CANADIAN Q1 GDP INCREASED 0.4% BUT DETAILS … 2019 Econoscope.pdf0.3% increase in Q4. Details were firmer and a 0.5% surge in March GDP bodes well for a return to stronger growth

CANADIAN Q1 GDP INCREASED 0.4% BUT DETAILS

STRONGER

UNCERTAINTY TAKING A TOLL ON GLOBAL ECONOMY

MOMENTUM SHIFTING DOWN IN MOST PROVINCES

June 2019

ECONOSCOPE, © ROYAL BANK OF CANADA

IN BRIEF

Volume 43, Number 6

June 2019

RBC ECONOMICS

RESEARCH

Craig Wright

SENIOR VICE PRESIDENT &

CHIEF ECONOMIST

Dawn Desjardins

VICE PRESIDENT &

DEPUTY CHIEF ECONOMIST

Robert Hogue

SENIOR ECONOMIST

REGIONAL ECONOMIES

Nathan Janzen

SENIOR ECONOMIST

MACROECONOMICS

Josh Nye

SENIOR ECONOMIST

FINANCIAL MARKETS & MACROE-

CONOMICS

Rannella Billy-Ochieng’

ECONOMIST

Ramya Muthukumaran

ECONOMIST

Andrew Agopsowicz

SENIOR ECONOMIST

Claire Fan

ECONOMIST

Carolyn Freestone

ECONOMIST

Farhad Panahov

RESEARCH ASSOCIATE

EDITOR

Adrianna Pineda

[email protected]

SUBSCRIPTION INFORMATION

[email protected]

Highlights This Month

2 GDP GROWTH WAS SLOW AGAIN IN Q1

Canadian GDP increased 0.4% in Q1, essentially matching a 0.3%

increase in Q4.

6 UNCERTAINTY TAKING A TOLL ON GLOBAL ECONOMY

Data point to the global economy expanding by 3.3% this year,

slower than 2018’s 3.6% pace, with trade volumes declining and

business sentiment deteriorating.

10 MOMENTUM SHIFTING DOWN IN MOST PROVINCES

Six out of 10 provinces to see a slowdown in 2019; outlook bright-

ens in Newfoundland and Labrador after sharp contraction in 2018.

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 information 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 completeness. 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.

® Registered trade-mark of Royal Bank of Canada

Printed on recycled and recyclable paper.


CURRENT TRENDS Nathan Janzen, Josh Nye

HIGHLIGHTS

▲ Canadian GDP increased 0.4% in Q1, essentially matching a 0.3% in-crease in Q4

▲ Employment increased another 28k in May, building on the outsized 107k increase in April. The unemploy-ment rate fell to 5.4%

▲ Retail sales inched up 0.1% in April

▲ Canadian housing starts fell to 202k annualized units in May from 233k in April

▲ The trade balance narrowed to $1.0 billion in April. Nominal exports increased 1.3% and imports fell 1.4%

▲ Headline inflation was stronger than expected, rising to 2.4% in May

CANADIAN Q1 GDP INCREASED 0.4% BUT DE-

TAILS STRONGER

LATEST AVAILABLE: MARCH

RELEASE DATE: MAY 31, 2019

Canadian GDP increased 0.4% in Q1, essentially matching a

0.3% increase in Q4. Details were firmer and a 0.5% surge in

March GDP bodes well for a return to stronger growth rates in Q2.

Much of the softness in Q1 can still be traced to disruptions to oil

& gas activity in the wake of lower prices last year and mandated

production cuts in Alberta. Excluding the oil & gas sector, output

rose by ~1½% in Q1 and that was despite a big weather-related

dip in output in February. And the composition of Q1 GDP growth

on an expenditure basis was generally better than feared. A 3.5%

jump in Q1 consumer spending is tough to square with earlier-

released soft retail spending numbers but household disposable

income also posted a decent 3.5% (nominal) increase after an

upwardly revised Q4 gain. A significant chunk of a 13.5% jump in

business investment reflected lumpy increases in aircraft purchas-

es flagged earlier in the international imports data but Statistics

Canada noted that spending rose in 8 of 9 sub-categories of

equipment investment. Net trade was, as expected, the main drag

on growth in Q1 with lower oil production weighing on exports.

-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


RISKS AROUND TRADE OUTLOOK REMAIN,

BUT CANADIAN LABOUR MARKETS STILL

LOOK SOLID

LATEST AVAILABLE: MAY

RELEASE DATE:JUNE 7, 2019

Employment increased another 28k in May, building on the

outsized 107k increase in April. The unemployment rate fell

to 5.4% -- the lowest for comparable data back to 1976.

