U.S. economy expected to slow in 2007

TORONTO - Canada is poised for stronger economic performance through 2007 with growth of 2.5 per cent and three per cent in 2008, according to the latest economic forecast from RBC.

"Canada's economy softened in the latter half of 2006 with the trade sector as the main culprit; but solid growth is expected to return in 2007," said Craig Wright, vice-president and chief economist, RBC. "The tight labour market, rising incomes and high levels of liquidity in investment portfolios will continue to support consumer spending and offset ongoing adjustments in trade and inventories."

RBC notes that while growth slowed for much of 2006, the economy regained momentum by year end. In December, broad-based gains in manufacturing, trade and retail spending saw the economy grow at its fastest monthly rate in more than a year - setting up for stronger activity in early 2007, especially given the sharp increase in employment numbers and construction projects.
"We expect Canada's trade sector to finally recover, softening its weakening influence on economic growth over the past few years," added Wright. "With a strong global outlook and energy prices remaining high, demand for Canadian exports is likely to pick up, while the pace of import demand slows alongside the modestly weaker Canadian dollar. Overall, the drag from the trade sector is expected to trim only a tenth of a percentage point from 2007 real GDP, a marked improvement from the one and a half to two percentage point impact of the previous two years."
In the U.S., RBC is forecasting 2.4 per cent growth for the U.S. economy in 2007, compared to 3.3 per cent growth in 2006. U.S. consumers are likely to pull back a bit in early 2007, but strong employment gains, rising wages and growing overall net wealth will support stronger gains in the second half of 2007. Looking ahead growth is expected to jump to 2.9 per cent in 2008.
After reaching a high of 91 U.S. cents in May 2006, the Canadian dollar slipped 6.5 per cent against the U.S. dollar and could weaken to 82.5 U.S. cents in the middle of this year. In 2008, Canada's strong economic performance should boost Canada's currency back to the 87 U.S. cent range.

RBC expects the Bank of Canada will hold the policy rate steady in 2007. Longer-term rates will rise in the second half of the year in line with U.S. Treasury yields, with rate hikes likely in 2008.

In the U.S., rising core inflation will keep the U.S. Federal Reserve from significantly easing interest rates this year. Stronger growth in 2008 will see the Fed shift into rate hike mode with a 50 basis-point increase expected in the second half of the year.

A complete copy of the forecast is available as of 8 a.m. E.D.T., at www.rbc.com/economics/market/pdf/fcst.pdf.

Moreover, the 2006 Census provided population counts as of May 16, 2006 while these population estimates are providing population numbers as of January 1, 2007. Population estimates based on the 2006 Census counts, adjusted for net undercoverage, will be available in the fall of 2008. For more information on the subject, consult the detailed explanation.

Population estimates published today show new patterns in interprovincial migration between October and December 2006.

Oil-rich Alberta recorded a slowdown in net gains from interprovincial migration. The province, whose population has been growing rapidly thanks to a booming economy, had a net inflow of 11,800 people in the fourth quarter. This was down from 17,100 for the same period of last year.

As a result, the growth in Alberta's population during the fourth quarter slowed slightly to 0.65%, a bit slower than last year (+0.75%). Even so, this was still more than four times the 0.14% overall increase in Canada's estimated population.

This slowdown occurred in large part because of an increase in people leaving Alberta for other parts of the country. As a result, net gains from interprovincial migration increased for most other provinces, especially British Columbia and Saskatchewan.

Fuelled by this shift in interprovincial migration patterns, Saskatchewan's population rose 0.21% during the fourth quarter. This was the first time in 23 years that the province's quarterly growth was faster than the national average. It was also the first time since 1996 that it recorded an increase in population for three consecutive quarters.

British Columbia was the only other province whose population rose faster (+0.25%) than the national average. Because of net gains in international and interprovincial migration, the province recorded its highest fourth quarter growth rate since 1996. British Columbia's net gains from other provinces were the highest for a fourth quarter since 1995.

