecast

-10

-8

-6

-4

-2

0

2

4

6

Real GDP 2.8 1.9 2.6 3.2 12 13 14f 15f

Annual Growth Rates

Source: Bank of Canada, Federal Reserve Board, RBC Economics Research

%Fed Funds Rate

Forecast

0

1

2

3

4

5

6

03 04 05 06 07 08 09 10 11 12 13 14 15

7


Canada’s economy managed to escape the hit from the harsh weather with less damage than in the US where the growth rate was just 0.1% in the first quarter. In Canada, the weather also reduced activity; however, the hit was smaller, and we expect real GDP growth to come in at an annualized 1.7% pace. The monthly GDP reports confirmed that after contracting sharply in December 2013, the economy posted sufficient gains in January and February 2014 to skate the quarterly growth rate into positive territory. Similar to the US, we expect that as the weight from the poor weather reverses, economic activity will rebound with second-quarter 2014 growth forecasted at 3.0%.

TEMPORARY GROWTH SLOWDOWN WILL NOT LEAD TO INFLATION PULLBACKIn the first quarter, the headline inflation rate averaged 1.4% with the core measure at 1.3%. The rise in energy prices will likely push the headline rate temporarily closer to 2.0% in the second quarter, although the core measure, which excludes most of the energy complex, will likely remain below 1.5%. In mid-April, the Bank of Canada held the policy rate at 1.0% and maintained a neutral policy bias with the statement reiterating that the downside risks to the inflation outlook “remain important.” In our view, Canada’s economy is set to grow at an above-potential rate in 2014, which would limit the downside risks to inflation. The monthly employment numbers have been volatile, with April’s 29,000 drop following a robust increase of 43,000 jobs in March, continuing the up and down pattern established in December 2013. Despite these gyrations, the unemployment rate held at 6.9%. Employment growth slowed on a three-month trend basis but is likely to reaccelerate as US demand for Canada’s exports materializes. In the first four months of 2014, wage increases averaged 2.3%, which is higher than 2013’s 2.0% gain, yet still significantly slower than the pace in the pre-recession period.

AS BALANCE OF RISKS SHIFT SO TOO WILL BANK POLICY BIASOur forecast that the economy will grow at a 2.5% pace in 2014 and a stronger 2.7% in 2015 stand slightly above the Bank’s 2.3% and 2.5% forecasts. We expect that the core inflation rate will approach the 2.0% target in the second half of 2015 as spare capacity is drained from the economy. Based on our growth and inflation forecasts, the Bank is likely to re-insert a tightening policy bias in its policy statement later this year as the risks to the inflation outlook swing from the downside to the upside. Rather than being driven by the outlook for central bank policy, interest rates in Canada followed other global markets, meaning that longer-term yields traded near the lower end of their 2014 trading range. We lowered the year-end forecast for the Canadian 10-year bond to 3.05%.

H I G H L I G H T S

▲ Canada was hurt by harsh weather although managed to post moderate growth in the fi rst quarter.

▲ The economy is expected to recover lost ground in the second quarter with real GDP forecasted to increase at a 3.0% annualized pace.

▲ The bottom for infl ation was reached in late 2013; headline and core rates should drift higher in 2014 and reach the 2.0% target in the second half of 2015.

▲ The Bank of Canada will hold the line on policy in the near term, with a shift to a tightening bias expected later this year.



DAWN DESJARDINS

Source: Statistics Canada, RBC Economics Research Forecasts

Canada Real GDPQuarter-over-quarter % change, annualized rate

-10

-8

-6

-4

-2

0

2

4

6

8Forecast

2007 2008 2009 2010 2011 2012 2013 2014 2015

Real GDP 1.7 2.0 2.5 2.7 12 13 14f 15f

Annual Growth Rates


Continued strength in recent indicators, including April’s cycle high in the euro area composite PMI, prompted us to revise our growth forecast upward to 0.4% in both the first and second quarters from 0.3% previously. The headline inflation rate stood at 0.7% on a year-over-year basis in April after falling to a cycle low of 0.5% in March (a dip that was accentuated by the timing of Easter). Price pressures are likely to remain subdued; however, the stronger pace of growth will underpin a slightly faster increase in underlying inflation in time. We expect the European Central Bank (ECB) will address money market liquidity issues, which are causing an unwarranted rise in rates, by cutting the refi rate to 0.10% from 0.25% in June and injecting liquid-ity through additional non-standard measures.

