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Royal Bank predicts Canada’s Economy will Skirt the Global Economic Turbulence

A new outlook from the Royal Bank predicts Canada’s economy will skirt the global economic turbulence and rebound strongly from a slow start to the year.

 

The RBC’s new quarterly forecast anticipates the economy will rebound to 3.1% growth during this quarter, which ends in June, and record a 2.6% gross domestic product gain overall for both 2012 and 2013.

 

The optimistic view from economists at Canada’s largest bank is somewhat surprising, given the stream of negative news emanating from Europe, China and the United States.

 

Last week, the Bank of Canada noted that “global economic growth has weakened,” and that first quarter growth of 1.9 was disappointing.

 

On Friday, Statistics Canada confirmed that the strong job gains seen in March and April had flattened in May.

 

Meanwhile, Europe has teetered from crisis to crisis, from the threat of a Greek default and exit from the eurozone, to insolvency in Spain’s banking sector. The eurozone has announced a $125 billion bailout of its banks, but questions remain about the package.

 

In their report being released Tuesday morning, RBC economists attribute the soft first quarter to temporary factors — a mild winter that reduced demand on utilities, and temporary shutdowns in both energy and mining production facilities.

 

They believe the economy will catch up in the second quarter, noting the outsized 140,000 employment increase recorded in March and April.

 

More fundamental to the optimistic outlook, RBC believes that policy-makers will meet the challenge of averting disaster in Europe.

 

Under that assumption, the bank believes the United States will continue to bounce along with moderate growth and Canada to benefit from strong fundamentals.

 

The 2.6% forecast for this year is identical to RBC’s previous call in March, but about half a point below the consensus.

 

“We’re relatively bullish,” agreed Craig Wright, RBC’s chief economist. “On balance, conditions for growth are positive, supported by a continuation of a low interest rate environment and a Canadian financial sector that is healthy and ready to provide credit.”

 

Wright said a lot of the recent bad news has dampened confidence, but has not changed the overall outlook.

“It’s still basically a risk story,” he said. “In a sense it’s more of the same, we get dragged to the edge of the cliff and then get dragged back.”

The other risks the bank says must be averted are the possibility of a harder than expected landing for China, and the danger that political gridlock in the U.S. will prevent a compromise to extend stimulative fiscal measures beyond this year.

 

Dodging the pitfalls would enable the U.S. recovery to continue, and for Canadians to benefit, particularly exporters in the auto and industrial production sectors.

 

“In 2012 and 2013, we expect that a strengthening U.S. economy, a soft landing in China and an eventual return to growth in the eurozone will support the fastest pace of Canadian export growth over a two-year period since 2000,” Wright said.

 

Given the positive growth, Wright said he expects the Bank of Canada will start raising interest rates later this year.

 

The report cautions that growth will not be evenly spread. The RBC economists say western Canada will continue to dominate in growth this year, led by Alberta, but with Saskatchewan and Manitoba close behind. Ontario and B.C. are expected to mirror the national average in growth.

 

RBC also sees the unemployment rate in Canada remaining just above 7% until the middle of next year, which implies modest job creation going forward.

 

The Canadian Press

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