RBC predicts rebound soon

The Canadian economy will return to growth this fall, economists at the Royal Bank predicted Wednesday.

A report released by the bank's research and forecasting branch, RBC Economics, forecasts that when Ottawa's GDP numbers for the quarter are released,they will show that aggressive government stimulusprograms have been effective.

The report predicted growth of 2.0 per cent in the latest three months, 2.4 per cent in the last three months of 2009, and 2.6 per cent in the three months to March 2010, driven by a sharp pickup in auto production and a recovery in housing sales.

Itsaid the economy contracted at an average of 3.4 per cent in the three months to June but predicted the latest downturn will turn out to be the least severe of the past three recessions.

'Confidence is returning to financialmarkets but it's possible there's something else out there that we weren't previously aware of...' Paul Ferley, RBC assistant chiefeconomist

The report suggested improved financial markets, low borrowing rates and fiscal stimulus have moved Canada's economy forward.

Paul Ferley, RBC's assistant chief economist, said two factors might undermine his optimism. Thestrong Canadiandollar might slow growth, or something unforeseen such as news about the exposure of banks to risky debt might stallthe recent rally in financial markets.

"At the moment I think we're seeing enough signs that confidence is returning to financial markets but it's possible there's something else out there that we weren't previously aware ofthat suddenly resurrects these concerns about counter-party riskwhich is a big problem in terms of what financial markets followed last year," he said.

Consumer spending will take longer to recover, the reportsaid. It predicted the unemployment rate now 8.7 per cent will likely headhigher by the end of 2009, but will begin to fall early next year and that that will lead consumers to borrow and spend more.

The report predicted that inflation will stay below the Bank of Canada's target rate of two per cent because consumers will constrain spending as job creationwill happen only slowly.

Saskatchewan to lead all provinces

The strengthening in demand for autos will bea clear plus for Ontario, Ferley said, and will be a factor in terms of returning growth in Ontario to the positive column in 2010.

He predictedthat Saskatchewan with its grain, oil and potash will lead all other provinces in recovery as the global economy rebounds."So with that support, we're expecting the commodity-producing regions and provinces of the country to benefit and its that factor that sends growth in Saskatchewan up 3.6 per cent in 2010."

RBC revised its growth forecast for the U.S. Canada's biggest trading partner based on improving economic data there.It increased its estimated growth rate to 1.9 per cent in the second half of this year and 2.2 per cent on average for 2010.

The bank predicted that U.S. unemployment will peak at 10.0 per cent late this year and drop to only 9.7 per cent by the end of 2010.