Canada’s economy is expected to grow by 1.6% in 2008, according to the latest economic forecast from RBC.

That’s down from 2.7% in 2007, as a result of strain from a slowing trade sector, unfavourable financial markets and a weak U.S. economy.

“Rising demand for imports will continue to outstrip export growth in 2008 and we anticipate the trade sector will trim 3.6% from the 2008 annual GDP growth rate,” stated Craig Wright, senior vice-president and chief economist, RBC.

“The drag from the trade sector on near-term growth, combined with limited inflationary pressures, will keep the Bank of Canada on its current path of lowering interest rates,” he added.

The report also notes the rise in Canadian house prices has stretched affordability to conditions not seen since 1990.

RBC says homeowners should see a modest improvement in affordability throughout 2008, as the Bank of Canada is expected to keep lowering interest rates.

The growth gap between the commodity-rich Western provinces and manufacturing-heavy Central Canada is expected to persist in 2008.

Across Canada, Saskatchewan is expected to be the top growth performer this year as its economy benefits from strength in energy, mining, and agriculture sectors.

Conversely, Newfoundland and Labrador should be the laggard as waning oil production weighs on its growth.