RBC Financial Strategy and Performance

2019 Economic Outlook Canada U.S. Euro Area Canada U.S. Euro Area Projected Economic Indicators for 2019 (1) RBC Unemployment Interest Rate Current Account GDP Growth Inflation Rate (2) (3 mth T-bills) Balance/GDP (2) Budget Surplus/GDP (3) 1.7% 1.6% 5.9% 2.20% (2.9%) (1.1%) 2.4% 1.9% 3.7% 2.9% (2.3%) (5.0%) 1.1% 1.8% 8.0% NA 2.9% (0.6%) ■The Canadian economy is forecast to grow by 1.7% in 2019 following a 2.0% increase in 2018 and a 3.0% gain in 2017. This year likely got off to a slow start due to weakness in the energy sector. Housing activity has continued to slow due to the ongoing impact of policy changes and rising interest rates. Consumer spending has also increased at a more moderate pace, though the labour market remains healthy. Rising exports and government spending will provide some offset, keeping growth near its underlying 'trend' rate. ■ The Bank of Canada continues to indicate that interest rates are likely to move toward a more neutral level over time. But we expect they will hold monetary policy steady in the near-term to evaluate the impact of lower oil prices, ongoing slowing in housing, and trade policy developments. We expect they will get enough clarity on those issues, and confirmation that the economy is operating close to full capacity, to raise interest rates twice over the second half of 2019. That would leave the overnight rate at 2.25% at the end of the year. ■ The U.S. economy is forecast to grow by 2.4% in 2019 following a 2.9% gain in 2018. Both are above the economy's longer run trend. Consumer spending is likely to increase at a more moderate rate as the effects of income tax cuts continue to fade, though a strong labour market and rising wages will support spending. Business investment is expected to continue to increase but could be dampened somewhat by market volatility and concerns about trade policy and global growth. ■ With interest rates now closer to ‘neutral' the U.S. Federal Reserve has signaled a pause in their tightening cycle, giving policymakers time to assess financial market stability, inflation developments, and the global growth environment. Our forecast assumes two rate increases this year in June and December. Euro area GDP growth is expected to slow to a 1.1% pace in 2019 following a 1.8% increase in 2018. Some of the recent loss of momentum reflects political uncertainty, as well as slowing global growth on the industrial sector. Growth is expected to remain slightly below-trend early this year before returning to a more trend-like pace over the second half of the year. ■ Inflation remains low despite the strengthening economic backdrop, though wage growth picked up in 2018. The European Central Bank ended net asset purchases at the start of the year, and could begin gradually raising interest rates from current, negative levels later this year if activity rebounds as we expect. Economic Backdrop 26 (1) RBC Economics Research as of February 8, 2019 and reflect forecasts for calendar 2019. (2) RBC Economics Research. (3) IMF Fiscal Monitor (October 2018), Congressional Budget Office FY2018, European Commission, RBC Economics Research.

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