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Blog by Kevin Wong

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RBC Reports: Canada—down but not out!

In their January 2011 Financial Markets Monthly, RBC reported that although the news on Canada’s economy soured mid-year 2010 with real GDP expanding at a 1.0% annualized pace in the third quarter, fourth-quarter 2010 reports fared slightly better. Not enough to support their original 2.9% forecast, RBC accordingly shaved their forecast to 2.3% as Canadian consumers scaled back late in the year after providing solid support for growth in the early days of the recovery and business spending showed signs of slowing after the rapid expansion in the third quarter of 2010.

RBC’s 2011 forecast remains unchanged at 3.2% with the strengthening in U.S. demand forecasted to boost net exports while low interest rates and accommodative financial conditions support both consumer and business spending this year. Unlike in 2010, when both the housing market and inventories provided support to the economy’s expansion, these sectors are expected to cool and restrain real GDP growth. RBC also assumes that the Bank of Canada will leave the overnight rate unchanged at 1.00% in the first quarter of 2011 after coming off the recent round of disappointing data. They predict that Canada’s slow-growth period is about to end with the U.S. economy moving into a faster gear and domestic financial conditions supportive. The combination of dissipating stress outside of Canada’s borders and firming domestic conditions will set the stage for the Bank of Canada to resume its program of reducing monetary policy stimulus. With the U.S. economy already showing signs of strength, the Bank’s attention will turn to the domestic data flow. RBC’s assumption that Canada’s economy will accelerate sharply (real GDP of 3.5% annualized pace) in the first quarter of 2011 is the underpinning for their call that the Bank will raise the overnight rate in the second quarter. For a full copy of the RBC report click here.