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Continuing high commodity prices will result in divergent economic performances regionally according to the new Provincial Outlook report released today by the BMO Financial Group Economics Department. The report notes that the West will benefit from high levels of natural resource production, while Central Canada will fare less favourably as it faces mainly higher input costs. The concentration of manufacturing in the central provinces will also restrain growth this year as this sector continues to cope with a high value of the Canadian dollar. However, the adverse impact of the past rise in the Canadian dollar on net export growth should largely dissipate by 2006 allowing real output growth in Ontario and Quebec to bounce back.

On indications that the Canadian economy has weathered the impact of a strong currency, the Bank of Canada is expected to resume interest rate hikes in the fall. The overnight rate is expected to rise from 2.5 per cent currently to an eventual peak in 2007 of 4.5 per cent. All Canadian provinces are expected to benefit from growth in the U.S. remaining at above-potential rates this year and next.

The strongest provincial growth in 2005 and 2006 will be in the West, where Alberta will lead the way with 4 per cent growth in both years and British Columbia’s economy will expand by 3.5 per cent this year and 3.8 per cent in 2006. Although the Atlantic provinces will see somewhat slower growth, all will record an improvement from their performances in 2004. The other provincial economies will grow at rates close to the national average of 2.9 per cent this year.

“To some extent the story is similar to what we saw in 2004,” said Rick Egelton, Chief Economist, BMO Financial Group.  “Provinces with the most dependence on commodities will see the strongest growth this year; provinces most affected by the strong Canadian dollar – notably Ontario and Québec – will continue to see growth constrained.”

The Provincial Outlook anticipates that commodity prices will remain high but will moderate over the next few years. In particular, oil is expected to average US$51 per barrel over the whole of 2005 – up from US$41.54 last year – but ease to an average of US$44 per barrel in 2006. This will still be high enough to encourage the development of energy sources – the oil sands in Alberta, for example – but will ease some of the pressure on the manufacturing sector.

At the same time, the forecast sees the Canadian dollar averaging somewhere between US 80.5¢ and US 81.2¢ over the years of the forecast.

Another noteworthy trend in the forecast is the gradual decline in home-building activity, which started in the middle of 2004 for most provinces.  Total housing starts are expected to fall from 233,000 units last year to 210,000 units this year and eventually to an average of 175,000 units in the 2007 to 2009 period.

“The boom in new home construction was a response both to the pent-up demand for homes that developed during the 1990s and the improvement in housing affordability facilitated by very low interest rates,” said Mr. Egelton. “This pent-up demand has been satisfied now and as interest rates are gradually pushed higher, residential construction activity will cool in the coming years.”

In 2006, Newfoundland and Labrador will surge to the head of the provincial growth chart with a full year of production from both the White Rose offshore oil project and the Voisey’s Bay nickel development. Ontario and Québec will benefit from stronger manufacturing performances as the adjustment to the stronger Canadian dollar will largely be complete. Most other provinces will see growth rates similar to this year’s.

In the last three years of the forecast period, between 2007 and 2009, growth is projected to be strongest in Alberta (3.8 per cent), British Columbia (3.6 per cent) and Ontario (3.3 per cent). The other provinces will see growth rates slightly below the national average of 3.2 per cent.

“Employment growth will moderate in the later years of the forecast,” said Mr. Egelton, “but slow growth in the labour force will keep unemployment rates from rising. Alberta and British Columbia will see the biggest declines in their unemployment rates over the next few years.”

The full Provincial Outlook report is available at www.bmo.com/economic .

Canadian Regional Outlook at-a-Glance
(All numbers are annual per cent changes, unless otherwise indicated)

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