Wage growth remains soft given the low unemployment rate,

but ticked up to 2.8% in May from 2.5% in April. The gain in

employment was the 8th in 9 months for what is normally a

very volatile measure – with gains over the period totaling

417k .

APRIL RETAIL SALES POINT TO SLOW-BUT-

STEADY GROWTH IN HOUSEHOLD SPENDING

LATEST AVAILABLE: APRIL

RELEASE DATE: JUNE 21, 2019

Retail sales inched up 0.1% in April. Excluding price-effects,

sale volumes edged down 0.2% after stronger gains the prior

two months. Looking through monthly wiggles, sale volumes

were still up 1.2% versus their Q1 average and 2.2% from a

year ago. That year-over-year rate is admittedly modest, but

nonetheless the highest since September of last year. The

pullback in interest rates in Canada and abroad in recent

months mean that household debt payments won’t likely in-

crease as much as has been previously feared this year or

next. We still expect consumer spending growth to remain

relatively unimpressive. An earlier boost to household pur-

chasing power from rapid home price appreciation won’t like-

ly be repeated, and the household saving rate is already very

low.

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 2019

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 2019

Retail sales% change, month-over-month



CANADIAN HOUSING STARTS TREND EAS-

ING TOWARD THE 200K MARK



Canadian housing starts were close to expectations,

falling to 202k annualized units in May from 233k in

April. The six-month trend was also 202k, which is the

slowest pace in more than two years. May’s pullback

was concentrated in multi-unit starts though the trend in

that component remains solid. Starts fell sharply in On-

tario to retrace a significant increase in the previous

month. A separate report saw building permits jump to

their highest level since 2005, largely due to a surge in

BC ahead of an increase in development costs in Van-

couver.

RISING EXPORTS, FALLING IMPORTS

SHRANK CANADA’S TRADE DEFICIT IN

APRIL

LATEST AVAILABLE: APRIL


Export volumes jumped 1.1%, but a big chunk of that

came from the a 15% surge in exports of metal and non

-metallic mineral products That reflected higher gold

exports, an often-volatile component, that is not likely to

be repeated going forward. A big 2.1% drop in import

volumes helped make the net trade balance look better

in April – and we continue to expect net trade will re-

trace about half of the large 4 percentage point drag on

overall Q1 GDP growth in Q2. But lower imports of

electrical equipment and the continued retracement of a

huge surge in aircraft imports in January also suggests

that business investment spending in Q2 will retrace a

big chunk of the 40% Q1 gain. The trade balance nar-

rowed to $1.0 billion in April. Nominal exports increased

1.3% and imports fell 1.4%

100

120

140

160

180

200

220

240

260

280

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

Housing startsThousands

Source: Canadian Mortgage and Housing Corporation

300

350

400

450

500

550

600

650

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Merchandise tradeC$ billions, annualized


Imports

Exports


CANADA’S INFLATION RATE TICKED UP

AGAIN IN MAY


RELEASE DATE: JUNE 19 2019

Headline inflation was stronger than expected, rising to

2.4% in May. BoC core measures averaged 2.1% (had

been 1.9-2.0% for past 15 months). Most major compo-

nents—particularly food and transportation—showed a

pickup in y/y inflation. Inflation numbers like these—with

core measures creeping higher in May but remaining

around the 2% target—are one reason the BoC faces less

pressure to reverse course and begin easing monetary poli-

cy. Granted, the BoC is subject to the same global forces as

the Fed, and a further increase in trade tensions would raise

the likelihood of both central banks lowering interest rates.

But for now, stable to slightly higher inflation readings and

generally improving domestic data allow the BoC to remain

patient and monitor the impact of external developments.

-2

-1

0

1

2

3

4

5

2012 2013 2014 2015 2016 2017 2018 2019

Consumer price index% change, year-over-year


Latest

month

Previous

month

Year

ago

Real GDP Mar 0.5 1.4

Industrial production Mar 0.8 -0.1

Employment May 0.1 2.4

Unemployment rate* May 5.4 5.9

Manufacturing

Production Mar 0.9 1.7

Employment May 0.5 1.9

Shipments Apr -0.6 3.1

New orders Apr -1.4 0.5

Inventories Apr 1.3 9.1

Retail sales Apr 0.1 3.7

Car sales Apr -4.2 -4.7

Housing starts (000s)* May 202.3 194.8

Exports Apr 1.3 3.5

Imports Apr -1.4 2.3

Trade balance ($billlions)* Apr -1.0 -1.5

Consumer prices May 0.4 2.4

* 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 pace of global growth will slow

this year as policy uncertainty takes

its toll on the world’s economy. The

prospect of a prolonged US-China

trade war, the lack of clarity around

Brexit, and political and economic

upheaval in countries like Venezuela

have combined to generate downside

risks to the outlook. Data point to the

global economy expanding by 3.3%

this year, slower than 2018’s 3.6%

pace, with trade volumes declining

and business sentiment deteriorating.

