Canadian economy remains on course for positive growth by the third quarter of this year

TORONTO - The tide is turning for the Canadian economy, with growing signs that aggressive policy actions are taking effect, according to a new report by RBC Economics. The report indicated that although the Canadian economy contracted at an average of 3.4 per cent in the second quarter, the stage is set for a return to positive growth by the third quarter of this year.

"Improved financial markets, low borrowing rates and fiscal stimulus have moved Canada's economy forward," said Craig Wright, senior vice-president and chief economist, RBC. "We expect that Canada's recession will turn out to be the least severe of the past three, even after the consecutive hefty drops in GDP output from late 2008 and early 2009."

The Canadian economy is set to grow in the second half of this year with a sharp rebound in auto production in the third quarter and a recovery in the housing market leading the charge. The report projects that the Canadian economy will grow by 2.0 and 2.4 per cent in the third and fourth quarters of 2009, respectively, and 2.6 per cent in 2010.

"While the staying power of the recovery at home and abroad is still at risk, we believe the momentum is likely to build as financial markets continue to recover and stimulus spending continues to have a positive impact," added Wright.

Consumer spending, however, is still being weighed down by the 8.7 per cent unemployment rate, which the report anticipates is likely to edge higher by year's end. Improvement is on the horizon in early 2010, when RBC forecasts the stage will be set for the labour market to stabilize, the unemployment rate to begin falling and the hiatus in consumer spending to end. However, with the unemployment rate set to remain historically high, inflation is expected to remain below the Bank of Canada's mid-point target of 2 per cent.

With positive signs emerging in the U.S. economy, RBC has boosted its U.S. forecast for growth over the second half of this year to 1.9 per cent and is anticipating the U.S. real GDP will expand by an average of 2.2 per cent in 2010. The report notes that expected Q3 growth of 2.0 per cent will be the first quarter in the past five to show a positive gain.

Though the return to positive growth in the U.S. is encouraging, the rate of increase in 2010 will only result in modest downward pressure on the unemployment rate. RBC Economics expects this rate to peak at 10.0 per cent late this year and only drop to 9.7 per cent by the end of 2010. A slow labour market is expected to keep inflation very low through the forecast.