UK ECONOMY MAINTAINING FIRST-QUARTER MOMENTUMWhile we continue to expect growth will moderate from the 0.8% pace seen in the first quarter, we raised our quarterly forecast to 0.6% in the second and third quarters from 0.5% previously. The recent strengthening in the pace of growth is chipping away at the excess capacity in the UK economy, although it has yet to exert upward pressure on prices. Given the slack in the labour market and consumer price index (CPI) inflation forecasted to remain below target this year and next, we expect the Bank of England will be comfortable sitting on the sidelines and leaving the Bank Rate steady at 0.50%, until the fourth quarter of 2015.

AUSTRALIAN GROWTH LIKELY STRENGTHENED IN THE FIRST QUARTERStronger than expected activity earlier this year prompted us to revise our first quarter growth estimate upward to 0.9%. Trade has been particularly robust to start 2014, while consumption looks to have remained solid in the first quarter. Spending moder-ated in March with nominal retail sales posting a gain of 0.1%. We expect that this is the beginning of a period of sub-trend household spending growth in the coming months as fiscal tightening weighs on consumer sentiment and weak wage growth caps consumption gains. While trade will continue to support growth as the economy reaps the benefits of earlier mining investment, we expect a tighter fiscal stance and continued decline in mining capex will also result in moderate growth in the next few quarters.

RBNZ CONTINUES TO HIKE WHILE INFLATION DISAPPOINTSFollowing a second consecutive rate hike in April, we expect the Reserve Bank of New Zealand (RBNZ) will increase the policy rate again in 25 basis point increments at each of its next two meetings. New Zealand’s inflation backdrop remains benign with the annual headline CPI rate edging downward to 1.5% in the first quarter. Despite the increase in output growth recently, labour market slack persists and is limiting wage growth and in turn domestic price pressures. Benign inflation and the strong currency are unlikely to affect near-term rate hikes but will likely prevent the RBNZ from maintaining the pace of increase later this year and in 2015.

H I G H L I G H T S

▲ Money market volatility should prompt an ECB rate cut in June.

▲ We now expect stronger UK growth this year and next.

▲ Australian activity looks set to slow following a strong fi rst quarter.

▲ Weaker than expected infl ation calls for a somewhat cautious approach to tightening by the RBNZ.



DAWN DESJARDINS, JOSH NYE

Source: ECB, RBC Economics Research

%ECB Refi Rate

03 04 05 06 07 08 09 10 11 12 13 14 15

Forecast

0

1

2

3

4

5

6

7

Eurozone Real GDP% change, quarter-over-quarter

Source: Eurostat, RBC Economics Research

Forecast

-3

-2

-1

0

1

2

2007 2008 2009 2010 2011 2012 2013 2014 2015

Real GDP -0.6 -0.4 1.2 1.2 12 13f 14f 15f

Annual Growth Rates


Canadian household credit growth edged upward in March to mark the first month of acceleration following three consecutive months of steady accumulation. Growth in household borrowing rose to 4.1% on a year-over-year basis in the month from a downwardly revised 4.0% in February (initially reported as 4.1%). Business financ-ing also edged higher to sustain an upward trend in March, rising by 7.4% from a year ago, and followed a 7.3% increase in February and 7.1% gain in January.

CONSUMER CREDIT GROWTH PICKING UP PACE FROM CYCLE LOWSAfter expanding at its slowest pace at 1.5% in two decades in November 2013, consumer credit growth appears to be emerging from cycle lows, with the rate of growth edging higher in each of the past four months. Outstanding balances of non-mortgage loans (which includes credit cards, lines of credit, other personal loans, and accounts for 30% of household debt outstanding) increased by 2.0% from year-ago levels in March, which was a slight uptick from 1.9% in February and 1.7% in January. In contrast, residential mortgage growth held steady at 5.0% for the fourth consecutive month in March.

