The tide is turning for the Canadian economy, with growing signs that aggressive policy actions are taking effect.

According to a new report by RBC Economics, although the Canadian
economy contracted at an average of 3.4% in the second quarter, the
stage is set for a return to positive growth by the third quarter of
this year.

“Improved financial markets, low borrowing rates and fiscal stimulus
have moved Canada”s economy forward,” said Craig Wright, senior
vice-president and chief economist, RBC. “We expect that Canada”s
recession will turn out to be the least severe of the past three, even
after the consecutive hefty drops in GDP output from late 2008 and
early 2009.”

The Canadian economy is set to grow in the second half of this year
with a sharp rebound in auto production in the third quarter and a
recovery in the housing market leading the charge.

The report projects that the Canadian economy will grow by 2% and 2.4%
in the third and fourth quarters of 2009, respectively, and 2.6% in
2010.

“While the staying power of the recovery at home and abroad is still at
risk, we believe the momentum is likely to build as financial markets
continue to recover and stimulus spending continues to have a positive
impact,” added Wright.

Consumer spending, however, is still being weighed down by the 8.7%
unemployment rate, which the report anticipates is likely to edge
higher by year”s end. Improvement is on the horizon in early 2010, when
RBC forecasts the stage will be set for the labour market to stabilize,
the unemployment rate to begin falling and the hiatus in consumer
spending to end. However, with the unemployment rate set to remain
historically high, inflation is expected to remain below the Bank of
Canada”s mid-point target of 2%.

With positive signs emerging in the U.S. economy, RBC has boosted its
U.S. forecast for growth over the second half of this year to 1.9% and
is anticipating the U.S. real GDP will expand by an average of 2.2% in
2010.

The report notes that expected Q3 growth of 2% will be the first
quarter in the past five to show a positive gain. Though the return to
positive growth in the U.S. is encouraging, the rate of increase in
2010 will only result in modest downward pressure on the unemployment
rate.

RBC Economics expects this rate to peak at 10% late this year and only
drop to 9.7% by the end of 2010. A slow labour market is expected to
keep inflation very low through the forecast.