Amid the uncertainty, global central

banks have moved to the sidelines.

Even with the economic expansion in

its tenth year, contained inflation pressures have removed any urgency for central banks to act. We expect most will hold

their policy rates steady for the remainder of 2019.

Eye of the storm

On trade policy, the US is the eye of the storm. The recent removal of tariffs on steel and aluminum imports and the

Trump Administration’s desire to ratify the new trade agreement with Canada and Mexico had dampened some of the

pressures within North America. The positive sentiment was stopped in its tracks in late May when the US threatened to

levy tariffs on Mexican imports in order to force its southern neighbor to stem the flow of migrants. Tensions between the

US and China, meanwhile, have become increasingly heated after the US bumped up tariff rates and made threats to

expand the list of products affected. These tariffs have increased costs in the US manufacturing sector, and China’s retali-

atory measures have made the global trade backdrop even more uncertain. It is not surprising that sentiment about trade

continues to deteriorate, with the latest world trade outlook indicator holding at its weakest level since the second quarter

of 2010.

US economy not seeing ill-effects of trade turmoil yet

The US economy continued to grow at a solid clip in the first quarter of 2019 on the back of net exports and inventory

building. Growth is likely to be somewhat weaker in Q2, but with a firmer-looking composition with less support from in-

ventory building and accelerating consumer spending and business investment. Despite an uneven quarterly pattern, the

UNCERTAINTY TAKING A TOLL ON GLOBAL ECONOMY

ECONOMIC AND FINANCIAL MARKET OUTLOOK

Craig Wright, Dawn Desjardins, Nathan Janzen

“Data point to the global economy expanding by 3.3%

this year, slower than 2018’s 3.6% pace, with trade vol-

umes declining and business sentiment deteriorating.”


key driver of the US economy remains the consumer. Strong demand for labour pushed the unemployment rate to a 50-

year low in early 2019 and wage growth accelerated. With more people working and wages rising faster than inflation, we

expect consumer spending to increase 2.3% this year, slightly slower than the previous two years.

Business investment is also forecast to contribute to the economy as companies take advantage of last year’s cut in the

corporate income tax rate and other supportive policies. The lift from these policy changes won’t match 2018’s jump. How-

ever, with financial conditions remaining accommodative, there is a case for investment to increase again this year assum-

ing the fractured trade environment doesn’t severely damage business confidence.

The US bilateral merchandise trade deficit with China dropped sharply in early 2019 as Chinese exports to the US de-

clined. This followed a period of large US purchases of Chinese goods in the second half of 2018 as US companies tried to

get ahead of an increase in tariffs. That pre-buying by US companies partly explains the rise, albeit temporarily, of the US

trade deficit with China late last year. Recent actions to ramp up tariffs on imports from China and potentially Mexico are

expected to weigh on US import demand.

Fed taking a risk management tact to monetary policy

For the Fed, it’s mission accomplished on getting the economy to full employment with most inflation measures at or slight-

ly below the 2% target. Maintaining these conditions is the challenge now facing US policymakers. The FOMC appears

content to hold the fed funds rate at a slightly below neutral level as a nod to the risks to the economic outlook coming from

policy uncertainty. Fragile financial market sentiment and growing concerns about US-China trade tensions raise the po-

tential for more aggressive slowing ahead, especially in businesses investment. The rally in the US Treasury market pro-

vides one of the clearest signs that investors are on edge with the 10-year yield falling back to the lowest level in over a

year and a half. The prospect that these uncertain conditions will persist limits how much US Treasury bond yields can be

expected to rise in the near term. We have adjusted our year-end forecasts down to reflect this uncertainty and now project

the 10-year rate will hold below 3%.

3.4

3.83.6

3.33.6

-1

0

1

2

3

4

5

6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

year-over-year % change

Global GDP growth

Source: International Monetary Fund, RBC Economic Research

Forecast

0

1

2

3

4

5

6

2015 2016 2017 2018 2019

% change, year-over-year, SA, 2010=100

World Trade Volume

Source: Netherlands Bureau of Economic Policy Analysis, RBC Economic Research

-4

-2

2

4

6

2014 2015 2016 2017 2018 2019 2020

Source: Bureau of Economic Analysis, RBC Economic Research

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

Annual Growth Rates

Real GDP2020f

1.7

Forecast:

2017

2.2

2018

2.9

2019f

2.4

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 2020

U.S. Fed Funds Rate BoC Overnight Rate

Source: Bank of Canada, Federal Reserve, RBC Economic Research

%

Forecast

Interest rates: Canada and U.S.


