Historically low interest rates, along with strong commodity prices, will result in a doubling of last year’s Canadian GDP growth levels by the end of 2004, according to a report released today by the BMO Financial Group economics department.

“Considering the number and magnitude of shocks that hit the Canadian economy in 2003, such as SARS, BSE, the stronger dollar, massive forest fires in the west, a hurricane in the Maritimes, and a power blackout in Ontario, it is remarkable that overall growth came in as high as it did,” said Tim O’Neill, executive VP and chief economist, BMO Financial Group, in a release. “With most situations returning to normal in 2004, provincial economic performances have improved.”

The Outlook 2005 report forecasts that the trend of solid household spending and upward business investment will send GDP up 3.4% on a fourth-quarter-over-fourth quarter basis by the end of 2004. That’s double the growth in 2003.

However, it would also be about one-half of a percentage point below the comparable U.S. growth rate. This under-performance is expected to be largely the result of the strong Canadian dollar.

The report notes the strong Canadian dollar is expected to continue into 2005, but the negative impact on exports will be tempered by solid growth of the U.S. economy. Interest rates are expected to rise, creating an attendant weakening of consumption of durables. “Nonetheless, monetary conditions will remain sufficiently stimulative that overall growth in consumer activity will continue to expand at a solid 3.0%,” predicted O’Neill.

High commodity prices and strong domestic demand should encourage businesses to undertake even greater capital expenditure in 2005. “As a result, business investment is expected to continue to trend higher and thus take a greater role in leading the expansion in 2005,” O’Neill said.

In 2005, GDP growth in Canada should hover near the 2004 rate, moving to 3.5% on a fourth-quarter-over-fourth-quarter basis. Significantly, this pace will be virtually identical to the 3.6% rate expected in the U.S.

Projected economic growth in 2004 and 2005 will be slightly above the economy’s long-run potential. However, firms will increasingly attempt to respond to demand by raising labour productivity growth rather than taking on more workers. Productivity in Canada is expected to start to match the U.S. performance in 2005.

In employment, the improvement in productivity will come at the expense of slowing job growth. The growth rate is expected to come in at 1.3% for 2004, compared to an average of near 2.0% since 2001.

“This in turn will minimize the improvement in the unemployment rate projected to be 7.0% at the end of 2005, little changed from the 7.1% forecast for the end of 2004,” O’Neill said.