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RBC cuts Canada's economic growth forecast for 2013, 2014

Tags: Economy

Canada's economy will grow at a slower pace than expected in 2013 and 2014, but will gain momentum in 2015, according to Royal Bank of Canada.

The bank cut its economic forecast to 1.8 percent this year, down from 1.9%. Next year RBC expects the economy to expand 2.8 percent, compared to its previous forecast for 2.9-percent growth.

However, RBC expects Canada's economy to "reach full potential in the first half of 2015, when inflation is expected to approach the 2.0 percent target," Craig Wright, RBC's senior vice-president and chief economist said in release.

Even though it trimmed its economic growth forecast, RBC is leaving its Bank of Canada rate hike outlook unchanged. It expects the central bank to keep its key interest rate unchanged at 1 percent this year, with a 50 basis point increase by the end of 2014.

The expected interest rate increase in 2014 will help the central bank fill the gap between its monetary policy support and Canada's economic growth, the bank said.

Much of this growth will be export-led, says the RBC pointing to the pace of exports in the first quarter of 2013, the fastest since late 2011.

RBC expects even stronger Canadian export figures as the global economy strengthens.

"The improvements in the U.S. housing market, rising motor vehicles sales and increasing U.S. business investment in machinery will augment the rising demand for Canadian exports coming from the Euro-area and the U.K. as the pace of economic growth improves," says Wright.

And improving job numbers are expected to provide further economic support. As of August 2013, Canada had an average gain of 12,100 jobs per month for the previous six months.

"We expect this pace of job creation to rise slightly on average through the forecast," says Wright. "This continuing support to household spending along with the improving external environment and rising investment will allow overall GDP growth to strengthen in 2014."

The bank anticipates housing activity to moderate and the slowing trend in mortgage credit growth to stabilize Canada's frothy housing market.

On the currency front, though, the sliding Canadian dollar will likely get little support from falling commodity prices, says RBC, but the bank expects that to change in 2014.

"As long as we don't see a strong upward shift in commodity prices, we expect the Canadian dollar will maintain its weakening trajectory for the remainder of 2013," says Wright. "Next year, as the economy propels itself forward, the loonie is likely to regain ground against the U.S. dollar."

Regionally, resource-rich Newfoundland and Labrador will lead the national growth in 2013, followed by Alberta, Saskatchewan and Manitoba. The pace in all other provinces will be below the national average of 1.8 percent, says the RBC report.

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