Canada’s economy hit turbulence in late 2018; tailwinds could return

Falling oil prices and a deepening in the housing-market correction saw Canada’s economy grow at just a 0.3% annualized

rate in the last quarter of 2018 and contributed to the economy growing at a similar pace in the first quarter of this year. A

recovery in oil production, easing of pressure in the housing market and the end of an unseasonably cold winter saw the

economy post a solid increase in March, paving the way for stronger gains ahead.

On balance, 2019 will likely be a year of subpar economic performance. After growing close to 1½% in 2019, we expect

the economy to accelerate modestly in 2020 to 1.8%. Despite the gearing down in growth, Canada’s labour market contin-

ues to power along, acting as one of the key supports for consumers. That isn’t to say spending activity won’t be modestly

slower in 2019 as household budgets are crimped by higher debt servicing costs. But strong job growth and accelerating

wages will mitigate the pressure on household finances and prevent a more radical pullback in consumer spending. In the

12-months to April, the economy generated 426K jobs and the unemployment rate was the near the lowest level in more

than 40-years. Wage growth, outside the oil-producing provinces, has picked up and we expect will continue to accelerate

as companies increasingly compete for workers. Surveys show that firms report labour shortages as the top obstacle to

increased sales activity auguring well for hiring to continue.

Housing market bottoming though no sharp rebound likely

Household credit market debt relative to income hit a record high in late 2018 while net worth declined as both real estate

and financial assets floundered. That said, the net worth-to-income ratio remained historically elevated. Further, the pace

of debt accumulation slowed significantly with the share of mortgages going to highly indebted households dropping as

regulatory changes and enhanced stress-testing took effect. The demand for credit was also dampened by the sharp drop

in housing activity with home sales down 11% in 2018 and a further 2.3% in the first quarter of 2019. Prices also came

under downward pressure. Resale activity rose in both March and April with the number of homes sold up 6% from Febru-

ary’s recent low. And while this suggests the market has hit bottom, it doesn’t necessarily point to a strong rebound ahead.

We continue to expect activity will remain soft as buyers cope with poor affordability in some of the larger markets and

amid tighter housing policies.

Uncertainty taking a toll on business sentiment

Canadian business confidence has weakened with the manufacturing sentiment index slipping into negative territory in

April for the first time in more than three years. Global policy uncertainty, frictions with the US, and the Chinese govern-

ment’s banning of Canadian canola all played into the more sombre mood. Although the recent removal of tariffs on steel

and aluminum by both the Canadian and US governments and renewed efforts to ratify the updated NAFTA sets up to re-

store confidence, the impact will be limited by the persistence of tensions between the US, China, Europe and Mexico,

Canada’s top trading partners.

These factors are weighing on the outlook for Canadian exports. Energy exports dropped in the first quarter, while non-

energy exports were up only slightly compared to a year earlier. The U.S. industrial sector, a key customer for Canadian

exports, has already shown some signs of softening and with the U.S.-China trade dispute heating up it is possible de-

mand for Canadian exports will remain weak. We expect net trade will add to growth this year, but this is more a result of

-4

-2

2

4

6

2014 2015 2016 2017 2018 2019 2020

Source: Statistics Canada, RBC Economic Research

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

Annual Growth Rates

Real GDP2020f

1.8

Forecast:

2017

3.0

2018

1.9

2019f

1.4

0

1

2

3

4

5

6

7

12 13 14 15 16 17 18 19 20

Source: Statistics Canada, RBC Economics Research

Year-over-year % change

Real export growth: Canada

Forecast:

Annual Growth Rates

2018

3.2

2017

1.1

2020f

2.2

2019f

0.8


of tariffs on steel and aluminum by both the Canadian and US governments and renewed efforts to ratify the updated

NAFTA sets up to restore confidence, the impact will be limited by the persistence of tensions between the US, China,

Europe and Mexico, Canada’s top trading partners.

These factors are weighing on the outlook for Canadian exports. Energy exports dropped in the first quarter, while non-

energy exports were up only slightly compared to a year earlier. The U.S. industrial sector, a key customer for Canadian

exports, has already shown some signs of softening and with the U.S.-China trade dispute heating up it is possible de-

mand for Canadian exports will remain weak. We expect net trade will add to growth this year, but this is more a result of

soft domestic demand growth limiting imports.

Bank of Canada – leaning against headwinds

The Bank of Canada pivoted toward a neutral policy stance as the domestic economy slumped and global environment

became evermore fraught. With inflation staying close to the 2% target, the bank decided to take a step back leaving the

policy rate unchanged at 1.75% and dialing down its rhetoric about the need to get the policy rate to neutral.

