Canadian GDP outlook slashed to 1.2% with 3 provinces in recession

Economists continue to scale back their forecasts for Canadian growth this year, with both TD Economics and RBC Capital Markets saying the economy will expand by just 1.2 per cent and three provinces will remain in recession.

Alberta is taking a hard hit because of low oil prices, with RBC forecasting a 1.3 per cent contraction in the provincial economy in 2015. Newfoundland and Labrador could shrink by threeper centand Saskatchewan's economy is also expected to contract.

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TD slashed its 2015 forecast for Canadian GDP growth by 0.4 percentage points to 1.2 per cent and its 2016 prediction by 0.3 percentage points to about twoper cent.

RBC is slightly more bullish on 2016, saying the economy could grow 2.2 per cent.

But there are plenty of risks hanging over those forecasts,with global growth uncertain and commodity prices volatile.

China is a key driver of global prices, especially for metals, an important Canadian export. Its slowdowncould cast a shadow over export performance, which TD predicts will lead to growth in the last half of the year. And unpredictable oil prices mean there's no sure way of projecting numbers into the coming year.

'Snap back' in 2nd half

Still, TD gave an optimistic assessment of Canada's potential, saying the economy will "snap back" in the third and fourth quarters.

It points to stable household spending, continued demand for housing and gains in employment as positive signs for Canada's economy.

"While investment is likely to remain weak for some time, Canada's export sector appears to be starting to flex its muscles, supported by rising U.S. demand and the low level of the loonie," TD chief economist Beata Caranci said in a research report.

A lot of growth is riding on the performance of exports, which have recovered more slowly than expected,she wrote. Figures for June and July show a rebound in exports, mainly to the U.S. and sustained consumer demand there bodes well for Canada.

Meanwhile, the energy-led downturn is still rippling through the Canadian economy, leading to lower business investment.

Recession in oil-producing provinces

In Alberta, the economy will contract by 1.3 per cent in 2015 compared to the June forecast of a 1 per cent decline in real GDP, RBC says.

The price of crude has fallen from $105 US a barrel in June of 2014 to around the $45 US a barrel level today. Forecasts of a recovery in the last half of the year have not come to fruition because of the worldwide oversupply of oil.

RBC forecasts a mild recovery in crude prices in 2016 to $50 to $57 a barrel, lower than the $54 to $74 it forecast in June. That could help real GDP growth in Alberta to return to positive territory in 2016, to about 0.6 per cent.

"Prospects for a relatively short bout of contraction were further dampened with drought conditions, wildfires and disruptions to crude oil production exacerbating the economic downturn," said Craig Wright, RBC senior vice-president and chief economist.

RBC's forecasts for GDP growth in other provinces for 2015.