Spending by consumers and businesses will help push Canada’s economy to grow by 3.2% in 2004 and 3.6% in 2005, while anticipated interest rate hikes will be “slow and moderate”, according to the latest economic forecast from RBC Financial Group.

“The first half of 2004 laid to rest much of the uncertainty around Canada’s economic outlook,” said Craig Wright, chief
economist, RBC, in a news release. “Canadian growth is on the upswing, domestic and external demand are healthy and the worst fears about the higher exchange rate have failed to materialize.”

The demand for housing should cool, but a lack of a supply glut suggests only a moderate impact on construction activity.

Meanwhile, employment growth – with over 300,000 new full-time jobs created in the 10 months to May of 2004 – is a major factor and commodity producers are benefiting from strong world demand.

Wright said solid U.S. growth has boosted Canadian exports despite the Canadian dollar’s 22% rise against the greenback in 2003.

RBC forecasts the loonie ending 2004 at US77 ¢, and 2005 at US80¢. It closed Monday at US75.38¢.

RBC said it expects the Bank of Canada to move interest rates up in the fall of 2004. “However, the pace of interest rate hikes will be slow and moderate,” while the U.S. Federal Reserve is expected to raise rates aggressively this year and next.

For the U.S., Royal Bank forecasts economic growth of 4.8% this year, before slowing to 3.5% in 2005.

“The world’s three main economic engines — the United States, China and Japan — have each been showing signs of vibrant and durable growth,” RBC said. “Other key economies, particularly Britain, France, Russia, India and Australia are, to varying degrees, all healthy and robust.”