Source: The Canadian Press

BMO Capital Markets is estimating that the Canadian economy will grow by 2.7% in 2011, substantially less than the 3.4% growth anticipated last summer in BMO’s previous provincial monitor.

The Bank of Montreal (TSX:BMO) division said Wednesday it still anticipates provincial economies in Western Canada will grow faster than most other parts of the country because of strong demand for commodities they produce.

But economic growth will be constrained by reduced government spending as Ottawa and the provinces grapple with budget deficits that ballooned during the recent recession.

“The coming year will see stimulus spending reined in across most of the country as capital spending programs, which were ramped up during the recession, begin to wind down,” BMO said in its report.

“Additionally, the budget-balancing work will likely begin in earnest this budget season, and the restraint required to accomplish the task will be much larger in Central and Atlantic Canada, which face deeper fiscal holes.”

“Indeed, at about 3%of GDP, Ontario’s deficit is the deepest in Canada, while other provinces like Quebec and Nova Scotia have already begun the budget-balancing task through a series of tax hikes. Meantime, Western Canada is in relatively healthy shape on this front, as shallower fiscal holes (if any) should be comfortably filled by stronger growth prospects and firming commodity revenues, at least outside of the natural gas space.”

BMO also said the strong dollar — currently worth slightly more than its U.S. counterpart — will limit economic growth from international trade. It said the manufacturing-heavy provinces in Central and Atlantic Canada will feel the greatest impact from the high loonie.

In the country’s two most populous provinces, Ontario and Quebec, economic growth this year is expected to be 2.6% and 2.5%, respectively. That’s down three-tenths of a point in each case from last summer’s forecast.

BMO reduced its outlook for British Columbia’s growth even more, lowering its estimate by six-tenths of a point to 3.3% from 3.9%.

Manitoba’s growth rate is expected to be the slowest of the four western provinces, at 2.7% — down four-tenths of a percentage point from 3.1% and barely ahead of Ontario.

Although Alberta is the heart of Canada’s energy industry, and oil is expected to be a hot commodity, the province will come in only third in terms of economic growth this year, according to BMO, which estimates it will see 3.5% growth this year — four-tenths of a point less than BMO previously expected.

Saskatchewan is still expected to have Canada’s strongest provincial growth, at 4.0%, two percentage points lower than in the June report, followed by Newfoundland and Labrador at 3.9% — one-tenth of a point less than previously estimated.

At the bottom of the provincial growth forecasts is Prince Edward Island at 1.9% growth, down four-tenths of a point from the previous forecast of 2.3%.

The bank says PEI’s private sector has been losing jobs, partially offset by an increase in public-sector jobs.

Nova Scotia and New Brunswick are expected to do only slightly better than PEI, at 2.0% and 2.1% growth respectively.

The N.S. revised outlook is considerably lower than it was last summer, when BMO estimated 2011 growth would be 2.7%. BMO also reduced its estimate for New Brunswick substantially, by five-tenths of a point to 2.6%.