While the economy is showing signs of pulling out of its slump, this is not giving the all-clear signal for the Bank of Canada

to resume raising interest rates. It will take some time for the economy to make up ground that was lost during the recent

downturn. Adding in the cool winds blowing from other countries and the fact that inflation pressures remain contained, the

most likely scenario is that the bank will maintain a modest amount of policy stimulus.

US tariffs creating risks for Canada

The growing list of US tariffs is starting to bite. And the threat of more to come raises the risk that tariffs will weigh even

more on global growth in the months ahead. The ‘average’ US tariff rate increased about a percentage point last year. The

Bank of Canada in October estimated those measures would subtract about 0.2% from US GDP by the end of 2020. In

other words, a manageable drag, particularly given other sizable fiscal tailwinds from federal tax cuts and spending in-

creases. The $200 billion worth of imports from China hit with a higher tariff rate as of May and the threat of an across-the-

board 5% tariff hike on imports from Mexico will more than double the average tariff rate.

The tariffs on Mexico still might not actually get implemented, and tensions with China could ease around the G20 meet-

ings at the end of this month. Further, a big enough sell-off in equity markets could also change President Trump’s

tone. But added uncertainty about the future trade backdrop will persist. The threat of new tariffs on Mexico in particular –

at a time when there seemed to be a US-led push to get the new USMCA NAFTA-replacement passed – sends a clear

message that no trade agreement is really protection from rising tensions with the current US administration. We think in-

creased uncertainty alone will be enough to push US growth to a slightly below-trend rate over the second half of this

year. Downside risks will increase if tariff hikes don’t ease before that.

Canada’s own tensions with the US have eased with the removal of US steel and aluminum tariffs along with Canadian

retaliatory measures. But the US industrial sector has borne the brunt of US trade actions to-date, and activity in the sector

has already started to look wobbly. US manufacturing output declined in three of the first four months of 2019. Close inte-

gration of cross-border production chains means that anything that hurts the US industrial sector will have spillovers to

Canada. Concerns about a slowing in global growth could also spill over to Canada’s resource-producing regions via lower

commodity prices. While the impact of these tariff wars doesn’t currently look very large for Canada, the risk remains that

they will pack a bigger punch over the quarters ahead.


Growth to moderate across most of the country: Six out of 10 provinces to see a slowdown in 2019; outlook brightens in Newfoundland and Labrador after sharp contraction in 2018

Alberta’s economy facing chal-lenges: Mandated oil production cuts by the government have been scaled back but effects of last fall’s oil price tumble will continue to impact the economy negatively in 2019

Housing market cooling: Hous-

ing markets have seen a correction, particularly in B.C. and Ontario, limit-ing their contribution to growth

Labour market tight in the mjority of provinces: Unemploy-ment rate below 6% in five out of 10 provinces

The overall climate facing provincial economics is far from stellar. The blows to the oil patch along with the unwind-

ing from heavy reliance on the housing market in parts of the country temper growth expectations in 2019 across

most provinces. The general moderation will continue this year, after growth in 2018 slowed to 1.9%. Although there

was some good news with the removal of steel and aluminum tariffs, global trade disputes aren’t helping the story.

The labour market remains a bright spot. Job creation has picked up and historically low unemployment rates have

persisted in the majority of provinces so far this year. However, this will add more pressure on employers who have

already been hiring from a smaller pool of laborers.

Housing, which provided a solid boost to growth over a number of years, has turned on its heels in B.C. and Ontario.

The cooling of the housing market – more stark in B.C., but equally visible in Ontario, will act as a drag on GDP in

2019. While the housing related grind will ease as the year progresses in both provinces, we don’t see scope for a

material rebound in the next year either. Ontario will see softer growth this year, however B.C.’s will accelerate

slightly thanks to the construction of the $40 billion LNG Canada megaproject in Kitimat. As for Quebec, improving

MOMENTUM SHIFTING DOWN IN MOST PROVINCES

PROVINCIAL OUTLOOK

Robert Hogue, Ramya Muthukumaran

“Six out of 10 provinces to see a slowdown in 2019; out-

look brightens in Newfoundland and Labrador after sharp

contraction in 2018.”


fundamentals that include a growing working-age population, and a sturdy housing market will keep the province near

the top of the provincial rankings.

Alberta’s oil patch continues to face significant challenges with the effects spreading beyond the energy sector. We

expect materially weaker growth this year. Amongst the other Prairie Provinces, Saskatchewan will see sluggish growth

on the back of lower mining output and threats to its agricultural exports to China. Ratification of the CUSMA coupled

with a strong labour market will boost Manitoba’s prospects.