LONGER-TERM FINANCING GROWS AT FASTEST PACE SINCE DECEMBER 2004A robust gain in the issuance of bonds and debentures more than offset a slowing in equities and warrants to support longer-term business financing rising at its fastest rate since December 2004. The 7.2% annual increase in March marked acceleration from 6.9% in February and 6.7% in January. A continued slowing in short-term busi-ness lending from earlier cycle highs provided some offset to overall business financ-ing growth, rising by 7.9% in March following gains of 8.2% and 8.3% in February and January, respectively. Short-term business lending by chartered banks accounted for much of the moderation with total loans outstanding rising by 7.8% compared to 8.0% in February.

CREDIT GROWTH TRENDS WARRANT CONTINUED MONITORING OFELEVATED RISKSResidential mortgage growth has stabilized in recent months, and upside risks of renewed momentum are likely to be contained because housing activity is forecasted to moderate gradually. In contrast, the emergence from cycle-lows for consumer credit indicated that households have increased their appetite for non-mortgage loans. Governor Poloz recently noted that the risks of elevated household balances along with downside inflation risks are within the “zone” for the current policy stance to remain in place and that a policy change will be dependent on incoming data. As a result, with inflationary pressures expected to rise, we anticipate that the Bank will reintroduce a tightening bias before raising the overnight rate in the second quarter of 2015.

C U R R E N T A N A L Y S I S

CANADIAN HOUSEHOLD & BUSINESS CREDIT GROWTH EDGE UPWARD IN MARCH

LAURA COOPER

1. Household & Business Credit Growth: Canada

Source: Bank of Canada, RBC Economics Research

% change, year-over-year

83 86 89 92 95 98 01 04 07 10 13-4

4

8

12

16

20Total household creditTotal business credit

0

% change, year-over-year3. Business Financing Growth: Canada


-18

-12

-6

0

6

12

18

Short-term business creditLong-term business financing

93 95 97 99 01 03 05 07 09 11 13

% change, year-over-year2. Household Credit Growth: Canada


0

3

6

9

12

15

18Consumer creditResidential mortgage credit

93 95 97 99 01 03 05 07 09 11 13


FORECAST DETAIL – CANADAR B C F O R E C A S T S O F T H E E C O N O M Y A N D F I N A N C I A L M A R K E T S

* Quarterly averages, levelSource: Bank of Canada, Statistics Canada, RBC Economics Research forecastsMay 2014

= Forecast 2013 | 2014 | 2015 | Annual

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012 2013 2014 2015

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

Household consumption 1.0 3.5 2.4 3.1 2.0 2.8 2.2 2.3 2.3 2.2 2.2 2.2 1.9 2.2 2.5 2.3 Durables 1.3 14.5 -0.7 -1.5 1.7 5.0 0.4 2.4 2.4 2.6 2.5 2.5 2.6 3.3 2.0 2.4 Semi-Durables 0.2 1.6 8.1 6.1 2.0 3.2 2.8 2.5 2.5 2.6 2.5 2.5 2.1 2.5 3.8 2.6 Non-durables -0.8 0.6 3.1 5.8 2.0 3.2 2.8 2.5 2.5 2.3 2.3 2.3 0.7 1.7 3.1 2.5 Services 1.8 2.8 2.1 2.5 2.0 2.1 2.2 2.1 2.1 2.1 2.1 2.1 2.2 2.2 2.2 2.1Government expenditures -0.4 1.7 0.4 1.6 0.4 0.4 0.4 0.4 0.8 0.8 1.0 1.0 1.1 0.8 0.7 0.7Residential investment -5.0 6.4 1.3 -2.3 -5.2 2.7 1.1 -2.0 -1.7 -1.7 -0.3 1.7 6.1 -0.2 -0.7 -0.7Business investment 1.5 -0.8 -0.1 -1.3 2.7 8.7 5.1 5.5 4.6 5.0 4.7 4.3 6.2 1.4 2.9 5.1 Non-residential structures 2.8 -1.0 2.6 -4.0 2.5 8.8 4.9 5.8 4.5 5.1 4.8 4.4 6.9 2.1 2.7 5.2 Machinery & equipment -0.7 -0.4 -4.3 3.2 3.0 8.5 5.5 4.9 4.7 4.9 4.4 4.2 5.2 0.2 3.3 5.0Final domestic demand 0.2 2.0 1.5 1.2 1.2 2.9 2.0 1.9 1.9 2.0 2.1 2.2 2.3 1.4 1.8 2.1Exports 6.1 4.9 -0.1 1.7 -5.0 12.2 8.9 9.7 7.9 6.8 6.7 6.7 1.5 2.1 3.2 8.2Imports 3.1 2.1 -1.0 0.9 -5.5 5.9 4.0 5.8 5.4 4.9 5.5 5.8 3.1 1.1 0.7 5.3Inventories (change in $b) 11.6 7.9 12.4 18.0 18.8 11.0 8.2 6.9 7.3 7.3 7.3 6.3 6.8 12.5 11.2 7.0Real gross domestic product 2.9 2.2 2.7 2.9 1.7 3.0 2.8 2.7 2.7 2.5 2.4 2.2 1.7 2.0 2.5 2.7

