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The Canadian economic playing field continues to be tilted to the west, according to the Provincial Outlook report released today by the BMO Financial Group Economics Department.  Saskatchewan, Alberta and British Columbia all exceeded the national growth rate in 2004 and have continued to do so for 2005.  Everywhere east, growth has been at or below the national average for these two years.

The report states that national growth in 2006 will rise to 3.5 per cent.  “Next year, the westward tilt is expected to continue although Newfoundland & Labrador will be the exception to the rule as major developments in the mining and oil sectors ramp up to full production,” according to Rick Egelton, Senior Vice-President and Chief Economist, BMO Financial Group.

Among the provinces, Newfoundland & Labrador will post the highest growth rate in 2006.  Growth in Alberta and British Columbia in 2006 will be even stronger than in 2005, although they will still place second and third in the provincial rankings behind Newfoundland & Labrador.  “Alberta’s growth will be boosted by rising oil production and the ramping up of construction on oil sands mega-projects, while in British Columbia, a construction boom — in part due to preparations for the 2010 Winter Olympics — will increase growth,” said Mr. Egelton.  Elsewhere in the west, Saskatchewan’s growth will fall below the national average in 2006.

Stronger growth in central Canada and in Manitoba and New Brunswick will be another factor pushing national growth higher in 2006.  “All four provinces have a relatively heavy reliance on manufacturing,” noted Mr. Egelton.  “Canada’s manufacturing sector has been hard hit by the run-up in the value of the Canadian dollar, but indications are that by 2006 the sector will have largely adjusted to the strong currency.”

Meanwhile, Nova Scotia will see stronger growth next year from an improvement in export performance, and Prince Edward Island will see a drop in growth as a result of a decline in construction.

In the country as a whole, the predicted rise of GDP growth to 3.5 per cent in 2006 from an estimated 2.9 per cent this year will flow from a turnaround in the performance of Canada’s external sector.  “While the sharp rise in the value of the Canadian dollar has hurt Canadian competitiveness and the country’s trade performance over the past three years, exporters and import-competing industries appear to have largely adjusted to the loonie’s more lofty level,” said Mr. Egelton.  “In 2006, export growth should match the pace of import gains so that the external sector will not be a drag on growth.  This should allow real GDP growth to rise slightly faster than potential.”

Growth at this pace will result in a drop in the Canadian unemployment rate of 0.4 percentage points to an average of 6.3 per cent in 2006.  The pace of hiring has slowed from 1.8 per cent in 2004 to 1.4 per cent in 2005, with this trend expected to continue in the latter half of the decade.  “This slowing pace of employment growth reflects both weaker labour force growth and an expected increase in labour productivity,” stated Mr. Egelton.

Meanwhile, the often predicted end of the housing boom has been slow in coming. Housing starts hit their highest level in 14 years in 2004, and the predicted pace of decline in 2005 has been more modest than expected.  “We expect further declines in 2006 and subsequent years as pent-up demand is fulfilled, and as interest rates rise over the medium term,” noted Mr. Egelton.

With respect to the Bank of Canada’s overnight rate, Mr. Egelton anticipated continued tightening.  “We expect the overnight rate to reach 4 per cent by April, and 4.5 per cent by the fall of 2006.”   He also said the Canadian dollar will trade in a range of 86.4 cents to 87.0 cents per U.S. dollar over the next year. 

Canadian Regional Outlook at-a-Glance

(All numbers are percentages)

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

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