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 stimulus programs have been effective.

RBC Economics sees auto production and housing sales picking up. (Canadian Press)

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.

It said 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 financial markets but it's possible there's something else out there that we weren't previously aware of...'—Paul Ferley, RBC assistant chief economist

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. The strong Canadian dollar might slow growth, or something unforeseen — such as news about the exposure of banks to risky debt — might stall the 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 of that suddenly resurrects these concerns about counter-party risk which is a big problem in terms of what financial markets followed last year," he said.

Consumer spending will take longer to recover, the report said. It predicted the unemployment rate — now 8.7 per cent — will likely head higher 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 creation will happen only slowly.

Saskatchewan to lead all provinces

The strengthening in demand for autos will be a 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 predicted that 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.