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

Business and labour Productivity -0.3 0.9 1.3 2.0 1.8 1.7 1.6 1.1 1.4 1.2 1.3 1.3 0.0 1.0 1.5 1.3 Pre-tax corporate profits -8.6 -5.0 1.2 2.9 1.0 5.7 1.7 3.0 3.3 3.2 3.6 2.9 -4.9 -2.6 2.8 3.3 Unemployment rate (%)* 7.1 7.1 7.1 7.0 7.0 6.8 6.7 6.7 6.6 6.6 6.5 6.5 7.2 7.1 6.8 6.6Inflation Headline CPI 0.9 0.8 1.1 0.9 1.4 1.8 1.6 1.6 1.6 1.6 1.9 2.0 1.5 0.9 1.6 1.8 Core CPI 1.3 1.2 1.3 1.2 1.3 1.4 1.5 1.8 1.8 1.9 1.9 2.0 1.7 1.3 1.5 1.9External trade Current account balance ($b) -58.7 -60.8 -59.2 -66.5 -47.7 -46.7 -45.5 -44.0 -43.0 -42.5 -41.9 -41.3 -62.2 -61.3 -46.0 -42.2 % of GDP -3.2 -3.3 -3.1 -3.5 -2.5 -2.4 -2.3 -2.2 -2.1 -2.1 -2.1 -2.0 -3.4 -3.3 -2.4 -2.1Housing starts (000s)* 172 190 194 194 175 184 178 178 176 176 173 173 215.0 188.0 178.7 174.4Motor vehicle sales (mill., saar)* 1.71 1.79 1.80 1.80 1.74 1.82 1.80 1.81 1.81 1.82 1.83 1.83 1.7 1.8 1.8 1.8

INTEREST AND EXCHANGE RATES %, END OF PERIOD

Overnight 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.25 1.50 1.75 1.00 1.00 1.00 1.75Three-month 0.98 1.02 1.00 0.95 0.90 1.05 1.10 1.10 1.10 1.35 1.60 1.85 1.05 0.95 1.10 1.85Two-year 1.00 1.22 1.20 1.14 1.07 1.15 1.35 1.50 1.70 2.00 2.40 2.60 1.05 1.14 1.50 2.60Five-year 1.30 1.80 2.00 1.96 1.71 1.80 2.15 2.45 2.65 2.85 3.00 3.35 1.30 1.96 2.45 3.3510-year 1.88 2.44 2.65 2.77 2.46 2.55 2.85 3.05 3.20 3.35 3.60 3.85 1.75 2.77 3.05 3.8530-year 2.50 2.90 3.15 3.24 2.96 3.00 3.30 3.50 3.70 3.85 4.15 4.40 2.40 3.24 3.50 4.40Canadian dollar 1.02 1.05 1.03 1.06 1.11 1.10 1.13 1.15 1.16 1.17 1.17 1.18 0.99 1.06 1.15 1.18


FORECAST DETAIL – UNITED STATESR B C F O R E C A S T S O F T H E E C O N O M Y A N D F I N A N C I A L M A R K E T S

* Quarterly averages, levelSource: U.S. Bureau of Economic Analysis, RBC Economics Research forecastsMay 2014

