While the United States labours to re-ignite its economic recovery, Canada’s economy is hot, says the latest economic forecast released today by RBC Financial Group.

RBC economists forecast economic growth for Canada of 3.7% in 2002 and 4.1% in 2003, compared to 2.6% and 3.3% in the U.S. The more favourable numbers for Canada are a result of a factor that is unique to the Canadian situation — a long-awaited release of consumers’ pent up demand.

“Call it the Canadian difference,” says Craig Wright, chief economist, RBC Financial Group. “We’re seeing the most favourable environment in years and it has allowed demand accumulated during some leaner years in the 1990s to start bubbling to the surface. This has boosted consumer spending and will keep the Bank of Canada moving aggressively on rate hikes relative to the Federal Reserve.”

In the U.S., consumers are feeling tapped out. “The U.S. Fed kept consumers spending during the slowdown when spending on large tickets items usually comes under pressure — keeping the recession short and shallow. But now the well’s run dry. The U.S. recovery is unlikely to be as vigorous as that found following a typical recession when consumers hit the stores hard,” says Wright.

While it’s a tale of two consumers, the business story is the same on both sides of the border, with business investment spending, inventory accumulation and international trade set to broaden and strengthen the pace of economic growth this year and next. This will be especially important in the U.S. where businesses will need to pick up the baton from fading consumers.

“It may sound too good to be true, but U.S. business looks like it’s ready to start investing again, says Wright. “Looking beyond gloomy business headlines it seems the bottom has been reached and it’s likely we’ll see in the second half of this year the first significant increases in machinery and equipment investment in the U.S. in nearly two years.”

The Canadian dollar is also set to have a better year than its American cousin. “Some of the missing pieces behind the Canadian dollar puzzle — falling commodity prices, poor productivity rates relative to the U.S. and lower short-term interest rates – have now joined the oft-cited positive fundamentals at the precise time when the fundamentals underpinning the U.S. dollar are starting to crumble,” says Wright. “We expect the Canadian dollar to hit US69.0¢. by year-end and US71.4¢ by the end of next year.”