TORONTO —  Expectations for the performance of the overall Canadian economy have been downgraded, but forget talk about a recession, while conditions should improve partly when it comes to the Atlantic Provinces, according to two new reports from the Royal Bank of Canada.

RBC Economics has lowered its forecast for the Canadian economy due primarily to the ongoing weakness in the energy sector. Canada’s gross domestic product (GDP), a measure of the total output of goods and services, is projected to grow 1.2 percent in this year. This is below the 1.8 percent forecast in June, and 2.2 per cent in 2016, 0.4 percent lower than earlier predictions.

RBC said while Canada’s economy contracted mildly in both the first and second quarters of 2015, the depth of the decline was marginal and the weakness was concentrated mostly in the energy sector. It expects positive economic activity outside of the energy sector to offset momentum lost in the first half of the year.

“The recent softening in the Canadian economy caused a flurry of recession talk, which we believe to be misplaced,” said Craig Wright, senior vice-president and chief economist at RBC. “Not only did the June GDP gain of 0.5 percent point to positive growth leading into the third quarter, a more compelling argument is the steadfast strength in Canada’s labor market.”

Despite the unemployment rate inching up to 7 percent in August from a consecutive six-month reading of 6.8 percent, RBC said that Canada’s labor market continued to generate approximately 14,000 new jobs per month in 2015. Additionally, wage gains accelerated starting in May, suggesting that businesses were competing for workers instead of laying them off.

RBC’s outlook also showed an uptick in consumer spending in Canada in the second quarter of 2015, resulting from increased purchases of durable goods, including autos. It says that a one-time boost to incomes from the retroactive Universal Child Care payment likely underpinned an even stronger increase in spending in the third quarter.

“Along with an increase in spending, Canadians continued to take advantage of low borrowing costs during the first half of 2015, with household debt balances rising at the quickest pace in more than two years,” Wright said. “That said, historically low interest rates and, to a lesser extent, sustained income gains have kept the costs to service these debt balances at a record low.”

Due to lower gasoline prices and ongoing job creation and wage gains in the Canadian labor market, RBC expects stronger consumption growth in Canada for 2016.

On the housing front, low interest rates continue to stimulate demand in 2015, despite lingering effects from oil price declines and a spike in condo completions in certain regions, according to the report. However, the seemingly insatiable appetite for housing is not equally shared across the country, with home resale activity plummeting in oil industry sensitive markets such as Alberta and Saskatchewan.

Home resales at the national level are expected to rise by five percent in 2015, making it the second-highest level on record. RBC expects home prices to rise by 4.6 percent in 2015, little changed from 4.8 per cent in 2014. With interest rates expected to rise in 2016, RBC anticipates that there will be a slight easing in resale activity, slowing to 3.2 percent.

On the business side, investment fell at double-digit rates in both the first and second quarters of 2015. However, this was largely due to cuts within the energy sector.

“Our forecast assumes that companies outside of the energy sector will gradually increase investment, and we expect this will sufficiently offset the pullback by energy producers in 2016, resulting in relatively flat business investment growth next year,” said Wright.

Looking ahead, RBC expects exports to boost the Canadian economy. As the U.S. economy strengthens against a weakening Canadian dollar, demands for Canadian exports are likely to accelerate. RBC noted that the Canadian dollar is expected to remain under downward pressure in the near-term, which will further improve the competitiveness of Canadian export companies.

On the provincial front, economies continue to be divided between oil producers and oil consumers. The fallout from plunging oil prices significantly dims the outlook for economic activity in Alberta and Saskatchewan. This is also expected in Newfoundland and Labrador, thought the rest of the Atlantic Provinces look somewhat better, according to a second RBC Economic report, in which Atlantic Canada is projected to see mild growth this year.

After contracting by an estimated 2.6 percent in 2014, the economy of Newfoundland and Labrador is at the bottom of provincial rankings again this year with the GDP projected to decline by 3 percent in 2015. On a more positive note, RBC expects the province will post a modest 0.8 percent recovery in 2016.

“Newfoundland and Labrador is going through a challenging year, as government-sector restraint, falling oil production and a drop in construction activity are weighing down overall economic performance,” said Wright “Furthermore, we’ll only see limited relief next year as downward pressure persists in the construction sector with work winding down on several major projects.”

The province’s construction industry will also face headwinds from the housing sector as job losses depress demand for new housing. Housing starts were down 17 percent in the first eight months of 2015 compared to the same period last year, and low levels of new building permits provide no indication of an imminent turnaround.

