The Canadian economy will grow by 2.9% next year and by 2.4% in 2007, thanks largely to the benefits of rising energy prices over the next two years, according to the latest forecast from CIBC World Markets.

However, today’s report notes that the expected GDP growth will hide some of the greatest regional disparities since the OPEC oil shocks of the 1970s and early 1980s.

While an energy boom will see real economic growth soar to more than 7% next year in energy-rich Alberta, the energy-hungry Ontario economy is expected to grow by less than 2%, only half the pace averaged over the last decade.

Jeff Rubin, chief economist at CIBC World Markets notes that the performance gap between energy producing and energy consuming parts of the country could grow even wider over the next two years in response to some of the monetary and fiscal policy consequences of rising oil and natural gas prices.

“With the energy trade balance poised to climb to a record 5% of GDP, the Canadian dollar is becoming a bona fide petro currency,” says Rubin. “While energy exports to the U.S. will be little affected by a soon to be 90¢ Canadian dollar, a soaring currency will saddle Canadian manufacturers with as much as 25% higher unit labour costs than their American competitors.”

CIBC World Markets is predicting that oil prices will average over US$70 per barrel in 2006 and natural gas prices will average US$13 per million Btu. Potential double-digit budget surpluses in Alberta are likely to lead to further reductions in Alberta taxes, already the lowest in the country.

“The fiscal ramifications of soaring energy prices on Alberta’s future tax structure may pose more of a long-run economic challenge to central Canada than rising energy prices themselves,” Rubin says.

While CIBC World Markets expects two more quarter point rate hikes from the Bank of Canada in the first half of 2006, weakening economic conditions, particularly in central Canada, should prompt the Bank to take back those increases with two rate cuts in 2007.