The rate of demographic growth in Ontario (+0.04%) was lower than the national average for a second quarter in a row, a situation not observed since 1981. The province's net interprovincial migration from October to December 2006 (-10,100) was the lowest recorded for a fourth quarter since 1974 (-10,700).

Quebec's demographic growth for the last quarter (+0.09%) was similar to what was recorded last year at the same period and stays below the national average. The increase in net interprovincial migration losses offset the increase in births recorded in the province since the beginning of 2006.

In Manitoba, the population growth for the last three months of 2006 (+0.13%) was higher than the same period last year (+0.00%). This growth stays nonetheless lower than the country's average. It can be explained by smaller losses from interprovincial migration and by the highest fourth-quarter increase in immigrants since 1973.

The population rose in both Prince Edward Island (+0.03%) and New Brunswick (+0.02%) during the last quarter, but at a pace slower than the national average. At the same period in 2005, these two provinces experienced losses in population. The decrease in net losses from interprovincial migration explains this change in trends.

The population declined in Nova Scotia (-0.04%), Newfoundland and Labrador (-0.08%) the Northwest Territories (-0.36%) and Yukon (-0.38%) in the fourth quarter of 2006. The population of these four also declined during the fourth quarter of 2005. Yukon is the only area to have recorded larger losses than last year.

Nunavut was the only territory to record population growth. With its strong fertility, the territory had a growth rate (+0.31%) twice as fast as the national average.

As of January 1, 2007, Canada's population was estimated at 32,777,300, up 329,000 from January 1, 2006. During the year, the population grew 1.0%, with international migration accounting for two-thirds of the increase.

Canada's population estimates and demographic growth1
	October 1, 2006pp	January 1, 2007pp	October 1, 2006 to January 1, 2007
	number		% change
Canada	32,730,213	32,777,304	0.14
Newfoundland and Labrador	508,955	508,548	-0.08
Prince Edward Island	138,596	138,632	0.03
Nova Scotia	934,172	933,793	-0.04
New Brunswick	748,439	748,582	0.02
Quebec	7,669,100	7,676,097	0.09
Ontario	12,721,776	12,726,336	0.04
Manitoba	1,178,491	1,180,004	0.13
Saskatchewan	985,859	987,939	0.21
Alberta	3,413,464	3,435,511	0.65
British Columbia	4,327,431	4,338,106	0.25
Yukon	31,151	31,032	-0.38
Northwest Territories	41,929	41,777	-0.36
Nunavut	30,850	30,947	0.31
pp preliminary postcensal estimates 1. These estimates are based on the 2001 Census counts adjusted for net undercoverage.

Note to readers

This study is the third in a series on the project initiated in the fall of 2003 by the Canadian Productivity Accounts at Statistics Canada to compare the level of productivity between Canada and the United States.

In this study, the output gap between the two countries is measured using relative nominal gross domestic product (GDP) per capita, which is expressed in a common currency, using purchasing power parity indices.

Relative GDP per capita may be broken down into three components: relative labour productivity, that is, GDP per hour worked; effort (relative hours worked per job) and the relative employment rate per capita (ratio of number of jobs to total population). This study describes the methods used to estimate each of these factors.

A large part of this study is devoted to developing and illustrating the conceptual and methodological framework required to make Canada-United States estimates of labour and population comparable in terms of levels. It also attempts to quantify the "statistical error" that arises from using inadequate statistics, or statistics not designed for this type of international comparison.

To obtain the dataset containing the GDP, hours worked and population estimates used in this study, send an email to (productivity.measures@statcan.ca).

Homebuyers combining fixed and variable options

TORONTO - The number of Canadians considering combination mortgages - those with both fixed and variable rate segments - is on the rise, according to RBC's 14th Annual Homebuyers Survey. Over one third (38 per cent) of Canadians who are likely to purchase a home within the next two years plan to take out a combination mortgage, compared to 30 per cent in 2006.