= Forecast 2013 | 2014 | 2015 | Annual

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012 2013 2014 2015

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

Consumer spending 2.3 1.8 2.0 3.3 3.0 2.5 2.6 2.7 2.8 3.0 2.9 2.7 2.2 2.0 2.7 2.8 Durables 5.8 6.2 7.9 2.8 0.8 8.0 6.0 6.2 6.3 6.5 6.4 6.1 7.7 6.9 4.7 6.4 Non-durables 2.7 1.6 2.9 2.9 0.2 4.1 2.4 2.5 2.8 3.1 2.8 2.5 1.4 2.0 2.3 2.8 Services 1.5 1.2 0.7 3.5 4.4 1.0 2.1 2.2 2.3 2.4 2.3 2.2 1.6 1.2 2.5 2.2Government spending -4.2 -0.4 0.4 -5.2 -0.5 2.8 0.4 0.4 1.0 1.0 1.3 1.5 -1.0 -2.2 -0.5 1.0Residential investment 12.5 14.2 10.3 -7.9 -5.8 19.4 16.6 14.1 11.2 10.1 9.0 7.9 12.9 12.2 5.3 12.1Business investment -4.6 4.7 4.8 5.7 -2.0 10.0 8.0 8.6 8.4 8.4 7.9 7.9 7.3 2.7 4.6 8.4 Non-residential structures -25.7 17.6 13.4 -1.8 0.2 9.4 5.8 7.0 6.5 6.5 6.0 6.8 12.7 1.3 5.2 6.6 Non-residential equipment 1.6 3.2 0.2 10.9 -5.5 10.3 9.1 9.5 9.4 9.3 8.8 8.4 7.6 3.1 4.4 9.3 Intellectual property 3.8 -1.5 5.7 4.0 1.5 4.6 4.6 4.6 4.0 4.0 4.1 4.3 3.4 3.1 3.5 4.3Final domestic demand 0.5 2.1 2.3 1.6 1.5 3.7 3.1 3.2 3.3 3.3 3.2 3.1 2.4 1.6 2.4 3.3Exports -1.3 8.0 3.9 9.5 -7.6 8.5 8.4 8.4 8.5 9.0 8.2 8.3 3.5 2.7 3.8 8.5Imports 0.6 6.9 2.4 1.5 -1.4 5.3 7.9 7.8 7.5 8.0 8.2 8.2 2.2 1.4 3.1 7.7Inventories (change in $b) 42.2 56.6 115.7 111.7 87.4 74.0 74.0 80.0 80.0 70.0 69.0 66.4 57.6 81.6 78.9 71.4Real gross domestic product 1.1 2.5 2.9 2.6 0.1 3.8 3.1 3.3 3.3 3.1 3.0 2.9 2.8 1.9 2.6 3.2

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

Business and labour Productivity 0.4 0.6 0.9 1.9 1.3 1.3 0.8 0.7 1.6 1.6 1.6 1.5 1.4 0.9 1.0 1.6 Pre-tax corporate profits 2.1 4.5 5.7 6.2 6.7 5.1 4.1 3.0 5.4 4.9 5.0 4.9 7.0 4.6 4.7 5.0 Unemployment rate (%)* 7.7 7.5 7.2 7.0 6.7 6.4 6.3 6.2 6.1 6.0 5.9 5.8 8.1 7.4 6.4 6.0Inflation Headline CPI 1.7 1.4 1.6 1.2 1.4 1.9 1.6 1.7 1.9 1.9 1.9 2.0 2.1 1.5 1.7 1.9 Core CPI 1.9 1.7 1.7 1.7 1.6 1.8 1.8 1.8 1.9 1.9 1.9 2.0 2.1 1.8 1.8 1.9External trade Current account balance ($b) -420 -387 -385 -324 -322 -306 -314 -318 -321 -324 -333 -341 -440 -379 -315 -330 % of GDP -2.5 -2.3 -2.3 -1.9 -1.9 -1.8 -1.8 -1.8 -1.8 -1.8 -1.8 -1.8 -2.7 -2.3 -1.8 -1.8Housing starts (000s)* 957 869 882 1008 923 1050 1267 1329 1387 1439 1485 1521 783 929 1142 1458Motor vehicle sales (mill., saar)* 15.3 15.5 15.7 15.6 15.6 16.0 16.1 16.3 16.4 16.6 16.7 16.9 14.4 15.5 16.0 16.6

