The Canadian economy will strengthen in 2004 and 2005, with economic growth rising from 2% in 2003 to near 3.5% during the next two years according to new report by BMO Financial Group.

BMO says the recovery will be broad-based across most provinces, as is a direct result of the strengthening of the U.S. economy.

It forecasts that the U.S. economy will grow by 4.4% and 3.8% in 2004 and 2005, respectively.

Although stronger U.S. demand will support growth in Canada, BMO says the appreciation of the Canadian dollar will have a dampening impact on Canadian exports as well as on sectors subject to import competition. This will soften the overall rebound in Canada.

“The strength of the Canadian dollar provides a challenge for the Bank of Canada,” said Tim O’Neill, chief economist, BMO Financial Group.”

The bank’s economists project the Bank of Canada will stand pat, leaving interest rates where they are until mid 2004. By the end of 2005, the central bank’s overnight rate is projected to rise from its current 2.75% to 4.5%.

Across the country, most regions will contribute to the pickup in national growth. BMO Financial Group’s economic forecast calls for Alberta to be the growth leader among the provinces next year.

BMO says both Manitoba and Saskatchewan will also benefit from improved agricultural conditions.

Ontario and Quebec, with their export ties to the U.S. market, stand to benefit from the rebound in the U.S. economy.

The Atlantic provinces will also enjoy the general improvement in the North American economy.

According to BMO, British Columbia is expected to see the second slowest growth of the Canadian provinces, as government restraint will offset some of the cyclical rebound. Even so, B.C.’s economy is expected to see the sharpest improvement of the provincial economies over the 2003-05 period

On a sector basis, BMO forecasts a an upswing for cyclicals, particularly oil services companies.

While the cyclicals should rebound, BMO says that the top performing industries will likely be the same service-providing sectors which achieved top-10 growth since 1998: communications and information services; wholesalers; and professional and technical services.

Looking at financial services, BMO “market conditions are now improving for providers of financial services.”

It says that although mortgage growth is likely to slow as the housing market becomes less heated, a recovery in investment spending should stimulate business loans.

It predicts “asset management should strengthen as confidence in equity markets gradually improves and mutual fund and discount brokerage activity turn upward.”

Overall, it anticipates that real output growth in the financial services industry will accelerate briskly to an average of 3.8% during 2004 and 2005.

BMO says the strong U.S. recovery should also spark a second half recovery for the global economy. It forecasts.Asia to have the strongest percentage growth.

Emerging Asia will remain the world’s top performer with growth for the year remaining over 6%, BMO says. “In 2004, slower growth in China should be more than offset by stronger growth elsewhere, especially in Korea, Hong Kong and Singapore. Excluding China, East Asian growth may rise from 3.6% to almost 5%.”


BMO says the outlook for Europe is brighter as exports are expected to gain momentum, though the euro’s appreciation against the U.S. greenback will dampen this impact.

A full copy of Outlook 2004 can be downloaded from BMO Financial Group’s Internet web site, at www.bmo.com/economic.