The Canadian economy will continue to grow faster than the U.S. economy through 2003, according to a report released today by BMO Financial Group.

Over the next two years, Canada’s growth rate will average more than 0.5% higher than that of the U.S., it says. The forecast calls for Canada’s economy to grow by 3.8% next year, a step up from the 3.4% pace estimated for 2002.

Much of next year’s expansion comes from the stimulative monetary policy in place this year. Home building and spending on such consumer durables as cars were spurred by a combination of low interest rates and strong employment growth this year. While housing starts and car sales are expected to cool in 2003, business investment and export growth will pick up.

“That Canada has outpaced the U.S. recently doesn’t indicate a new era of independent growth,” said Tim O’Neill, chief economist at BMO, in a news release. “The quarter-to-quarter pattern of GDP growth in this country is still reflecting that of our southern neighbour — when its economy picks up, Canada’s economy gains more steam, for example – and so the U.S. outlook remains central to Canada’s prospects for growth.”

BMO’s economists project that the U.S. economy will gain momentum as 2003 progresses. BMO projects that U.S. growth in the current quarter will be less than 2% at an annual rate. However, the next four quarters should see the U.S. grow by close to 4% as business investment recovers and exports benefit from a broader global expansion. “We expect that the pace of the recovery will level off by 2004,” said O’Neill. “Canada’s head start is one reason we think the Canadian dollar will be on an uptrend, reaching 70¢US in 2004.”

At the regional level, BMO estimates that, while Newfoundland will be the growth leader this year, largely as a result of one-time surges in crude-oil production, all provincial economies are recording stronger growth than they did in 2001.

BMO’s economists make particular note of the improvement in Québec’s performance this year, citing it as evidence that deep restructuring of the provincial economy is having a positive effect on its performance.

Next year, all of the provinces (except Newfoundland) will again see stronger growth. Housing activity will be slower in most parts of the country, but this will be offset by the impact on their exports of a stronger U.S. economy.

BMO’s economists note that the impact of policies to cut greenhouse-gas emissions constitute one of the risks to their forecast but assume that the consequences will be small before the end of 2004.