The Canadian economy will pick up steam in the next two years after a heavier than expected slowdown in 2003, the Organization for Economic Co-operation and Development said Wednesday.

The international agency’s forecast raises the prospect of higher interest rates.

In its latest global outlook, the OECD estimates Canada’s growth in gross domestic product at 1.8% in 2003, compared with 3.3% last year.

Canadian growth will rise to 2.8% next year and 3.2% in 2005.

The OECD said Canada will benefit from strong economic output in the United States, where growth is projected at 2.9% this year, 4.2% in 2004 and 3.8% in 2005.

As a whole, growth in the OECD’s 30 member countries is estimated at 2% this year, 3% in 2004 and 3.1% the year after.

Canada’s economy was hit hard this year by a “series of negative shocks” such as the SARS outbreak, mad cow disease, the power blackout in Ontario and British Columbia’s forest fires, the OECD observed.

The stronger Canadian dollar has also put a dent in economic growth by reducing exports to the United States.

“Since most of the above-mentioned shocks have now ceased to affect output, a strong bounce-back is expected in the last quarter of 2003, as also suggested by the recent pickup in job creation,” the agency said.

OECD economists praised the Bank of Canada, saying it “reacted judiciously” to the weakening economy with interest-rate cuts.

In fact, the OECD said the Canadian central bank might have to start raising rates again “as soon as the recovery is firmly in place and the output gap is narrowing.”