Out east, Newfoundland and Labrador will see a welcome return to positive growth with a big boost from oil production,

and mining and offshore oil construction projects. PEI will extend its winning streak thanks to strong immigration and a

robust labour market bolstering consumer spending. Nova Scotia will see a modest pullback in growth owing to lower

business investment, while New Brunswick’s economy will get into gear after a refinery explosion last year brought

things to a virtual standstill.

-2.7

0.2

1.2

1.3

1.4

1.9

2.1

2.2

2.3

2.4

2.5

NL

NB

NS

MB

SK

Canada

AB

ON

BC

QC

PE

Real GDP Growth% change

2018

Source: Statistics Canada, RBC Economic Research

0.6

0.8

0.9

1.1

1.4

1.4

1.5

2.0

2.2

2.4

2.6

AB

NB

NS

SK

ON

Canada

MB

QC

PE

BC

NL 2019

0.2

0.9

0.9

1.6

1.6

1.6

1.8

2.0

2.2

2.4

2.5

NL

NB

NS

QC

ON

MB

Canada

PE

SK

AB

BC 2020


FORECAST DETAIL - CANADARBC FORECASTS OF THE ECONOMY AND FINANCIAL MARKETS

= Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2017 2018 2019 2020

Household consumption 1.3 1.9 1.3 1.0 3.5 1.4 1.5 1.5 1.4 1.4 1.4 1.4 3.6 2.1 1.9 1.4

Durables -0.1 -1.8 -0.6 -1.9 4.9 1.4 1.0 1.0 0.5 0.5 0.5 0.5 7.1 1.0 1.1 0.7

Semi-Durables 0.6 1.8 3.1 -0.1 4.9 1.4 1.5 1.5 1.4 1.4 1.4 1.4 3.1 1.4 2.2 1.4

Non-durables -0.1 1.6 2.0 0.5 2.7 1.4 1.5 1.5 1.4 1.3 1.3 1.3 2.7 1.6 1.6 1.4

Services 2.3 2.9 1.3 2.0 3.3 1.4 1.7 1.6 1.6 1.6 1.6 1.6 3.3 2.6 2.1 1.6

Government expenditures 2.0 4.3 2.7 2.1 2.2 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.1 2.9 2.3 2.0

Residential investment -8.4 -0.3 -3.2 -10.4 -6.1 4.0 -0.9 1.8 0.3 1.5 2.4 2.8 2.4 -1.5 -3.3 1.3

Business investment 7.3 -0.9 -11.8 -9.5 13.5 -2.1 8.3 6.0 4.0 3.0 3.0 3.0 2.5 1.9 0.6 4.1

Non-residential structures -1.3 -4.1 -8.6 -14.2 -2.6 4.0 10.0 6.0 4.0 3.0 3.0 3.0 1.1 -0.9 -2.6 4.7

Machinery & equipment 22.0 4.0 -16.3 -2.3 39.5 -10.0 6.0 6.0 4.0 3.0 3.0 3.0 4.7 6.1 5.1 3.3

Final domestic demand 1.4 1.6 -0.1 -1.0 3.4 1.4 2.1 2.1 1.7 1.7 1.7 1.7 3.1 2.0 1.4 1.8

Exports 3.6 12.0 0.8 0.3 -4.1 3.0 2.5 2.2 2.2 2.2 2.0 2.0 1.1 3.2 0.8 2.2

Imports 4.2 6.2 -8.9 -0.7 7.7 -2.0 0.5 1.7 1.8 1.5 2.0 2.3 4.2 2.9 0.7 1.4

Inventories (change in $b) 16.6 13.3 7.2 13.9 17.7 13.0 10.0 7.5 7.5 6.5 6.5 6.5 17.6 12.7 12.1 6.8

Real gross domestic product 1.5 2.5 2.1 0.3 0.4 2.2 2.2 1.8 1.8 1.7 1.7 1.6 3.0 1.9 1.4 1.8

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

Business and labour

Productivity -0.5 -0.3 0.3 -0.3 0.4 0.0 0.4 1.1 1.1 1.4 1.1 1.0 1.7 -0.2 0.5 1.2

Pre-tax corporate profits -1.4 2.2 6.9 -5.7 -4.4 -4.5 -6.1 6.8 6.1 4.1 3.0 1.2 20.1 0.5 -2.2 3.6

Unemployment rate (%)* 5.8 5.9 5.9 5.6 5.8 5.8 5.9 5.9 5.9 5.9 6.0 6.0 6.3 5.8 5.9 6.0