INTEREST RATES %, END OF PERIOD

Fed funds 0.125 0.125 0.125 0.125 0.250 0.250 0.250 0.250 0.250 0.250 0.250 0.500 0.125 0.125 0.250 0.500Three-month 0.07 0.04 0.02 0.07 0.05 0.05 0.05 0.05 0.05 0.05 0.10 0.20 0.09 0.07 0.05 0.20Two-year 0.25 0.36 0.33 0.38 0.45 0.45 0.65 0.85 1.05 1.30 1.65 2.05 0.25 0.38 0.85 2.05Five-year 0.77 1.41 1.39 1.75 1.74 1.75 2.00 2.25 2.50 2.75 3.00 3.35 0.70 1.75 2.25 3.3510-year 1.87 2.52 2.64 3.04 2.73 2.75 3.05 3.30 3.50 3.70 3.90 4.20 1.70 3.04 3.30 4.2030-year 3.10 3.52 3.69 3.96 3.55 3.70 4.00 4.25 4.45 4.55 4.70 4.90 2.90 3.96 4.25 4.90Yield curve (10s-2s) 162 216 231 266 228 230 240 245 245 240 225 215 145 266 245 215


CURRENT TRENDS

C U R R E N T E C O N O M I C I N D I C A T O R S

CANADA - US COMPARISONS

FROM FROM YEAR- LATEST FROM FROM YEAR- LATEST

PRECEDING YEAR TO- MONTH PRECEDING YEAR TO- MONTH

MONTH AGO DATE MONTH AGO DATE

BUSINESS

Industrial production1 0.9 3.6 3.8 Feb. 0.7 3.7 3.4 Mar.

Mfg. inventory - shipments (level) 1.4 1.4 1.4 Feb. 1.3 1.3 1.3 Mar.

New orders in manufacturing 18.8 29.4 17.7 Feb. 1.1 5.3 2.2 Mar.

Business loans - Banks 2.8 9.5 9.1 Mar. 1.0 10.3 9.7 Apr.

Index of stock prices2 2.2 17.6 13.6 Apr. 0.0 18.7 19.7 Apr.

HOUSEHOLDS

Retail sales 0.5 3.7 3.9 Feb. 0.1 4.0 3.2 Apr.

Auto sales 0.3 1.7 0.3 Feb. -2.3 0.7 -1.6 Apr.

Total consumer credit3 0.3 1.9 1.9 Feb. 0.6 5.8 5.7 Mar.

Housing starts 24.4 9.7 1.6 Apr. 2.8 -5.9 -3.6 Mar.

Employment -0.2 0.8 0.8 Apr. -0.1 1.4 1.4 Apr.

PRICES

Consumer price index 0.6 1.5 1.4 Mar. 0.2 1.5 1.4 Mar.

Producer price index4 0.4 2.7 2.4 Mar. -0.1 1.7 1.5 Mar.

INTEREST RATES

Policy rate 1.0 1.0 1.0 Apr. 0.13 0.13 0.13 Apr.

90-day commercial paper rates 1.2 1.2 1.2 Apr. 0.1 0.1 0.1 Apr.

Government bonds (10 years) 2.4 1.8 2.5 Apr. 2.7 1.8 2.8 Apr.

Seasonally adjusted % changes unless otherwise indicated. Interest rates are levels.1 The U.S. series is an index.2 Canada = S&P/TSX; United States = S&P 5003 Excludes credit unions and caisses populaires.4 Canada’s producer price index is not seasonally adjusted.May 2014

ISSN 0712-2012Printed in Canada

May 2014





CANADIAN HOUSEHOLD & BUSINESS CREDIT GROWTH EDGEUPWARD IN MARCH

Documents

0.2% C US - RBC I&TSand that housing starts will resume a gradual downward trend. Our forecast calls for starts to slow to an overall pace of 181,000 this year from the 188,000 units