The year ahead should be much like that of 2005 for the Canadian economy, according to an economic outlook from the Canadian Chamber of Commerce.

For 2006 as a whole, growth in real gross domestic product is expected to average around 2.9%, placing Canada second only to the United States among G7 nations in terms of growth.

However, considerable variation in the growth patterns of regions within Canada is expected with economic growth remaining above 3% in the western provinces and below the national average in central and eastern Canada.

“It will be steady as she goes in the coming year for the Canadian economy,” said Nancy Hughes Anthony, president and CEO of the Canadian Chamber of Commerce. “Overall, consumer spending is expected to continue to make a contribution to growth in 2006, albeit at a more modest pace than in 2005, with the business sector doing more of the heavy lifting.”

The Canadian Chamber is expecting solid gains in business investment reflecting high rates of industrial capacity utilization in a number of capital-intensive sectors and earlier reductions in the prices of imported machinery and equipment thanks to a stronger Canadian dollar. Canadian firms import approximately 75% of their machinery and equipment from the U.S. and the higher Canadian dollar has made the acquisition significantly more affordable.

The external side of the economy (i.e. real net exports) is also expected to make a contribution to GDP growth in 2006. Exports have already adjusted significantly to the appreciation of the Canadian dollar.

In terms of interest rates, the Canadian Chamber looks for the Bank of Canada to continue to raise its key policy interest rate, lifting the target overnight interest rate to 4% by mid 2006, up from the 3.25% at present.

The Canadian Chamber is also anticipating that the Canadian dollar will peak at close to US90¢ in the first quarter of 2006, and then drift back through the course of 2006 ending the year at about US84¢. This is largely a reflection of an expected pullback in commodity prices as the global economy slows, particularly in the U.S. and with some moderation expected in China.

The risks and uncertainties to the Canadian Chamber’s projections relate to future energy prices and their impact on exports, the exchange rate and inflation; and how the Canadian economy adjusts to global developments, including strong competition from newly industrialized economies, like China and India.