At the same time, the RBC poll found that many Canadians are confused about the various mortgage options now available to them. A majority (66 per cent) responded that they found it difficult to choose between a fixed rate and a variable rate.

Poll results also revealed that, even when Canadian homeowners planning to choose a fixed rate mortgage were informed they could pay less interest overall through a combination or variable rate mortgage, only 12 per cent indicated they would be much more likely to choose combination or variable. The top reason cited for not opting for a variable rate was the preference for payments that don't change every month (30 per cent). Seventy-six per cent of Canadians believe that their regular mortgage payments will change when the prime rate changes, if they take out a variable rate mortgage.

"The research suggests many Canadians think that only fixed rate mortgages provide predictability of payments. But in reality, variable rate does not necessarily mean variable payment," explained Adams. "There are variable rate mortgages that are designed to keep the payment stable. When interest rates go up, your payment will pay off more interest than principal; when interest rates go down, your same payment will pay off more principal than interest."

Fixed rate mortgages continue to be the most common choice for potential buyers and current mortgage-holders across the country - preferred by 49 per cent of Canadians likely to buy a home within the next two years and 54 per cent of Canadian homeowners with mortgages they plan to renew. Atlantic Canadians planning to buy are most likely (69 per cent) to opt for a fixed rate; Albertans planning to buy are the least likely (41 per cent) to choose a fixed rate.

"We find that many Canadians automatically opt for a fixed mortgage with a longer term, until they begin to explore the upside potential of combining multiple mortgage segments under one plan," said Catherine Adams, vice-president, Home Equity Finance, RBC Royal Bank. "As consumers begin to learn about the benefits that mortgage diversification can bring, we're seeing more homebuyers gaining a better comfort level with including variable rate mortgage options."

Adams emphasized that exploring all the mortgage options now available requires doing some homework. "Typically people will spend more time planning their vacation activities or financing their next vehicle, than understanding how best to maximize their mortgage," added Adams. "This is a great example of a personal finance area where a little investment of your time can save you a substantial amount of money down the road."

Mortgage findings at-a-glance

Fixed rate mortgages are preferred by: <<

- 49 per cent of Canadians likely to buy a home within the next two years
- 54 per cent of Canadians homeowners with mortgages they plan to renew
- 69 per cent of Atlantic Canadians planning to buy a home within the next two years (the highest in Canada)

Variable rate mortgages are preferred by:

- 13 per cent of Canadians likely to buy a home within the next two years
- 23 per cent of Canadian homeowners with mortgages they plan to renew
- 31 per cent of Quebec homeowners with mortgages they plan to renew (the highest in Canada)

Mortgage term most likely to be chosen at renewal time:
- Five year term: 46 per cent
- More than five year term: 31 per cent
- Three year term: 8 per cent >>

63 per cent: the proportion of Canadian homeowners who have mortgages (compared to 60 per cent in 2006)

$105,557: the average amount remaining on Canadian homeowners' mortgages (compared to $95,840 in 2006)

39 per cent: the proportion of Canadian homeowners who have borrowed against the equity in their homes (compared to 38 per cent in 2006)

28 per cent: the proportion of Canadian homeowners who have refinanced their mortgage in the last 12 months (compared to 27 per cent in 2006)

RBC is the largest residential mortgage lender in Canada with more than $109 billion in loans outstanding at the end of 2006 and over 15.5 per cent of the Canadian mortgage market. As the country's number one source of financial advice on homeownership, RBC conducts consumer surveys as one way to provide insight to Canadians about the marketplace in which they live.

These are some of the findings of an RBC poll conducted by Ipsos Reid between January 18 and 22, 2007. The online survey is based on a randomly selected representative sample of 2,404 adult Canadians. With a representative sample of this size, the results are considered accurate to within +/-2.0 percentage points, 19 times out of 20, of what they would have been had the entire adult Canadian population been polled. The margin of error will be larger within regions and for other sub-groupings of the survey population. These data were statistically weighted to ensure the sample's regional and age/sex composition reflects that of the actual Canadian population according to the 2001 Census data.

