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RBC cuts growth forecast for 2013

Economic growth in Canada is expected to be subdued in 2013 as consumers and businesses remain cautious about spending following a softer-than-expected performance in the second half of last year, the country's biggest bank said on Tuesday.

In its latest economic and financial market outlook, the Royal Bank of Canada trimmed its real gross domestic product growth forecast to 1.8 per cent for this year, down from 2.4 per cent it predicted in its December outlook.

"After boasting the strongest economic performance in the G-7 in the post-recession period, Canada’s economy hit a speed bump in the second half of 2012," the report by RBC economists said.

"Slumping mining, oil, and gas production weighed on activity in the third quarter and was augmented by a slowing in manufacturing and construction."

The energy complex managed to recover in the final quarter of the year, weakness was evident in other sectors of the economy with transportation and public administration output falling, and manufacturing industries continuing to contract, RBC added.

High levels of household debt, which hit a record at the end of last year, will limit spending on housing as well as goods and services, while global worries about U.S. fiscal policy and troubles in Europe weigh on confidence.

Still, growth in businesses spending and exports is expected to improve. Pent-up demand in the U.S. for housing and vehicles will help fuel Canadian exports. At the same time, RBC expects a rise in U.S. business investment, which should strengthen demand for Canadian machinery exports.

However, greater-than-expected fiscal restraint emerging in the U.S. with the implementation of the sequestration expenditure cuts in March will likely temper the strength.

Provinces expected to show tepid growth

Most provinces are expected to notch lower growth this year, fueling the broader downward revision to the national growth forecast. The main exception is Newfoundland and Labrador, RBC said. In 2014, provincial growth is expected to strengthen across most of the country.

The bank expects the Bank of Canada to keep its policy rate at 1.0 per cent -- where it has sat since September 2010 -- for longer than previously thought, largely due to economic weakness in the second half of last year and lower inflation. RBC sees interest rates at 1.5 per cent end-2014.

“The urgency to boost interest rates is now less compelling; concerns that low interest rates were fueling an untenable buildup in consumer debt are being alleviated because of the slowing pace of household debt accumulation,” said Craig Wright, the bank's chief economist, in a statement.

Much of the outlook is tied to developments in U.S. and Europe. RBC sees another year of mediocre growth for the global economy, which it expects to grow at 3.5 per cent.