Inflation

Headline CPI 2.1 2.3 2.7 2.0 1.6 2.1 1.8 2.2 2.3 2.0 2.1 1.9 1.6 2.3 1.9 2.1

Core CPI 1.8 1.8 2.1 2.0 1.9 2.1 1.9 2.0 1.9 2.1 2.1 2.0 1.6 1.9 2.0 2.0

External trade

Current account balance ($b) -65.5 -61.5 -40.6 -66.5 -69.4 -57.7 -50.1 -46.6 -44.9 -41.0 -38.3 -39.6 -60.1 -58.5 -55.9 -41.0

% of GDP -3.0 -2.8 -1.8 -3.0 -3.1 -2.5 -2.2 -2.0 -1.9 -1.7 -1.6 -1.6 -2.8 -2.6 -2.5 -1.8

Housing starts (000s)* 224 218 197 217 188 199 194 193 191 191 192 192 220 213 193.4 191.5

Motor vehicle sales (mill., saar)* 2.10 2.07 2.02 1.96 2.02 1.94 1.94 1.93 1.93 1.92 1.92 1.92 2.08 2.04 2.0 1.9

INTEREST AND EXCHANGE RATES %, END OF PERIOD

Overnight 1.25 1.25 1.50 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.00 1.75 1.75 2.75

Three-month 1.10 1.26 1.59 1.64 1.67 1.65 1.65 1.65 1.65 1.65 1.65 1.65 1.06 1.64 1.65 2.75

Two-year 1.78 1.91 2.21 1.86 1.55 1.50 1.60 1.70 1.75 1.85 1.85 1.90 1.69 1.86 1.70 3.00

Five-year 1.97 2.07 2.34 1.89 1.52 1.50 1.65 1.80 1.85 1.95 1.95 2.00 1.87 1.89 1.80 3.15

10-year 2.09 2.17 2.43 1.97 1.62 1.65 1.80 1.90 2.00 2.10 2.15 2.20 2.04 1.97 1.90 3.30

30-year 2.23 2.20 2.42 2.18 1.89 1.90 2.05 2.15 2.25 2.30 2.35 2.35 2.27 2.18 2.15 3.30

Canadian dollar 1.29 1.31 1.29 1.36 1.33 1.34 1.34 1.35 1.35 1.36 1.36 1.37 1.26 1.36 1.35 1.37

*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

Annual2018 2019 2020


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

= Forecast

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2017 2018 2019 2020

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

Consumer spending 0.5 3.8 3.5 2.5 1.3 2.5 2.1 1.8 1.9 1.9 1.7 1.7 2.5 2.6 2.3 1.9

Durables -2.0 8.6 3.7 3.6 -4.6 2.3 2.0 1.6 1.6 1.5 1.2 1.4 6.8 5.5 1.2 1.6

Non-durables 0.1 4.0 4.6 2.1 2.0 3.5 2.0 1.8 1.8 1.8 1.5 1.5 2.1 2.8 2.7 1.9

Services 1.0 3.0 3.2 2.4 2.1 2.3 2.1 1.8 2.0 2.0 1.9 1.8 2.0 2.1 2.4 2.0

Government spending 1.5 2.5 2.6 -0.4 2.5 3.7 2.4 2.0 1.0 0.5 0.5 0.5 -0.1 1.5 2.1 1.3

Residential investment -3.4 -1.4 -3.5 -4.7 -3.5 4.5 -1.0 0.9 0.9 1.2 2.0 1.4 3.3 -0.3 -1.6 1.1

Business investment 11.5 8.7 2.5 5.4 2.3 1.2 0.9 1.2 2.1 2.5 2.3 2.0 5.3 6.9 2.8 1.8

Non-residential structures 13.9 14.5 -3.4 -3.9 1.7 -4.0 0.0 1.0 2.5 2.5 2.3 2.0 4.6 5.0 -0.6 1.4

Non-residential equipment 8.5 4.6 3.4 6.6 -1.0 2.0 0.5 0.5 1.5 2.5 2.3 2.0 6.1 7.4 2.1 1.5

Intellectual property 14.1 10.5 5.6 10.7 7.2 3.6 2.0 2.2 2.5 2.5 2.3 2.0 4.6 7.5 6.2 2.4

Final domestic demand 1.9 4.0 2.9 2.1 1.5 2.6 1.9 1.7 1.7 1.7 1.6 1.5 2.5 2.9 2.2 1.8

Exports 3.6 9.3 -4.9 1.8 4.8 -4.0 2.2 2.2 2.8 2.5 2.5 2.5 3.0 4.0 1.1 2.1

Imports 3.0 -0.6 9.3 2.0 -2.5 -3.2 3.0 1.8 1.5 1.5 1.0 2.0 4.6 4.5 0.7 1.4

Inventories (change in $b) 30.3 -36.8 89.8 96.8 125.5 75.0 63.0 60.0 53.0 51.0 45.0 41.0 22.5 45.0 80.9 47.5