Consumer demand for durable goods remained buoyant at the turn of the year. Robust labour market conditions and lower gas prices fuelled strong growth in real incomes. However, housing retreated sharply in February, as a return to seasonable winter conditions followed the unusually balmy conditions that had boosted starts and sales in the previous two months.

Financial market conditions continued to improve. The stock market hit new highs early in the new year, before its recent slip. The optimistic outlook for firms was reflected in investment intentions. Firms plan to spend 5% more in 2007, their fourth straight year of strong growth. Almost all sectors plan to boost investment, with energy again leading the way as gains for utilities and the oil sands offset cuts by natural gas producers.

New orders for durable manufactured goods jumped 1.8%, their largest monthly advance in over two years. A rebound in transportation equipment led the upturn. The increase in demand already had started to be reflected in higher output and shipments late in 2006, although not enough to reverse the drop in the ratio of shipments to inventories. Manufacturers remained cautious about their labour demand, as the workweek stayed the same while layoffs multiplied.

The US leading indicator rose 0.2%, continuing its gradual recovery from declines in the second half of 2006. Continued strong labour market conditions were reflected in higher consumer confidence. Industrial production rebounded sharply in February, led by a recovery in autos and the need for power as cold temperatures lingered.

Record purchase of foreign bonds

Canadians bought a record $6.2 billion worth of foreign bonds in January, adding to last year's record purchases of $43.2 billion. Over 70% of January's investment was in overseas bonds, a record $4.4 billion, of which $3.0 billion was in Maple bonds. In addition, Canadians invested $1.6 billion in US Maple bonds in January.

Heavy investment in foreign stocks

Canadian investors resumed their heavy purchases of foreign equities and bought $3.4 billion worth in January, following investment of $1.0 billion in December. January's acquisitions were almost equally split between US and overseas stocks, while December saw investment concentrated on US stocks. Shares of foreign manufacturing firms and retailers topped the investment list.

Canadians sell foreign money market paper

Canadians reduced their holdings of foreign money market paper by $1.8 billion in January, a sharp turn from the trend of heavy purchases in 2006 amounting to a record $6.4 billion. January saw residents divest $1.5 billion in overseas paper, largely due to sizable retirements of corporate paper.

Substantial divestment of outstanding Government of Canada bonds

Non-residents sold off $3.1 billion worth of Canadian bonds, nearly 90% ($2.7 billion) were outstanding Government of Canada bonds. This followed December's divestment totalling $3.3 billion, mainly due to retirements of federal government bonds ($2.2 billion). The differential on long-term interest rates for government issues continued to favour investment in the United States at 66 basis points.

Most of January's sell-off of outstanding bonds was Canadian-dollar denominated ($2.1 billion). With a depreciating Canadian dollar, new issues of US-dollar denominated bonds placed abroad were reduced significantly in January, especially those issued by Federal Government Enterprises and corporations. Net retirements over the month were largely in US-dollar denominated bonds ($1.2 billion).

On a regional basis, American and European investors sold off $3.1 billion and $1.1 billion worth respectively. Investors from emerging economies, on the other hand, purchased Canadian bonds for a 5th consecutive month, buying nearly $1.0 billion worth in January.

Foreign investors sell off Government treasury bills

Non-residents sold off $764 million worth of Canadian money market paper in January, after buying $366 million over the previous month. January's disposition was focused in federal government treasury bills ($880 million) and corporate paper ($223 million), partly offset by a $246 million investment in provincial government paper.

Investment in Canadian shares flat

Despite increasing Canadian stock prices, foreign investment in Canadian equities experienced a second consecutive month of little change in January. While holdings of outstanding shares barely changed over the month, non-residents added $86 million worth of new shares to their portfolios. On a regional basis, demand for Canadian stocks shifted during the month with American investors buying $1.2 billion worth, while investors from Europe and emerging economies sold off Canadian shares worth a similar amount.