So far in 2015, job losses have been concentrated in the public sector, where year-to-date employment is down by 8 percent and the outlook remains dim, as the provincial government retrenches in the face of projected serial deficits until 2019 or 2020.

“Looking ahead, we expect oil production to pick up modestly in 2016 before growing strongly in the following years when the Hebron offshore facility begins operations,” said Wright.

Prince Edward Island Growth Picking Up

Modest growth is expected to continue in Prince Edward Island, where GDP growth is projected to pick up to 1.7 percent in 2015 before moderating slightly to 1.5 percent in 2016, according to RBC

“PEI’s economy is on track for steady growth this year and next as the tourism and export sectors benefit from a weaker dollar, and as construction activity picks up,” said Wright. “However, growth in these sectors has yet to impact the labor market, and modest job gains in late 2014 have given way to losses so far this year.”

Following a 19 percent surge in 2014, strong growth in PEI’s merchandise exports has continued so far in 2015. Export growth is concentrated in food products, which are offsetting modest declines in machinery and aerospace products following a period of rapid growth since the 2008 recession. However, a new multi-million dollar investment in the aerospace industry bodes well for future growth in the sector.

The weaker Canadian dollar, which is expected to provide a tailwind to exporters through 2016, also supports PEI’s tourism industry. Though tourist arrivals fell below seasonal averages during the winter, strong early indicators for the summer suggest tourism will contribute to growth this year.

Despite initially encouraging job numbers this year, conditions have since worsened and RBC projects PEI will see employment decline by 1 percent in 2015. While the overall jobs picture is gloomy, manufacturing remains a bright spot and is on track for a second year of double-digit employment growth. Additionally, a recent rebound in construction activity will contain job losses in that sector.

New Brunswick Weak but Improving

New Brunswick’s economic indicators remain generally weak so far in 2015, but are expected to improve somewhat during the remainder of the year. Following four years of essentially no growth, RBC projects GDP growth to expand by 1 percent in 2015 before accelerating slightly to 1.2 percent in 2016.

“Growth in New Brunswick is expected to remain slow this year. The housing and employment situations remain challenging, and, despite a weakened Canadian dollar, exports are set to decline as the Saint John oil refinery is partially idled for maintenance and upgrades,” said Wright. “Though private and public sector investment spending will provide some positive offset, a difficult fiscal environment will limit public-sector contribution to the province’s growth in the coming years.”

Declining capital spending has weighed on the province’s economy in recent years, but some of the weakness will reverse in 2015. While non-residential investment tumbled in the first half of the year, RBC expects a rebound as the government increases spending on road and bridge construction, and on improvements to the energy efficiency of public buildings. The private sector will also contribute to investment growth.

RBC expects employment in New Brunswick will continue to decline this year as the private sector sheds more jobs. One bright spot in the dreary employment picture is the manufacturing sector, where employment is up nearly 10 percent to date compared to 2014, and this increase is expected to be sustained thanks to the weaker Canadian dollar fuelling export.

Nova Scotia Economy Expected to Slow

Nova Scotia’s economy will face crosscurrents this year as work on a major shipbuilding contract in Halifax begins, and as a pickup in construction activity runs against a significant drop in natural gas production. Following an estimated 1.8 percent advance in 2014, RBC projects GDP growth to slow this year to 0.9 percent in the province.

“We see further declines in natural gas output having a smaller negative effect next year, and job creation will be supported by growing construction and manufacturing sectors, propelling economic growth to a six-year high of 2.1 percent in 2016,” said Wright.

“Aside from increased shipbuilding activity, we expect the province’s manufacturing sector to see gains in other segments,” said Wright. “We’ve seen rising exports of tires, and investments in aerospace and pharmaceutical manufacturing are expected to translate into rising production going forward.”

RBC said falling natural gas production is weighing on the province’s exports, which have declined by 8 percent in nominal terms so far this year, despite gains in key export categories such as food products, paper, and tires.

RBC notes that public-sector investment intentions are up in the province in 2015, propelled by the 18-month re-decking of the Macdonald Bridge and other infrastructure investments across the province. Private-sector investment is also expected to rise this year, as construction activity peaks on the Maritime Link and major construction projects take shape in Halifax.

Despite residential construction picking up after falling sharply this winter due to severe weather, housing market indicators remain soft signaling that the rebound in homebuilding activity this spring and summer will likely be short lived. Home resales fell to a 17-year low in the second quarter, and the unabsorbed inventory of newly completed housing units remains high despite some recent improvement.