Real gross domestic product 2.2 4.2 3.4 2.2 3.1 1.6 1.5 1.7 1.8 1.8 1.7 1.5 2.2 2.9 2.4 1.7

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

Business and labour

Productivity 1.1 1.5 1.2 1.8 2.4 1.6 1.4 1.3 0.5 0.5 0.8 0.8 1.1 1.4 1.7 0.7

Pre-tax corporate profits 5.9 7.3 10.4 7.4 3.1 0.1 -3.1 -2.5 0.7 1.2 1.3 1.2 3.2 7.8 -0.6 1.1

Unemployment rate (%)* 4.1 3.9 3.8 3.8 3.9 3.7 3.7 3.6 3.6 3.6 3.6 3.7 4.4 3.9 3.7 3.6

Inflation

Headline CPI 2.2 2.7 2.6 2.2 1.6 1.8 1.8 2.0 2.2 2.1 2.2 2.1 2.1 2.4 1.8 2.1

Core CPI 1.9 2.2 2.2 2.2 2.1 2.1 2.1 2.1 2.1 2.2 2.2 2.2 1.8 2.1 2.1 2.2

External trade

Current account balance ($b) -496 -414 -506 -538 -494 -496 -510 -514 -509 -509 -505 -504 -4 -5 -503 -507

% of GDP -2.5 -2.0 -2.5 -2.6 -2.3 -2.3 -2.4 -2.4 -2.3 -2.3 -2.3 -2.3 0.0 0.0 -2.4 -2.3

Housing starts (000s)* 1321 1260 1233 1185 1203 1250 1295 1295 1300 1300 1310 1310 1209 1250 1261 1305

Motor vehicle sales (millions, saar)* 17.1 17.2 16.9 17.5 16.8 17.1 17.2 17.2 17.2 17.2 17.1 17.1 17.1 17.2 17.1 17.2

INTEREST RATES %, END OF PERIOD

Fed funds 1.75 2.00 2.25 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 2.50 1.50 2.50 2.50 4.00

Three-month 1.73 1.93 2.19 2.45 2.40 2.40 2.40 2.40 2.40 2.40 2.40 2.40 1.39 2.45 2.40 3.85

Two-year 2.27 2.52 2.81 2.48 2.27 2.00 2.20 2.35 2.45 2.55 2.55 2.55 1.89 2.48 2.35 3.90

Five-year 2.56 2.73 2.94 2.51 2.23 2.05 2.25 2.45 2.55 2.65 2.75 2.75 2.20 2.51 2.45 3.95

10-year 2.74 2.85 3.05 2.69 2.41 2.25 2.45 2.60 2.70 2.80 2.85 2.85 2.40 2.69 2.60 4.00

30-year 2.97 2.98 3.19 3.02 2.81 2.75 2.90 3.00 3.10 3.20 3.20 3.20 2.74 3.02 3.00 4.00

Yield curve (10s-2s) 47 33 24 21 14 25 25 25 25 25 30 30 51 21 25 30

*Quarterly averages, level

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

Annual2018 2019 2020


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* 0.8 -0.1 2.6 Mar. 0.4 2.0 0.9 May.

Manufacturing inventory -

shipments ratio (level) 1.5 1.5 1.4 Apr. 1.4 1.4 1.4 Apr.

New orders in manufacturing -1.4 0.5 2.1 Apr. -0.8 1.0 -0.2 Apr.

Business loans - Banks 0.9 16.6 7.4 Apr. 0.0 7.4 7.4 May.

Index of stock prices** -3.3 -0.1 4.4 May. -1.7 5.7 10.8 May.

Retail sales 0.1 3.7 4.9 Apr. 0.5 3.2 3.6 May.

Auto sales -4.2 -4.7 3.8 Apr. 0.7 -11.4 -5.7 May.

Total consumer credit*** 0.3 3.5 3.6 Apr. 0.4 5.3 5.4 Apr.

Housing starts -13.3 3.8 3.9 May. -0.9 -4.7 7.0 May.

Employment 0.1 2.4 1.1 May. 0.1 0.8 1.6 May.

Consumer price index 0.4 2.4 1.6 May. 0.1 1.8 1.42 May.

Producer price index**** 0.8 1.8 1.2 Apr. -0.1 1.0 0.5 May.

Policy rate 1 1.75 1.25 - May. 2.50 1.75 - May.

Government bonds -

(10 years) 1.7 2.4 - May. 2.4 3.0 - May.

1 latest available

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

Documents

CANADIAN Q1 GDP INCREASED 0.4% BUT DETAILS … 2019 Econoscope.pdf0.3% increase in Q4. Details were firmer and a 0.5% surge in March GDP bodes well for a return to stronger growth