Canada's international transactions in securities
	October 2006	November 2006	December 2006	January 2007	2005	2006
	$ millions
Foreign investment in Canadian securities	-4,049	10,537	-3,053	-3,764	8,472	27,854
Bonds (net)	2,295	11,481	-3,349	-3,062	-1,183	13,293
Outstanding	2,264	4,656	-572	-2,040	4,278	11,551
New issues	3,440	9,818	4,378	700	33,603	43,134
Retirements	-3,795	-3,370	-5,923	-2,362	-39,402	-41,713
Change in interest payable1	385	377	-1,233	639	339	323
Money market paper (net)	-352	-1,741	366	-764	522	3,746
Government of Canada	-398	-1,006	1,036	-880	1,435	3,717
Other	46	-735	-670	116	-914	29
Stocks (net)	-5,992	797	-69	62	9,133	10,814
Outstanding	3,216	1,068	-644	-24	13,165	21,145
Other transactions	-9,208	-271	575	86	-4,032	-10,331
Canadian investment in foreign securities	-6,486	-5,497	-5,117	-7,769	-51,652	-77,866
Bonds (net)	-5,836	-1,089	-3,568	-6,169	-27,615	-43,233
Stocks (net)	-192	-3,912	-1,011	-3,379	-21,947	-28,263
Money market paper (net)	-457	-496	-538	1,778	-2,089	-6,370
1. Interest accrued less interest paid. Note: A minus sign indicates an outflow of money from Canada , that is, a withdrawal of foreign investment from Canada or an increase in Canadian investment abroad.

Related market information

In January, Canadian short-term interest rates increased by only 1 basis point to 4.17% while US short-term rates increased 13 basis points to 4.98%. Continuing to favour investment in the United States, the resulting differential increased to 81 basis points.

Both Canadian and US long-term interest rates increased in January. Canadian rates increased 12 basis points to 4.17% while US rates climbed 17 basis points to 4.83%. As a result, the differential between the two countries widened further to 66 basis points.

Canadian stock prices increased for the fourth month in a row as the S&P/TSX Composite Index closed January at a record 13,034.1, an increase of 1.0% from the month before. Meanwhile, US stock prices rose for the eighth straight month as the Standard and Poor's Composite Index ended the month at 1,438.2, up 1.4% from December's close.

The Canadian dollar fell for the fifth consecutive month in January, down 0.85 US cents. The dollar ended the month at 84.96 US cents, the lowest month end since November 2005.

Definitions

The data series on international security transactions cover portfolio transactions in stocks, bonds and money market instruments for both Canadian and foreign issues.

Stocks include common and preferred equities, as well as warrants.

Debt securities include bonds and money market instruments.

Bonds have an original term to maturity of more than one year.

Money market instruments have an original term to maturity of one year or less.

The growth in national wealth (economy-wide non-financial assets) slowed to 1.7%. This reflected the easing of economic activity, partly offset by sustained price increases for selected non-financial assets. Residential real estate continued to be the major contributor to growth in national wealth, accounting for over half of the gain.

The advance in national net worth was strongly supported by the sharp decline in Canadians' net foreign indebtedness (with marketable securities on a market value basis). Net foreign debt fell by almost half in the quarter, as assets abroad increased at nearly twice the rate as liabilities to non-residents. Growth in the value of foreign portfolio assets held by Canadians was the main contributor. The increase in these assets was driven by sustained strong investment flows, as well as the revaluation effects of sharp gains in foreign equity prices and a depreciating Canadian dollar in the fourth quarter.

Household net worth up strongly

Household net worth leapt 3.8% in the fourth quarter, a sharp increase from the third (+1.8%). Strong gains in the value of Canadian and foreign equities drove this increase, supported by continued growth in the values of residential real estate.

