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Western Canada will continue to lead the Canadian economic parade in 2006, maintaining the trend of the last few years, according to the BMO Financial Group Economics Department's Provincial Outlook report issued today.

“Most of the strength found in the West, as well as in Newfoundland and Labrador, can be attributed to high resource prices,” said Rick Egelton, Senior Vice President and Chief Economist, BMO Financial Group.  “At the same time, these prices are creating a drag on growth in both Ontario and Quebec.”

Alberta will lead the way with growth of 5.2 per cent this year, and there will be robust economic expansion in B.C., Saskatchewan and Manitoba.  Meanwhile, Newfoundland and Labrador will post a 5.0 per cent gain, an impressive figure given its growth of 0.4 per cent in 2005. 

Nationally, Canada's performance in 2006 is expected to be slightly stronger than in 2005, with growth estimated at 3.1 per cent compared to last year's 2.9 per cent. Investment is expected to be a key contributor to growth, while the impact of the strong Canadian dollar will be tempered by still high commodity prices. Earlier interest rate tightening is expected to have more of a dampening impact on consumption this year.

“Going forward, the restraint from the loonie will ease, though the impact of higher interest rates will intensify,” said Egelton.  “Meanwhile, investment will continue to be an important source of growth. In total, GDP is expected to rise 3.1 per cent in 2007 and 3.0 per cent on average over the period 2008-2010.”

On the employment side, the pace of hiring has picked up from 1.4 per cent in 2005 to 2.0 per cent in 2006, which will contribute to a drop in the unemployment rate to 6.3 per cent this year from 6.8 per cent in 2005. “However, we don't expect the upward trend in employment growth to continue,” stated Egelton.  “A slower pace of employment growth in 2007 and beyond reflects the fact that firms are increasingly responding to rising demand by adding capital rather than new workers. This will contribute to an improvement in productivity in the Canadian economy.”

The often predicted end of the housing boom has been slow in coming. Housing starts in 2005 were down 3.4 per cent from 2004, but further expected declines have not materialized. “We now expect housing starts in 2006 to be about the same as in 2005,” said Egelton.  “Nonetheless, higher interest rates will eventually move housing starts lower — a development which we now expect to happen starting in 2007.”

After bottoming out in the spring of 2004 at 2 per cent, the Bank of Canada raised the target for the overnight rate to 2.5 per cent by the early fall of that year. It then moved onto the sidelines, holding the rate steady until September 2005. It has since raised the rate seven times to 4.25 per cent. “The Bank of Canada now appears satisfied that the current level of the overnight rate is sufficient to contain inflationary pressures,” stated Egelton.  “We therefore expect that the Bank of Canada will hold the overnight rate steady at 4.25 per cent for the foreseeable future.”

The Canadian dollar has continued to rise in 2006. In the first six months of the year, the dollar averaged 87.8� U.S., up from 82.5� U.S. in 2005. “We expect the currency to average 89� U.S. for the year as a whole, then rise to 91� U.S. in 2007 on general weakness in the greenback, before easing off to 90� U.S. in 2008,” said Egelton.

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

Canadian Provincial Outlook

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