The Toronto stock exchange closed December 2006 at an historical high, with the S&P Toronto stock exchange composite index reaching just below the 13,000 mark. Mounting unrealized capital gains translated into significant advances in share holdings, investment fund units and pension assets. Growth in corporate share asset values contributed to 60% of the increase in financial assets.

The value of residential real estate continued to expand, providing the bulk of the increase in non-financial assets, given its relative size among household assets. New housing prices advanced 1.4% in the fourth quarter.

Households continued to build up mortgage and consumer credit debt. As a result, household debt continued to outpace personal disposable income (seasonally adjusted at annual rates). Canadian households currently carry about $1.10 in debt for every dollar of their disposable income. However, the gains in both financial and non-financial assets in the fourth quarter reduced the ratio of household debt to net worth to 17.8%, down from 18.2% in the third.

Corporate debt and leverage edge up

Despite sustained strong saving and net lending to the rest of the economy, corporate demand for borrowed funds increased in the fourth quarter, as capital investment strengthened.

In particular, private non-financial corporations turned to credit markets in the fourth quarter. The increase in credit market debt, in particular bonds, reflected both sharper borrowing and the impact of a depreciating Canadian dollar on foreign-denominated liabilities. As a result, the ratio of debt-to-equity (at book value) halted its downward trend and edged up in the fourth quarter.

Government debt-to-gross domestic product continues to fall

With the government sector as a whole registering another surplus in the fourth quarter, partly as a result of negligible net borrowing on financial markets, government net debt (total liabilities less total financial assets) fell for a seventh consecutive quarter. Net government debt as a percentage of gross domestic product (GDP) declined further, representing less than half of GDP, compared to 90% a decade ago.

Annual review 2006

National net worth spikes upward

National net worth on a year-over-year basis jumped 9.3% in 2006, up from 5.7% growth in 2005. This was largely driven by the significant drop in net foreign indebtedness, concentrated during the third and fourth quarters of 2006.

Somewhat stronger growth in national wealth also contributed, as business investment in non-residential structures strengthened and prices for non-financial assets continued to advance. Residential real estate assets continued to be the main contributor to the increase in the value of non-financial assets, accounting for over 70% of the change. National wealth grew 6.7% in the year, compared to 5.6% in 2005.

Natural resources constrain growth of national wealth

The broader measure of national wealth (including natural resources) grew 5.8% in 2006, slightly faster than the pace set in 2005. However, growth in natural resource assets was muted by falling natural gas and timber prices.

The value of selected natural resource assets (timber, energy and mineral resources) rose 1.5% to $980.6 billion in 2006. This was a deceleration from the 3.5% rate in 2005. The value of the three broad natural resource components showed mixed growth: a 31.9% increase for minerals, a 1.1% increase for energy, and a 9.8% decline for timber. Increases in the value of metals, crude bitumen, and crude oil offset declines in the value of natural gas and timber. Vigorous growth in the value of minerals in 2006 was propelled by strong international demand. The price of most mineral resources increased substantially in 2006.

Note to readers

The national balance sheet accounts are statements of the balance sheets of all of the various sectors of the economy. They consist of the non-financial assets owned in the various sectors of the economy and of financial claims outstanding. National wealth is the sum of non-financial assets (produced assets, land surrounding structures and agricultural land) in all sectors of the economy. National net worth is national wealth less net foreign liabilities (i.e., what is owed to non-residents less what non-residents owe to Canadians). Alternatively, it is the sum of the net worth of persons, corporations and governments.

National saving is the sum of saving of persons, corporations and governments. National saving and investment contribute to change in national net worth. The revaluation of assets and liabilities is also responsible for changes in national net worth. The causes of revaluation include changes in share prices, interest rates, exchange rates and loan allowances.

Quarterly series, both book and market value, run from the first quarter of 1990; market value estimates have been available since June 2004. For more information on the market value estimates, consult Balance sheet estimates at market value.

An annual measure of national wealth that includes selected natural resources is also available (CANSIM table 378-0005). The estimates of natural resources are released annually at the time of the fourth quarter.